EAU1S12 CGA-Canada, 2012 Page 1 of 6

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
September 2012
Marks Time: 3 Hours

30 Question 1
Select the best answer for each of the following unrelated items. Answer each of these items in your
examination booklet by giving the number of your choice. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will
not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.

Note:
2 marks each

a. What is the appropriate audit opinion when the auditor is unable to obtain sufficient appropriate audit
evidence, and the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive?
1) Unqualified opinion
2) Qualified opinion
3) Adverse opinion
4) Disclaimer of opinion

b. On March 26, 2012, a CGA firm completed the audit of GHI Ltd.s 2011 financial statements
(December 31 fiscal year end). GHI is a public company listed on the Toronto stock exchange. On
April 3, 2012, GHI made its yearly payment on a bank loan (a 10-year loan, with annual payments due
on April 3 each year from 2011 to 2020). On April 7, 2012, GHIs board of directors approved the
financial statements. On April 30, 2012, the financial statements were mailed to the shareholders.
What is the appropriate date for the independent auditors report in these circumstances?
1) March 26, 2012
2) April 3, 2012
3) April 7, 2012
4) April 30, 2012

c. What is the appropriate audit opinion when the auditor finds that the financial statements contain a
misstatement that is material and pervasive?
1) Unqualified opinion
2) Qualified opinion
3) Adverse opinion
4) Disclaimer of opinion

d. WWW.CA Inc. is a public corporation listed on the Toronto stock exchange. As a publicly
accountable enterprise, what accounting standard is the company required to use in the preparation of
its financial statements for the fiscal period ended December 31, 2011?
1) GAAP for either the United States or Canada
2) International Financial Reporting Standards (IFRS)
3) Canadian Accounting Standards for Private Enterprises (ASPE)
4) Differential accounting rules




Continued...
EAU1S12 CGA-Canada, 2012 Page 2 of 6
e. Lees audit firm has accepted the contract to audit TTT Inc.s financial statements for 2011. Lee
worked at TTT when he was a student in the CGA program, before joining the audit firm. What is the
likely ethical issue for Lee?
1) An advocacy threat
2) A self-review threat
3) A self-interest threat
4) An intimidation threat

f. During the audit of DeepWell Mining Inc., the auditor discovered that the company had bribed a
member of the government in order to obtain the rights to explore a piece of property containing gold
deposits. The bribe was illegal but the auditor was also aware that the Code of Ethical Principles and
Rules of Conduct (CEPROC) has a rule concerning maintaining confidentiality of a clients affairs.
The bribe was recorded in the clients board of directors minutes, and the client explained this was a
normal business practice, and that most of its competitors also paid bribes. How should the auditor
handle this situation?
1) Do nothing because the auditor must maintain the confidentiality of the clients information
2) Withdraw from the engagement (without an audit fee) without advising anyone of the issue
3) Obtain legal advice regarding this issue
4) Insist that the bribe be disclosed in the audit report if the client wants an unqualified audit opinion

g. When the auditor for XYZ Diamonds Ltd. discussed hiring an expert to provide a valuation of the
companys inventory, the client threatened to withhold the audit fee and to sue the auditor for
negligence for failing to maintain the confidentiality of the clients information. Which of the
following is true?
1) The auditor must obtain an agreement from the expert to maintain the clients confidentiality.
2) The auditor may not hire an outside party to perform a valuation.
3) The auditor can hire the outside party without restriction, since the auditor has already guaranteed
the confidentiality of the clients records.
4) The auditor can hire the outside party only if the expert is also a CGA subject to CEPROC.

h. Cleona is a partner in a CGA firm that has been asked to conduct an audit of GTE Inc.s financial
statements. Which of the following is true?
1) If Cleonas firm audited the client last year, this would likely create the appearance of bias and
she would not be seen to be independent by the general public.
2) It would not affect her independence if a family member owned shares in GTE as long as Cleona
does not own any shares in the company.
3) Cleona must consider whether there are any threats to her independence before accepting the audit
engagement.
4) Cleona should assume that she has independence of GTE unless a threat to her independence
arises.

i. Which of the following would provide the most assurance for an auditor seeking to verify the balance
of the accounts receivable in the general ledger control account?
1) Confirmation from the purchaser
2) Sales invoice prepared by the sales department
3) Shipping memo prepared by the shipping department
4) Payment recorded in the clients sub-ledger account for that customer





Continued...

EAU1S12 CGA-Canada, 2012 Page 3 of 6
j. How should confirmations of accounts receivable be handled in an audit?
1) Confirmation letters should be printed on the audit firms letterhead.
2) Confirmations should be controlled by the audit firm.
3) Responses should be sent directly to the client, for confidentiality reasons.
4) Responses should be requested to be handled by the management of the company that they are
being sent to.

k. How is the audit procedure of vouching sales conducted?
1) An auditor selects a recorded sales invoice and works backward in the system to find the related
source documentation, such as the shipping documents and customer purchase order.
2) An auditor reviews the recorded sales entries to look for anything that appears unusual, and then
investigates the unusual entry further.
3) An auditor selects the sales shipping documents and works forward in the system to find the final
recorded sale in the general ledger.
4) An auditor compares the recorded sales for the current year to the recorded sales for the prior year
to find significant differences between the two amounts.

l. When the auditors risk assessment includes an expectation that controls at a service organization used
by the auditee are operating effectively, how should the auditor obtain audit evidence about the
operating effectiveness of those controls?
1) Obtain a type 1 report
2) Ask the service organizations auditor to perform appropriate tests of controls
3) Use another auditor to perform tests of controls at the service organization on your behalf
4) Issue an unqualified audit report (assuming no material misstatements are found in the auditees
records), since you have no indication of any problem

m. When a company changes audit firms, who owns the audit files from the previous years audit?
1) The previous auditor owns the audit files, until a new auditor is appointed, then ownership passes
to the new audit firm.
2) The auditee always owns the audit files, since they contain confidential information.
3) Ownership is shared between the previous firm and any future firm as long as the previous years
audited information is included in the financial statements (as past years data).
4) The previous audit firm owns the files even though it is no longer auditing the company.

n. What is the risk of incorrect acceptance if IR =0.20, CR =0.60, AR =0.05, and the analytical
procedures risk =0.80?
1) 0.006
2) 0.096
3) 0.521
4) 1.920

o. Which of the following is true concerning dollar-unit sampling?
1) It can only be used for sampling for tests of details of balances.
2) When testing accounts payable, each separate account payable would be a population unit.
3) It is an attribute sampling method.
4) All accounts have an equal chance of being selected in the sample, regardless of their balance.






Continued...
EAU1S12 CGA-Canada, 2012 Page 4 of 6
9 Question 2
J J J Movers Ltd. is owned by J acques. The company used to be profitable but several new small companies
have started to compete with J J J , offering very low prices that J J J cannot match. J acques thinks he can
make his company profitable again if he eliminates his competitors, which will allow him to raise prices.
He therefore decided to purchase one of his competitors each year for the next 4 years. The first company
he bought was a proprietorship called J errys Trucking. Jacques has hired your CGA firm to review the
accounting system and controls at J errys Trucking to see what changes are needed before he can integrate
it into J J J Movers. J acques hopes there are not many problems.

You interviewed the owner of J errys Trucking and the companys bank manager and learned the
following information:
The company has customers in both Canada and in the United States, and the owner was not very
knowledgeable about customs fees that must be paid and regulations that have to be followed when
transporting goods across the borders. Also, the owner, J erry, often simply took any cash that the business
earned and spent it on personal items, instead of claiming a wage from the business. There is only one
office staff besides J erry: J errys cousin, who does all of the bookkeeping. His cousin is not an accountant
but has taken some accounting courses. J erry explained that control at J errys Trucking is strong because:
He can trust his cousin completely (having honest employees is important for effective control).
J erry personally checks all of the bookkeeping entries, making any corrections he feels are necessary.
At the year end, J erry takes the bookkeeping records to a tax preparer who prepares his tax return.

Required
Discuss the inherent risk at J errys Trucking based on the above information. Include six observations in
your answer.

9 Question 3
LKL Inc. has been audited by the same CGA firm for the past 2 years, with unqualified audit reports
issued both years. This year, some of the audit staff has changed at the CGA firm. Steve is a CGA and is
responsible for the inventory account and the cost of goods sold calculation. Steve was satisfied with the
inventory count procedures, including pre-numbered count sheets and experienced staff, and was confident
that the staff followed the procedures. He now has the inventory count sheets and wants to reconcile the
value of the count results to the trial balance. Steve looked at last years working papers for guidance and
to make sure he did not miss anything. The working papers had the following notes:
Objectives for inventory count:
Verify count sheets are complete
Look for fictitious adjustments to inventory account
Find out about obsolete items
Check cut-off
Check assignment of inventory

Required
7
1
/2 a. Design one audit procedure for each of the objectives in the working paper. Do not use analytical
procedures.

1
1
/2 b. Design one additional audit procedure that should be performed to determine the accuracy of the
inventory records.






Continued...
EAU1S12 CGA-Canada, 2012 Page 5 of 6
10 Question 4
W-Air Ltd.s 2010 net income before audit adjustments was $2,100,000. Its income would have been
$2,600,000, but the company had recorded a special development expense of $500,000. During the audit,
however, the auditor discovered that the $500,000 was actually a fine for illegal activities. The treasurer
had paid a $400,000 bribe to a government official to obtain confidential information about a new aircraft
design. The $400,000 was hidden in several expense accounts, whose balances had been inflated to hide
the payment. The auditor found one other misstatement, which was collusion between the treasurer and his
assistant to record $2,500 in personal expenses for a vacation taken by the treasurer as business travel
expenses. The $2,500 had been incorrectly recorded as a debit to business travel expenses.

Required
8 a. Calculate the amount that you would consider to be appropriate for materiality for the company for
2010. Explain each factor in your calculation.

2 b. Explain how the vacation expense misstatement would be treated by the auditor in terms of
materiality.

12 Question 5
Small-M Stores Inc. operates department stores in smaller communities. The companys strategy is to
locate stores in communities that are not within a 1 hour drive to larger cities. There are 21 stores in the
chain and all accounting is handled in the companys head office. All purchases are handled by 3 buyers,
who report to the purchasing manager, who authorizes all purchases. Stores place their orders through one
of the buyers, and then the buyer submits a purchase order (PO) to the purchasing manager for approval.
When a purchase is approved, the purchasing manager releases the PO by computer to the accounting
system for recording. An accounting clerk checks the PO for authorization and then authorizes the system
to enter the PO to the purchase journal.

When goods are received, a receiving clerk checks the goods for quantity and updates the online inventory
record. The goods are then moved to the inventory area of the warehouse, under the control of the
warehouse supervisor. Each quarter, the inventory clerks count the inventory on hand and send this
information to the accounting manager for reconciliation with the recorded inventory. Any adjustments to
inventory above $1,500 per quarter are authorized by the controller.

Required
Identify the four kinds of segregation of responsibilities for the purchasing function at Small-M Stores.
Using the case facts, include one example for each kind in your answer.

8 Question 6
XWA Chemicals Inc. appointed its auditors late in the year. The auditors were able to attend the year-end
inventory count but could not test the controls during the year. To keep the audit costs down, they decided
to use the test data approach for payroll to test samples of transactions for the year. You are a partner at the
audit firm and have been asked to provide advice to the auditors designing the test data.

Required
Explain what advice you would provide to the auditors regarding the test data approach. Include at least
four points in your answer.







Continued...

EAU1S12 CGA-Canada, 2012 Page 6 of 6
10 Question 7
DEF Inc. sells motors and parts to boat retailers and repair shops. DEF ships to many different areas
in 3 Canadian provinces. A typical entry to record a sale for DEF is:
Accounts receivable .................................................................................................... 976
Sales ..................................................................................................................... 976
To record sales in sales journal

DEFs sales journal records all sales details, including the sales date and the shipping date, and there is an
automatic adjustment to the appropriate receivables sub-ledger account for whichever customer the sale
was made to. Last year the company had more than 30,000 sales entries, of which only 150 exceeded
$1,600. Most sales were under $1,000 (200 were under $600). Last year the auditor was curious about the
increase in sales to smaller repair shops in northern Ontario, therefore she used a CAAT to identify all
customers in that particular geographic area.

Required
Identify four other examples of how CAATs could be used in the audit of sales at DEF, using the above
information. State briefly why the results of each CAAT you design would be relevant for the audit of
sales or receivables.

12 Question 8
Easy Oil Inc. started as a proprietorship owned by Chen. When she found a large oil deposit in Argentina,
South America, Chen incorporated, but she holds 60% of the issued and outstanding shares (the other 40%
are held by various hedge funds). Chen acted as guarantor of the companys bank loan and the companys
bank holds 50% of Chens shares as collateral (the loan is the largest liability on the companys balance
sheet). Easys long-term plan is to develop the oil field and ship oil to the refineries off the coast of Texas.
On the companys December 31, 2010, balance sheet, the South American oil field was valued at
C$70 million and total assets were C$80 million. The company is audited by Hen Hao CGAs. The audit
firm has two partners, Jing and Wan. The auditors in this case reported to J ing. Wan was not involved in
the audit and has never met Chen.

The audit firm completed the field work on the audit of the 2010 financial statements on February 28, 2011,
and found no material misstatements. However, on March 1, 2011, the government of Argentina made a
surprising announcement that it was nationalizing the oil field and taking ownership of the property. Chens
company will be paid C$6 million. Chen was very surprised at this as she had always involved the local
government in her plans and was expecting to receive favourable tax treatment in Argentina by creating at
least 200 jobs locally.

Required
3 a. Indicate whether the nationalization is a Type I or Type II subsequent event. Briefly explain your
answer.

6 b. Assuming that the government nationalized the oil field on March 8, 2011 (1 week after the
announcement), explain in two points how this announcement should be handled by the auditor.

3 c. Indicate who should perform the independent review when the audit is completed. Explain your
answer.


END OF EXAMINATION

100


EXTERNAL AUDITING [AU1]
EXAMINATION














AU1
















Before starting to write the examination, make sure that it is complete and that there are no
printing defects. This examination consists of 6 pages. There are 8 questions for a total of
100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.


To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.

Calculate Mathematically determine the amount
or number, showing formulas used and
steps taken. (Also Compute).
Compare Examine qualities or characteristics that
resemble each other. Emphasize
similarities, although differences may
be mentioned.
Contrast Compare by observing differences.
Stress the dissimilarities of qualities or
characteristics. (Also Distinguish
between)
Criticize Express your own judgment concerning
the topic or viewpoint in question.
Discuss both pros and cons.
Define Clearly state the meaning of the word or
term. Relate the meaning specifically to
the way it is used in the subject area
under discussion. Perhaps also show
how the item defined differs from items
in other classes.
Describe Provide detail on the relevant
characteristics, qualities, or events.
Design Create an outcome (e.g., a plan or
program) that incorporates the relevant
issues and information.
Determine Calculate or formulate a response that
considers the relevant qualitative and
quantitative factors.
Diagram Give a drawing, chart, plan or graphic
answer. Usually you should label a
diagram. In some cases, add a brief
explanation or description. (Also Draw)
Discuss This calls for the most complete and
detailed answer. Examine and analyze
carefully and present both pros and
cons. To discuss briefly requires you to
state in a few sentences the critical
factors.
Evaluate This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not sufficient.)
Cite authorities. Cite advantages and
limitations.
Explain In explanatory answers you must clarify
the cause(s), or reasons(s). State the
how and why of the subject. Give
reasons for differences of opinions or of
results. To explain briefly requires you
to state the reasons simply, in a few
words.
Identify Distinguish and specify the important
issues, factors, or items, usually based on
an evaluation or analysis of a scenario.
Illustrate Make clear by giving an example, e.g., a
figure, diagram or concrete example.
Interpret Translate, give examples of, solve, or
comment on a subject, usually making a
judgment on it.
Justify Prove or give reasons for decisions or
conclusions.
List Present an itemized series or tabulation.
Be concise. Point form is often
acceptable.
Outline This is an organized description. Give a
general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Prove Establish that something is true by citing
evidence or giving clear logical reasons.
Recommend Propose an appropriate solution or course
of action based on an evaluation or
analysis of a scenario.
Relate Show how things are connected with
each other or how one causes another,
correlates with another, or is like
another.
Review Examine a subject critically, analyzing
and commenting on the important
statements to be made about it.
State Clearly provide a position based on an
evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in
condensed form, like the summary of a
chapter, omitting details and illustrations.
Trace In narrative form, describe progress,
development, or historical events from
some point of origin.

SAU1S12 CGA-Canada, 2012 Page 1 of 4
CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
September 2012
SUGGESTED SOLUTIONS

Marks Time: 3 Hours

30 Question 1
Note:
2 marks each

Sources/Calculations:
a. 2) Topic 1.9 (Level 1)

b. 3) Topic 1.8 (Level 1)

c. 3) Topic 1.9 (Level 1)

d. 2) Topic 1.8 (Level 1)

e. 2) Topic 2.4 (Level 1)

f. 3) Topic 2.3 (Level 1)

g. 1) Topic 2.3 (Level 1)

h. 3) Topic 2.4 (Level 1)

i. 1) Topic 3.3 (Level 1)

j. 2) Topic 3.4 (Level 1)

k. 1) Topic 3.4 (Level 1)

l. 3) Topic 3.4 (Level 1)

m. 4) Topic 3.6 (Level 1)

n. 3) Topic 6.7 (Level 2)
RIA =
.
...
= 0.521

o. 3) Topic 6.11 (Level 2)









Continued...
SAU1S12 CGA-Canada, 2012 Page 2 of 4
9 Question 2
Source: Topic 4.6 (Level 1)
The inherent risk at Jerrys Trucking is high.
Integrity of management is doubtful, since Jerry simply takes cash and does not appear to report this in
the company income.
The company has never been audited before.
The accounting is done by one person, who is not a trained accountant.
Jerry checks all of the bookkeeping entries, making any corrections he feels are necessary, but he is not
a trained accountant.
Management is not knowledgeable about customs fees and regulations; therefore, mistakes will likely
occur.
The company has transactions in Canada and the United States; therefore, there are foreign currency
complexities to deal with.

Note:
1
1
/2 marks per bullet to a maximum of 9 marks

9 Question 3
Source: Topic 9.2 (Level 2)
7
1
/2 a. Verify count sheets are complete
Select a random sample of the count sheets and test them by a re-count
Verify that all pre-numbered count sheets are included in the inventory reconciliation

Look for fictitious adjustments to inventory account
Scan the inventory entries in the ledger for unusual entries and amounts, and trace back to
supporting documents

Find out about obsolete items
Enquire with management about the policy for identifying and writing down obsolete items
Scan the inventory records for slow-moving items
Review samples of inventory and look for damaged or shop-worn items

Check cut-off
Obtain the serial numbers of the last shipping and last receiving documents for the year
Trace the last receiving document into the inventory account for the year
Trace the goods from the last shipping document to ensure they were removed from the inventory
account for the year
Trace subsequent shipping and receiving documents to ensure they were removed from or added to
next years inventory

Check assignment of inventory
Review bank confirmations for indications of assignment
Review board of directors minutes for authorization of assignment
Review debt agreements for pledge of inventory

Note:
1
1
/2 marks per bullet to a maximum of 7
1
/2 marks




Continued...
SAU1S12 CGA-Canada, 2012 Page 3 of 4
1
1
/2 b. Select a sample of inventory items and vouch unit prices to supporting invoices
Select a sample of entries to inventory records and recalculate purchase invoice amounts
Recalculate the journal extensions and footings for accuracy

Note:
1
1
/2 marks for any reasonable procedure

10 Question 4
Source: Topic 4.4 (Level 1)

8 a. Use 5% to 10% of normalized income from continuing operations (if income is used as a base, it
should be adjusted for extraordinary or abnormal items)
$2,100,000 + $500,000 (the bribe is not a normal business item)
$2,600,000 + $400,000 = $3,000,000 (the $400,000 is fraudulent)
Therefore 5% to 10% = $150,000 to $300,000
The auditor would choose an amount in the above range, based on professional judgment.

Note:
2 marks per bullet to a maximum of 8 marks

2 b. The vacation expense misstatement was fraudulent, therefore qualitatively material, even though much
less than the quantitative amount calculated by the auditor for materiality.

12 Question 5
Source: Topic 5.3 (Level 1)

Segregation of responsibilities category:
Authorization of transactions
Example: The purchase manager can authorize transactions, but cannot enter them to the general ledger
(G/L).

Recording of transactions
Example: The accounting department enters the PO to the G/L but cannot authorize a PO.

Custody of goods
Example: It is not clear how custody of inventory is maintained, but is stated to be under the control of
the warehouse supervisor, therefore separate from the other functions.

Periodic reconciliation
Example: There is a reconciliation done each quarter and any adjustments to the G/L account above
$1,500 are authorized by a separate person.

Note:
1 mark each for the segregation of responsibilities plus 2 marks for each example to a maximum of 12 marks







Continued...
SAU1S12 CGA-Canada, 2012 Page 4 of 4
8 Question 6
Source: Topic 7.11 (Level 1)
When using the test data approach:
The computer system being tested must be the same one the client used to process data for the entire
period under review.
None of the test data can contaminate the clients records and files.
The auditor must include both valid and invalid transaction data in order to test controls for invalid data.
Examining only the output may miss offsetting errors in the computer processing.
Without examining the internal processing logic of the computer systems, the auditor can only prove
that the computer system works correctly with the test data used.
Note:
2 marks per bullet to a maximum of 8 marks

10 Question 7
Source: Topic 8.2 (Level 1)
Stratify sales by customer, or by amount (possible high-risk accounts)
Scan the 30,000 sales for unusually large amounts, or for round numbers (possible fraud or error)
Verify the numerical accuracy of sales to the general ledger sales account (accuracy)
Scan for entries without shipping dates (fictitious sales)
Scan for duplicated sales (validity of sales)
Scan for shipping dates after year end (possible cut-off errors)
Note:
1
1
/2 marks for CAAT plus 1 mark for reason (2
1
/2 marks per bullet) to a total of 10 marks

12 Question 8
3 a. Source: Topic 10.9 (Level 2)
This is a Type II event, because the cause and manifestation both occurred after year end.

6 b. Source: Topic 10.9 (Level 2)
The auditor will have to ensure proper and full disclosure, but there will not be any adjustment to
the companys accounts and financial statements.
The amount is highly material, because the company is losing at least C$64 million and is also
losing its largest asset. The value of the collateral held by the bank is now drastically reduced and
the bank may call its loan.
The auditor should consider the risk of going concern.
Note:
3 marks per bullet to a maximum of 6 marks

3 c. Source: Topic 10.11 (Level 2)
The independent review should be performed by Wan.
She is from the same audit firm.
She has had no experience on the engagement.
She has not been biased by the ongoing relationship with the client.
Note:
1 mark per bullet to a maximum of 3 marks

END OF SOLUTIONS

100

AU1S12 CGA-Canada, 2012
CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
September 2012
EXAMINERS COMMENTS
General Comments
Overall performance on this examination was good. Students answers demonstrated a good awareness of
the tested issues involved in internal control, inherent risk, materiality, inventory, audit risk, ethics, and
reporting. The performance on the multiple-choice questions was good.

However, it appears that some students may be focusing their study on past examinations rather than the
course material. For example, some students had very little awareness of the test data approach, even
though the module notes provide most of the material for the answers. These examinations do not repeat
questions from old examinations, and all course material is examinable as indicated (Level 1, Level 2, or
Level 3). There is also a blueprint provided to help guide students.

Another problem was that some answers did not address the required; they cannot obtain a satisfactory
mark.

AU1 examinations are reviewed and designed to address the learning objectives of the course, with
appropriate emphasis on Levels 1 and 2. Students should be sure to study the course materials for topics
and the depth of detail. It is recommended that students underline the task in the required part of the
question, to ensure that their answer addresses each point. When answering questions dealing with audit
procedures, students should ensure that the procedure identifies what records or items will be selected and
what actions will be taken. It is also helpful to think of what audit evidence is being sought and how this
would be obtained.
Specific Comments
Question 1 Multiple choice (Levels 1 and 2)
This question was answered well. Parts (e), (l), and (o) were not answered satisfactorily.
e. Auditors independence Evaluate situations that may threaten independence (Level 1)
This question was not answered satisfactorily. An advocacy threat occurs when an auditor is
promoting a clients position or opinion; a self-interest threat occurs when an auditor stands to benefit
from an association or interest in a client; and an intimidation threat occurs when an auditor is deterred
from acting objectively, by actual or perceived threats from a client. None of these situations is
suggested by the fact that the auditor previously worked for the client as a student, therefore
options 1), 3), and 4) are not reasonable. Option 2), however, is possible since the auditor may be
reviewing his or her own work. Therefore option 2) is the best choice.

l. Evidence-gathering audit procedures (Level 1)
This question was not answered satisfactorily. CAS 402, Audit Considerations Relating to an Entity
Using a Service Organization, which is a Level 1 required reading for Topic 3.4, discusses this topic.
A Type 1 report is a report prepared by the service auditor on the description and design of the
controls, but the given information states that the external auditor has already made a risk assessment
and expects that controls are operating effectively. Therefore option 1) is not a reasonable choice. The
auditor needs to obtain evidence concerning the operating effectiveness of the controls at the service
organization, therefore the recommended procedure is to have another auditor (that is, independent) to
perform tests of controls at the service organization on behalf of the external auditor. Therefore
option 2) is not the best choice. Option 4) cannot be reasonable since the auditor still needs evidence.
Option 3) is the best choice.


Continued...
AU1S12 CGA-Canada, 2012

o. Dollar-unit sampling (Level 2)
This question was not answered satisfactorily. The module notes point out that dollar-unit sampling
(DUS) is an attribute sampling method that can be used for sampling for tests of controls and for
sampling for tests of details of balances, and that the population in DUS is a pool of dollars not a
pool of transactions, nor a pool of individual accounts. Therefore options 1), 2), and 4) are all
incorrect, and option 3) is correct.

No particular problems were noted with the remaining multiple-choice questions.

Question 2 Inherent risk (Level 1)
Overall performance on this question was excellent. Students who had difficulty with this question tended
to discuss internal controls and control risk, when inherent risk is the risk that exists without considering
the entitys internal controls. Most students obtained full marks or almost full marks.

Question 3 Audit procedures for inventory (Level 1)
a. Overall performance on this question was excellent, but some students were unable to provide actual
audit procedures or assumed consignment instead of assignment of inventory. Particularly, answers
dealing with cut-off tended to be vague, such as test the last few purchases to make sure they are
recorded in the right period Such an answer is more of an objective than an audit procedure; it does
not indicate how these purchases would be tested or how the auditor would determine that they were
or were not recorded in the right period. Audit procedures are a major topic in the course, so students
should expect this topic to be worth significant marks when tested.

b. Overall performance on this question was satisfactory. The question is not difficult and there are
several procedures one could use to determine accuracy. Relying on ratio analysis to compare results
either to budgets or to prior years would not provide very good evidence for accuracy. The question
asked students to determine the accuracy, not to see if the inventory numbers seemed reasonable or as
expected; therefore ratio analysis would not be a satisfactory procedure in this case.

Question 4 Materiality (Level 1)
a. Overall performance on this question was excellent, but some students confused materiality with
material misstatement and calculated which of the misstatements they would consider to be material.
This problem results from not reading the required carefully. Students are reminded that their answer,
even if it contains true statements, cannot be awarded full marks if it does not answer the question
asked. Part (a) dealt with the quantitative aspect of materiality. There were marks for each factor
considered in the answer, and most students obtained at least part marks.

b. Overall performance on this question was satisfactory. Most students identified the fraudulent nature
of the misstatement and its implications. Some students, however, simply stated that the error would
be added to unadjusted errors to be considered at the end of the audit. While the amount itself was
immaterial, misstatements involving fraud are always considered material. Again, the required part of
the question has to be addressed. The question was not how would the auditor handle this
misstatement for the audit, but how would it be treated in terms of materiality.

Question 5 Internal controls (Level 1)
Overall performance on this question was excellent. Most students achieved full or almost full marks.
Students who had difficulty with this question tended to answer in terms of how to improve the internal
control at the company, which may be an answer from a past examination. This question simply required
analysis of the existing segregation of responsibilities. Some students were unaware of the four kinds of
responsibilities that should be segregated for effective internal control. A few answers simply repeated the
given information in the question with no indication of segregation of responsibilities.



Continued...
AU1S12 CGA-Canada, 2012
Question 6 Test data approach (Level 1)
This question was not answered satisfactorily. Answers that did not address the test data approach could
not obtain any marks. Although the topic is fully discussed in the module notes, many students appear to
have very little knowledge of this topic. A typical answer simply offered one point that there could be
offsetting errors but little more, or else explained general sampling issues, such as select a random
sample, or suggested audit steps for the payroll account, such as check the time cards or verify the pay
scale rate. These may be helpful to an auditor in a general sense, but are not related to the test data
approach.

Question 7 Computer assisted audit techniques (Level 1)
This question was answered satisfactorily, but some students lost marks by providing examples that were
not related to auditing, such as select all sales to a particular product so that the company can determine
which products are in high demand. This may be a useful strategy for the business itself, but is not related
to auditing. These types of answers were awarded part marks for the use of the computer software to select
files or transactions or accounts, but could not obtain full marks as they were not shown to be related to
auditing of sales at the company. Answers that simply repeated the example in the given information about
identifying customers in a particular geographic area were not awarded any marks as the question asked
for four other examples.

Question 8 Subsequent events (Level 2)
a. Part (a) was answered satisfactorily, but some students confused subsequent events with contingent
liabilities and answered based on the probability of the event and the materiality. However most
students obtained at least high part marks for this question.

b. Part (b) was answered satisfactorily, with no problems noted other than a lack of detail in some
answers. The event was very significant and as such the disclosure should have been extensive. There
were no other problems noted.

c. Part (c) was not answered satisfactorily. Many students answers suggested a lack of awareness of the
independent review at the end of the audit. Some students suggested that another audit firm be hired,
or that the auditor partner, Jing, who was in charge of the audit do it. There are important reasons for
the independent review, which should have suggested that the other partner, Wan, was the appropriate
choice.