RSM 323 - Spring 2011 Midterm Exam - SOLUTION

RSM 323 - Spring 2011 Midterm Exam - SOLUTION - RSM323H1F...

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RSM323H1F (SPRING 2011) L. HARVEY MIDTERM EXAM – SOLUTION Page 1 of 9 Question 1 – Multiple Choice Total Marks: 15 (1 mark per question) Total Time Allocation: 30 minutes 1. Which one of the following situations represents a breach of the Rules of Professional conduct regarding communication with other members? a. The predecessor auditor refuses to let the successor auditor review their working papers from the previous year. b. The predecessor auditor purposely withholds information from the successor regarding suspected illegal activity by the company. c. The predecessor auditor was not able to obtain permission from the client to respond to the successor auditor. d. The predecessor auditor does not respond to the successor auditor’s letter because the fees charged to the company have not yet been paid in full. Answer: B or D 2. Which one of the following statements regarding materiality is correct ? a. The materiality level should always be set as 5% of income from continuing operations. b. The determination of a material misstatement is based solely on quantitative factors. c. Materiality is calculated by only taking audit risk into consideration. d. When materiality is determined to be lower than the prior year, procedures must be performed on the opening balances of the financial statements. Answer: D 3. Which one of the following regarding the use of confirmations is incorrect ? a. Negative confirmations can be used when the information being confirmed is material to the intended recipient. b. Follow-up and alternate procedures are required for all confirmations that are returned with exceptions. c. A positive confirmation is defined as a request that asks the recipient to reply regardless of whether the information in the confirmation is incorrect. d. If a confirmation is not returned, no additional follow-up and alternate procedures are required to be performed. Answer: D 4. Which one of the following statements regarding legal liability is incorrect ? a. A duty of care is owed if auditors know or should have known that the third party would be relying on the financial statements. b. To sue an auditor under criminal law, the plaintiff must prove that the auditor knowingly made a false assertion. c. For negligence, a breach in the duty of care owed by auditors can only be met if the auditors failed to follow the Rules of Professional Conduct (ROPCs). d. Shareholders can sue auditors under contract law. Answer: C
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RSM323H1F (SPRING 2011) L. HARVEY MIDTERM EXAM – SOLUTION Page 2 of 9 5. PA’s client sells computer equipment and supplies and thus the risk of inventory obsolescence is high. Which one of the following procedures does not provide audit evidence to support the valuation of inventory with respect to obsolescence? a. Review contracts with customers to determine whether the proper quantities
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This note was uploaded on 04/28/2011 for the course RSM 323 taught by Professor Lisaharvey during the Spring '11 term at University of Toronto- Toronto.

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RSM 323 - Spring 2011 Midterm Exam - SOLUTION - RSM323H1F...

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