Auditing: The Art and Science of Assurance Engagements 15th Canadian Edition by Alvin A Arens Test b

information risk.
D) The bank manager is unsure that the client will be able to continue operating successfully in the future
given the economic climate.
Answer: C
24) What is the most appropriate method for an organization to lower information risk related to its financial
statements?
A) Use a high- quality software package to keep track of information.
B) Have an independent financial statement audit conducted.
C) Have an independent operational audit conducted on effectiveness.
D) Hire a good CPA to complete its bookkeeping work.
Answer: B
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
25) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank will make a loan to
Frost Corp, a snow removal company. Further, Frederic has to decide how much they will lend to Frost and at
what rate.
Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest? What factors are
impacted by auditing and how?
Answer: Factors:
1. Risk- free interest rate: The rate the bank could earn in a risk- free investment such as Canada Treasury
bills.
2. Business risk for the customer: Possibility that the customer will not be able to repay their loan because
of economic or business conditions.
3. Information risk: Possibility that the information upon which the business decisions are made were
inaccurate.
Audits impact information risk. Having a set of audited financial statements can reduce the information
risk and increase the likelihood that the bank will make the loan and even at a reduced interest rate due
to the reliance it can place on the audited financial statements.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
26) ZK3 Ltd. is a successful 20- year- old private Canadian family-owned business. The company is owned equally
by four siblings who are all involved in managing the daily operations of the company. A private equity
company is contemplating an investment in ZK3 and insists on audited financial statements. The following are
likely explanations for the private equity company's request except
A) remoteness of information related to ZK3's operations.
B) biases and motives of ZK3 management.
C) reducing information risk to the private equity investor.
D) Canada Revenue Agency requirements for audited financial statements.
Answer: D
27) Information risk can be caused through any one of the following except
A) low volume of data. B) complex exchange transactions.
C) remoteness of information. D) biases and motives of the provider.
Answer: A
28) The underlying conditions that create demand by users for reliable financial information include the fact that
A) there is a need for the expression of an opinion as to the fairness of financial statements.
B) more reliable information will allow investors to calculate the rate of return on their investment.
C) governments rely on such information to create tax policies.
D) users are separated from accounting records by distance and time.
Answer: D
29) Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario.
Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable CPA on staff in the
Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the
CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development
project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala's
financial statement auditors assist in addressing?
A) Concerns over business risk B) Concerns over remoteness of information
C) Concerns over assessment risk. D) Concerns over client risk
Answer: B
30) Annual financial statement audits are required for which of the following situations?
A) American corporations as part of filing their tax returns with the IRS
B) Private companies
C) Public companies and large not-for- profit organizations
D) Canadian corporations as part of their tax filings with the Canadian Revenue Agency
Answer: C
31) How does a financial statement auditor help reduce information risk, and make financial statements more
trustworthy and reliable?
A) By ensuring the business is using its resources efficiently.
B) By confirming that the company is only taking reasonable business risk.
C) By bringing integrity, independence, competence, and knowledge of financial statement reporting to the
audit of the financial statements.
D) By verifying that the company has a credible CSR plan.