CPA Canada Core 1: Audit and Assurance

Use this page to isolate Audit and Assurance before returning to mixed CPA Canada Core 1 practice.

Topic snapshot

Sample questions

These questions are original Finance Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Audit and Assurance

An audit team is planning the year-end audit of Northline Tools Ltd., a private company. Overall materiality is $100,000. At interim, the team planned to rely on a September inventory count and limited roll-forward testing because controls over inventory quantities had tested effective. In December, a major customer cancelled a product line that uses specialized components held in inventory. The partner concludes that the assessed risk of material misstatement for inventory valuation is now higher, so the team should perform more persuasive and more extensive valuation testing at year end rather than rely mainly on interim work. Which evidence source best supports the partner’s conclusion?

• A. A September cycle-count summary showing no quantity exceptions for the specialized components.
• B. A signed management representation stating that the specialized components are expected to be sold in the normal course.
• C. A year-end aged inventory report reconciled to the general ledger, showing $420,000 of the specialized components on hand, together with January sales invoices for those components at prices below cost.
• D. A supplier catalogue showing list prices for new replacement components sold by the same supplier.

Best answer: C

What this tests: Audit and Assurance

Explanation: As assessed risk of material misstatement increases for a specific assertion, the assurance response should become stronger: more persuasive evidence, procedures closer to year end, and/or greater extent of testing. The issue here is inventory valuation, not just quantity existence. The reconciled year-end aged inventory report identifies a material amount of specialized components still on hand, and the subsequent sales invoices provide objective evidence that selling prices after year end are below cost. That combination directly supports a higher valuation risk and the need for expanded year-end substantive procedures rather than relying mainly on interim inventory work.

• The September cycle count supports interim quantity controls, but not year-end valuation or net realizable value.
• The management representation is relevant but not sufficiently persuasive on its own when assessed risk is higher.
• The supplier catalogue supports replacement pricing, not whether Northline can recover cost through sale of the specialized inventory.

This directly supports a material year-end valuation risk and justifies more persuasive, more extensive substantive testing close to year end.

Question 2

Topic: Audit and Assurance

A private Canadian company uses ASPE and records revenue when goods are shipped. At month end, the accounts receivable clerk exports open sales orders to Excel, manually changes some shipment dates based on emails from the warehouse, and uploads the edited file to the general ledger. The original export is not retained. A cutoff error was found because December revenue included orders that were not shipped until January. Which remediation best addresses the process weakness affecting source-data reliability?

• A. Add a note disclosure stating that revenue cutoff depends on warehouse emails and manual spreadsheet updates.
• B. Ask the accounts receivable clerk to document the reason for each manual shipment-date change in the Excel file.
• C. Record a recurring month-end revenue reversal based on the average cutoff error from prior periods.
• D. Require a system-generated, read-only cutoff report based on shipment date, retain the original report, and reconcile the upload to shipping records before posting revenue.

Best answer: D

What this tests: Audit and Assurance

Explanation: The issue is not only the identified cutoff error; it is the unreliable source-data process used to create the revenue entry. Manual edits to an Excel upload, no retained original export, and reliance on informal emails create a risk that revenue is recorded using incomplete or altered data. The best remediation should strengthen the process at the source: use a controlled system-generated report, make it read-only or restrict edits, retain the source report, and reconcile the posted amounts to reliable shipping evidence. This targets the cause of the misstatement and supports reliable financial reporting under ASPE revenue recognition based on shipment.

• Documenting manual changes may improve the audit trail, but it still permits unreliable source-data alteration.
• A recurring estimate corrects symptoms and may create new errors if actual cutoff differs.
• Disclosure does not fix an unreliable revenue recording process or support proper recognition.

This directly improves reliability of the source data by using controlled system data, preserving the source, and reconciling to shipment evidence.

Question 3

Topic: Audit and Assurance

You are planning a review engagement for Koru Home Inc., a private company reporting under ASPE. The primary user is the bank renewing Koru’s operating line; the bank requires a current ratio of at least 1.20. The engagement objective is to provide limited assurance on the annual financial statements. Draft current assets are $2,480,000 and current liabilities are $2,000,000. Inventory includes $150,000 of a discontinued product, and management has not reassessed net realizable value after a major customer cancelled orders. Which planning implication should be classified as the most appropriate?

• A. A covenant-sensitive inventory valuation risk requiring targeted review procedures and materiality consideration.
• B. An audit evidence issue requiring physical inventory count attendance before issuing any review report.
• C. A tax-only inventory issue because any write-down primarily affects taxable income.
• D. A routine inventory balance because a review engagement is limited to general inquiries and analytics.

Best answer: A

What this tests: Audit and Assurance

Explanation: The planning implication follows from the user need, engagement objective, and reporting risk together. The bank relies on the ASPE financial statements to assess a current ratio covenant, and the draft ratio has limited headroom. Inventory includes a discontinued product with a clear indicator that net realizable value may be below cost. In a review engagement, the practitioner provides limited assurance, but still plans work around areas where material misstatement is likely and where users are sensitive to the outcome. Therefore, inventory valuation should be treated as a covenant-sensitive review area, with targeted inquiries, analytical procedures, and additional support as needed for NRV and the covenant impact.

• Treating inventory as routine ignores the covenant sensitivity and the specific NRV indicator.
• Requiring inventory count attendance imports an audit-type response that is not automatically required for a review engagement.
• Classifying the matter as tax-only ignores the bank’s financial statement use and the ASPE inventory valuation issue.

The bank covenant and possible inventory write-down make inventory NRV a likely material reporting risk for review planning.

Question 4

Topic: Audit and Assurance

Loon Lake Components Inc. is being audited for its bank under ASPE. You are reviewing the junior’s risk assessment:

• The owner-manager’s bonus and line of credit renewal depend on meeting a current ratio covenant. The draft current ratio is just above the required minimum.
• The controller resigned three weeks before year-end, and no one reviewed the year-end adjusting entries prepared by the junior bookkeeper.
• Several supplier statements dated one week after year-end show invoices for goods received before year-end that were not recorded in accounts payable.

Junior’s conclusion: “The unrecorded supplier invoices are a financial-statement-level risk because the covenant affects the overall financial statements. No assertion-level risk needs to be documented.”

What is the best correction to the risk assessment?

• A. Reclassify all facts as an assertion-level risk for debt classification because the covenant relates to the line of credit.
• B. Document the covenant pressure and lack of review as financial-statement-level risks, and document an assertion-level risk for completeness and cutoff of payables and expenses.
• C. Treat the supplier statements as conclusive evidence of fraud and plan to modify the audit opinion unless management records all invoices.
• D. Leave the conclusion unchanged because any matter affecting a bank covenant is only a financial-statement-level risk.

Best answer: B

What this tests: Audit and Assurance

Explanation: Financial-statement-level risks are broad risks that may affect many accounts or the financial statements as a whole, such as management pressure to meet a covenant and a weak year-end review process after the controller resigned. Assertion-level risks relate to specific accounts, classes of transactions, or disclosures. The unrecorded supplier invoices for goods received before year-end directly indicate a risk that accounts payable and related expenses are incomplete or recorded in the wrong period. The correction should preserve both levels of risk assessment rather than forcing all facts into one category.

• Treating all covenant-related matters as financial-statement-level risks misses the specific payable completeness and cutoff risk.
• Focusing only on debt classification corrects the wrong issue; the source conflict is about unrecorded supplier invoices.
• Calling the supplier statements conclusive fraud evidence overstates the required response; they are evidence of a misstatement risk requiring follow-up.

The pressure and weak review process are pervasive, while the omitted supplier invoices point to specific payables and expense assertions.

Question 5

Topic: Audit and Assurance

You are assisting with risk assessment for the year-end audit of a retailer. Two weeks before year end, the warehouse system failed and customer shipments continued using handwritten pick slips. Some shipments were delayed, causing customer complaints and possible lost future sales. Several pick slips were entered into the accounting system after year end by temporary staff. Which conclusion best distinguishes the operational risk from the financial reporting risk?

• A. The system failure is only a financial reporting risk because all operational problems ultimately affect the financial statements.
• B. The system failure is only an operational risk because the issue arose in the warehouse rather than in the accounting department.
• C. The customer complaints are the financial reporting risk because they indicate reduced future sales and possible lower profitability.
• D. The delayed shipments and customer dissatisfaction are operational risks, while the late entry of handwritten pick slips creates a financial reporting risk over revenue and inventory cutoff.

Best answer: D

What this tests: Audit and Assurance

Explanation: Operational risk relates to the entity’s ability to run its business effectively, such as delayed shipments, unhappy customers, and possible lost future sales. Financial reporting risk relates to whether the financial statements may be misstated. In this scenario, the handwritten pick slips and after-year-end system entry create a risk that revenue, receivables, cost of sales, and inventory may be recorded in the wrong period or inaccurately. The correct audit response would focus financial reporting procedures on cutoff, completeness, occurrence, and accuracy of shipments around year end, while separately noting the operational consequences for business risk assessment.

• Treating the issue as only operational ignores the direct risk of misstatement from manual documents and late data entry.
• Treating every operational problem as a financial reporting risk is too broad; the reporting risk must be tied to a possible misstatement.
• Future sales and profitability concerns are operational or business risks unless they support a specific current-period recognition, measurement, or disclosure issue.

This separates business disruption from the risk that transactions are recorded in the wrong period or at incorrect amounts.

Question 6

Topic: Audit and Assurance

Maple Ridge Supplies Ltd. sells products to retail customers and recognizes revenue when goods are shipped from its warehouse. During a walkthrough of the sales process, the following observations were noted:

Which interpretation best identifies the financial reporting risk and an appropriate related control?

• A. Inventory may be overstated due to duplicate bills of lading; require the warehouse to stop using sequential shipping documents at month end.
• B. Revenue and accounts receivable may be overstated due to cutoff errors; require a month-end match of invoices to bills of lading and defer revenue for unshipped orders.
• C. Accounts receivable may be misstated mainly due to credit risk; require credit approval for all new customers before accepting orders.
• D. Revenue may be understated due to unrecorded shipments; require sales staff to compare customer orders to cash receipts before issuing invoices.

Best answer: B

What this tests: Audit and Assurance

Explanation: The entity’s stated revenue recognition point is shipment. However, the system records revenue and receivables when the sales order is entered and the invoice is generated. Since shipments can occur after the invoice date, especially near month end, December revenue may include goods not shipped until January. The sales increase, longer accounts receivable collection period, and January shipments linked to late-December invoices all support a cutoff and occurrence risk for revenue, with a related overstatement of accounts receivable. A relevant control would reconcile invoices recorded near period end to bills of lading and adjust or defer any invoices where shipment has not occurred by the reporting date.

• Comparing orders to cash receipts does not address whether revenue was recognized in the correct period.
• Credit approval addresses collectability risk, not the cutoff risk created by recording revenue before shipment.
• Sequential bills of lading support completeness and cutoff testing; stopping their use would weaken, not improve, reporting reliability.

Because revenue is recorded before shipment, the key risk is improper cutoff and the related control should verify shipment before period-end revenue recognition.

Question 7

Topic: Audit and Assurance

A CPA firm is asked to accept a review engagement on the ASPE financial statements of a private company for submission to its bank. Before signing the engagement letter, management says it will provide records and approve the final statements, but it will not acknowledge responsibility for the financial statements or the selection and application of ASPE because “that is the CPA firm’s job.” No specific account balance or transaction has yet been identified as misstated. How should this issue be characterized?

• A. A reporting treatment issue because the CPA firm must choose the most conservative ASPE policies for management.
• B. An engagement-acceptance issue because management has not accepted its responsibilities for the financial statements.
• C. A disclosure issue because the financial statements should state that management relied on the CPA firm for accounting expertise.
• D. A planning materiality issue because the CPA firm has not yet identified which account balances are material.

Best answer: B

What this tests: Audit and Assurance

Explanation: This is not primarily about how to measure, classify, present, or disclose a specific financial statement item. The decisive fact is that management refuses to acknowledge responsibility for the financial statements and the selection and application of the reporting framework. That affects whether the preconditions for accepting the review engagement are present. Even if the CPA firm assists with drafting statements or proposing adjustments, management remains responsible for the financial statements. A reporting treatment issue would involve applying ASPE to a specific transaction, balance, presentation, or disclosure.

• Choosing conservative ASPE policies is incorrect because management, not the practitioner, is responsible for selecting appropriate accounting policies within ASPE.
• Disclosing reliance on the CPA firm does not cure management’s refusal to accept responsibility.
• Planning materiality is relevant after engagement acceptance, but it does not address the missing precondition in the stem.

A review engagement should not be accepted unless management acknowledges its responsibility for the financial statements and related accounting policies.

Question 8

Topic: Audit and Assurance

Oakridge Components Ltd. reports under IFRS. During fieldwork for the audit of the draft financial statements for the year ended December 31, 2025, the engagement team performed a legal letter procedure. The draft statements disclose a customer lawsuit as remote with no liability recorded. The lawyer’s response states:

• the lawsuit relates to defective goods shipped before year end;
• the insurer denied coverage on December 15, 2025;
• a settlement agreement for $420,000 was signed on February 5, 2026, before the statements are authorized for issue; and
• planning materiality is $100,000.

What should the engagement team do next to address the financial statement implication of this finding?

• A. Propose recording a $420,000 provision and revising the lawsuit note to describe the obligation and settlement.
• B. Treat the settlement as a non-adjusting subsequent event and add disclosure only.
• C. Wait to record any liability until the settlement is paid in cash.
• D. Issue a modified audit opinion immediately without first requesting a financial statement adjustment.

Best answer: A

What this tests: Audit and Assurance

Explanation: The assurance finding changes the reporting analysis. Under IFRS, a provision is recognized when there is a present obligation from a past event, an outflow is probable, and the amount can be reliably estimated. The defective goods were shipped before year end, and the insurer denied coverage before year end, so the condition existed at the reporting date. The settlement signed before the statements are authorized provides further evidence of the amount and confirms the obligation. Because $420,000 exceeds planning materiality, the next step is to propose the adjusting entry and update the related note disclosure. A modified audit opinion would be considered only if management refuses to make a required material correction.

• Disclosure only incorrectly treats the settlement as non-adjusting even though it confirms a pre-year-end obligation.
• Waiting for cash payment confuses payment timing with recognition of a liability.
• Modifying the audit opinion immediately is premature because management must first be asked to correct the material misstatement.

The legal response provides evidence of a material present obligation from a pre-year-end event with a reliably measurable amount.

Question 9

Topic: Audit and Assurance

Brighton Tools Ltd. is a private manufacturer reporting under ASPE. You are assisting with planning for the annual audit and need to assess the risk of material misstatement in revenue. The draft financial statements show revenue up 28% even though industry sales are down. Management bonuses are based on revenue growth, and a bank covenant depends on EBITDA. In December, Brighton began selling to a new distributor that may return unsold goods for 120 days. Invoices are recorded when goods leave the dock. The warehouse clerk can both update the shipping log and create sales invoices, and there is no review of unmatched shipments or invoices. What should be done next?

• A. Identify revenue as a higher assertion-level risk and match year-end sales to contracts, shipping records, invoices, and subsequent returns or credits before concluding on recognition and cut-off.
• B. Conclude revenue risk is low because goods were shipped before year-end and invoices were issued to the distributor.
• C. Focus first on calculating the bank covenant impact because lender pressure is the main stakeholder issue.
• D. Recommend adding a note disclosure about the return policy and perform no further revenue work unless actual returns occur.

Best answer: A

What this tests: Audit and Assurance

Explanation: The next step is to assess revenue risk at the assertion level and obtain evidence that directly supports the reporting conclusion. Several facts increase risk of material misstatement: revenue growth contradicts industry conditions, management has bonus and covenant incentives, the new distributor has significant return rights, and the same employee can affect both shipping and invoicing records without review. These factors point to possible overstatement of revenue, especially occurrence, cut-off, and measurement. The appropriate next step is therefore to connect the risks to the relevant assertions and verify the source data before deciding whether revenue has been recognized appropriately under ASPE.

• Relying on shipment and invoice existence ignores return rights, incentives, and weak controls.
• Disclosure alone is premature because recognition and measurement must be assessed first.
• The bank covenant explains management pressure, but calculating the covenant does not assess whether revenue is materially misstated.

The facts create incentive, industry, transaction, and control risks that require source-supported assessment of revenue occurrence, cut-off, and measurement.

Question 10

Topic: Audit and Assurance

Prairie Office Supplies Ltd. sells goods on credit and reports under ASPE. Credit approval is required before the warehouse can release goods, and selling prices are pulled automatically from a locked price master file. During a control walkthrough, you find that warehouse shipping documents are not sequentially accounted for and are not reconciled to the sales invoice register. The accounts receivable clerk records revenue only when a shipping document is received from the warehouse. How should this control deficiency be characterized for financial reporting purposes?

• A. A completeness risk for revenue and accounts receivable because shipped goods may not be invoiced or recorded.
• B. An accuracy risk for revenue because invoice prices may not agree to approved selling prices.
• C. A cutoff risk for revenue because shipments may be recorded in the wrong accounting period.
• D. An authorization risk for sales because goods may be released without customer credit approval.

Best answer: A

What this tests: Audit and Assurance

Explanation: The key deficiency is that shipping documents are not controlled for sequence and are not reconciled to the sales invoice register. Since revenue is recorded only when the accounts receivable clerk receives a shipping document, any missing shipping document could result in a valid shipment not being invoiced or recorded. That affects the completeness of revenue and accounts receivable. The stem reduces other possible risks: credit approval is required before release of goods, which addresses authorization, and prices come from a locked price master file, which makes pricing accuracy less directly affected by this deficiency. Cutoff may be relevant in some shipping controls, but the primary implication here is omitted transactions, not recording transactions in the wrong period.

• Pricing accuracy is not the best characterization because the deficiency does not involve price changes, quantity extensions, or invoice calculations.
• Cutoff is less direct because the issue is missing shipping documents, not specifically recording shipments before or after the correct period.
• Authorization is not the best characterization because the facts state credit approval is required before goods are released.

The missing reconciliation from shipping documents to invoices creates a risk that valid shipments are omitted from revenue and receivables.

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• CPA Canada Core 1: Financial Reporting
• CPA Canada Core 1: Finance
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