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2014 CARE Part II
Sample Questions and
Solutions
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
ASSURANCE
QUESTION 1:
The auditor has a responsibility related to events occurring between the date of the financial
statements and the date of the audit report on those financial statements (subsequent events).
Which one of the following is the period in which the auditor should actively seek evidence
regarding subsequent events?
A. The period from the date of the balance sheet to the date of completion of the audit fieldwork.
B. The period from the date of the balance sheet to the date the financial statements are filed with
regulatory authorities.
C. The period from the date of the balance sheet to the date the financial statements are presented to
the shareholders at the annual general meeting.
D. The period from the date of the balance sheet to the date of the audit report.
QUESTION 2:
Which one of the following statements describes the form and content of a disclaimer of opinion
in the audit report of an entity that uses IFRS as its financial reporting framework?
A. The opinion paragraph should state, “Except for the effects of the matter(s) described in the basis
for disclaimer of opinion paragraph…”
B. The opinion paragraph should state, “Except for the possible effects of the matter(s) described in
the basis for disclaimer of opinion paragraph…”
C. The opinion paragraph should state, “The auditor does not express an opinion on the financial
statements.”
D. The opinion paragraph should state, “The financial statements do not present fairly in accordance
with IFRS.”
QUESTION 3:
You are the auditor of Big Money Co. (BMC). BMC has a large accounts receivable balance
and, given current economic conditions in the industry, you have identified collectability of the
receivables as an area of concern.
Which one of the following procedures would provide only limited assurance as to the
collectability of the accounts receivable?
A. Direct confirmation of the accounts receivable balances with customers.
B. Assessing BMC’s customers’ credit worthiness based on your obtained knowledge of the industry
and the customers.
C. Checking a statistically selected sample of the accounts receivable balances to subsequent
receipts.
D. Assessing BMC’s insurance coverage for customer defaults.
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
QUESTION 4:
CPA Canada Handbook Section 9100, Reports on the Results of Applying Specified Auditing
Procedures to Financial Information Other than Financial Statements, provides guidance to a
public accountant hired to perform a special type of engagement. For example, the public
accountant could be asked to compare prices on inventory items to recent purchase invoices.
Which one of the following statements would be appropriate in a Section 9100 report?
A. I compared the prices of 40 inventory items to recent purchase invoices and found them to be in
agreement.
B. I compared the prices of 40 inventory items to recent purchase invoices and nothing came to my
attention which would lead me to believe that inventory is misstated.
C. I compared the prices of 40 inventory items to recent purchase invoices, and in my opinion, the
inventory cost is presented fairly.
D. I compared the prices of 40 inventory items to recent purchase invoices and, based on this limited
sample, it appears that the inventory is presented in accordance with IFRS (or other appropriate
framework).
QUESTION 5:
The auditor has determined that the client uses a computer program to calculate interest on notes
receivable.
Which one of the following is the most appropriate audit procedure to determine whether the
auditor can rely on the program’s calculations?
A.
B.
C.
D.
Reperformance of the interest calculations using generalized audit software.
Analytical review to determine whether the interest calculations overall are reasonable.
Examination of documentation of the algorithms used within the program.
Inquiries of the client to determine whether customers are paying interest as calculated by the
program.
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
QUESTION 6:
You have just returned from observing the physical inventory count performed by your client,
Summitview Inc., a distributor of auto parts. While there, you selected items from the client
inventory listing, performed test counts of these items and agreed these counts to the tags on the
inventory items selected. In addition, you noted several inventory items in the inventory listing
marked “consignment inventory”. You discussed these items with the controller and determined
that they represented parts at customer sites. You called the customers noted as holding
consignment inventory and confirmed that they performed counts of the consignment goods.
Which one of the following lists the audit assertions that have been addressed by the procedures
performed?
A.
B.
C.
D.
Rights and obligations, existence.
Completeness, rights and obligations.
Existence, valuation and allocation.
Completeness, existence.
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
PERFORMANCE MEASUREMENT & REPORTING – IFRS
QUESTION 7:
Construct Co. uses the percentage of completion method to recognize revenue from construction
contracts and determines the stage of completion of a contract based on the proportion of
contract costs incurred for work performed to date and total expected contract costs. During the
year, the company incurred costs of $489,000 out of a total estimate of $876,000 on Contract A.
According to the fixed price contract, total revenues are $1,500,000. Expected profits (when the
contract was signed) were $600,000. In the previous year, $200,000 was incurred on this
contract and costs were on budget.
Which one of the following represents the amount of profits to be recognized in the current year
relating to Contract A (rounded to the nearest $1,000)?
A.
B.
C.
D.
$326,000.
$348,000.
$358,000.
$491,000.
QUESTION 8:
On January 1, 2011 Tax Ltd. acquired an asset at a cost of $150,000. This asset is depreciated on
a straight line bases over 10 years. Tax Ltd. has no other depreciable assets.
During the year ended December 31, 2013, Tax Ltd. had income before taxes of $100,000 after
deducting a $12,000 fine that is not deductible for tax purposes. Tax Ltd. claimed CCA in the
amount of $20,000 in 2013. The tax base of the depreciable asset at December 31, 2013 is
$85,000 (December 31, 2012 - $108,000). Tax Ltd.’s 2013 tax rate is 30%, unchanged from the
preceding year.
Based solely on the information provided, which one of the following is the amount of the tax
provision that Tax Ltd. would recognize on the statement of comprehensive income for the year
ended December 31, 2013?
A.
B.
C.
D.
$30,000
$30,900
$32,100
$34,500
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
PERFORMANCE MEASUREMENT & REPORTING – ASPE
QUESTION 9:
Which one of the following statements regarding research and development costs is correct?
A. Expenditure on the research phase of an internal project could be recognized as an intangible
asset once the technical feasibility of the internal project is determined.
B. The search for alternative materials and the formulation of possible alternatives for improved
products are examples of development activities.
C. The development of a new internally generated company brand could be recognized as an
intangible asset.
D. The costs of employee salaries, wages and benefits arising from the development of a new
technology could be recognized as part of the cost of the intangible asset.
QUESTION 10:
Which one of the following statements regarding impairments of long-lived assets is correct?
A. The carrying amount of a long-lived asset is not recoverable when its carrying amount exceeds
the estimated undiscounted future cash flows from its use and eventual disposition.
B. Once an impairment loss has been recorded on a depreciable long-lived asset, the new cost base
should not be amortized.
C. Impairments of long-lived assets must be determined on an individual, long-lived asset basis and
not on the basis of a group of long-lived assets.
D. It is acceptable to increase the net carrying value of a long-lived asset previously reduced to its
net recoverable amount if the net recoverable amount subsequently increases.
Solutions are on the next page 
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
Solutions
ASSURANCE
1: Correct answer is D.
See CPA Canada Handbook - Assurance, CAS 560.06 and .07. “The auditor shall perform audit
procedures designed to obtain sufficient appropriate audit evidence that all events occurring
between the date of the financial statements and the date of the auditor's report that require
adjustment of, or disclosure in, the financial statements have been identified.” The date of the
audit report is no earlier than the date on which the auditor has obtained sufficient appropriate
audit evidence and when those with recognized authority have asserted that they have taken
responsibility for those financial statements (CAS 700.41).
A is not correct as the period covered is often prior to the date of the auditor’s report.
B and C are not correct as the periods extend beyond the date of the auditor’s report.
2: Correct answer is C.
Refer to CPA Canada Handbook - Assurance, CAS 705.09, .10 and .25, and illustrations 4 and 5
of the appendix to CAS 705.
A and B are incorrect as these describe the form of an audit opinion when a positive opinion is
rendered on the financial statements as a whole, but the auditor qualifies the opinion with respect
to a scope limitation of the audit and/or a departure from IFRS (or other reporting framework).
[CAS 705.07 and .23 and illustrations 1 and 3 of the appendix.]
D is incorrect because it describes an adverse opinion issued when the departure(s) from IFRS
(or other reporting framework) is/are both pervasive and material such that the auditor concludes
the financial statements do not present fairly in accordance with IFRS (or other reporting
framework) even when read in conjunction with the audit report. [CAS 705.08 and .24 and
illustration 2 of the appendix].
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
3: Correct answer is A.
Confirmation of a receivable balance provides only limited assurance as to collectability of the
accounts receivable. Confirmation of accounts receivable is an audit procedure designed
primarily to provide assurance on the existence of the balance (refer to CPA Canada Handbook Assurance, CAS 330.A49).
B is incorrect because verifying creditworthiness of customers provides some assurance as to
collectability in the absence of subsequent receipts.
C is incorrect because examining subsequent receipts is the most common procedure for
examining collectability.
D is incorrect because in the case of accounts receivable that are fully insured, collectability is
not an issue (provided that the receivable exists).
4: Correct answer is A.
A report of the results of specified auditing procedures should specify the procedures performed
and state only the factual results of those procedures (CPA Canada Handbook - Assurance, OCS
9100.11). The procedures performed are not intended to enable the accountant to provide
positive or negative assurance (OCS 9100.01).
B is incorrect because it provides negative assurance.
C is incorrect because it provides an opinion on fair presentation.
D is incorrect because the term “it appears” is not assurance, however, users may interpret this as
providing assurance.
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
5: Correct answer is A.
Reperformance involves recomputation. This is a dual-purpose test that will both substantively
verify that the calculations are correctly performed and also verify that the program is
functioning as described; if the amounts match, the program is working correctly.
B is incorrect because analytical review will not provide evidence to the auditor as to whether or
not the program is functioning correctly. If there are offsetting differences in the calculations,
analytical review will not likely detect this.
C is incorrect because documentation of the algorithms will indicate how the program is
expected to work, but this does not mean that the program was created correctly and that the
algorithms are functioning as described. Reperformance of a test of transactions or of all of the
transactions (as described in A) is needed.
D will not indicate that calculations are correct since all customers may not calculate the
amounts of the interest independently but may rely on the amounts provided by the client.
6: Correct answer is A.
Testing from the inventory list to the physical tags only verifies existence of the inventory, not
its completeness. Verifying the nature of the consignment inventory provides some assurance as
to the rights & obligations and existence of the inventory. None of the procedures indicated tests
completeness and valuation and allocation.
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
PERFORMANCE MEASUREMENT & REPORTING – IFRS
7: Correct answer is C.
($489 + $200)/$876 x $624 (revised total profit) = $491 less the profit recognized last year of
$133 ($200/$900 x $600) = $358.
A is incorrect because it is based on the contract costs and profits estimated at the time the
contract was entered into ($689/$900 x $600 – $133 = $326). Expected costs are now $876 and
the original profit estimate of $600 is now $624 ($1,500 - $876).
B is incorrect because it is based on this year’s costs only and does not adjust for profits
recognized in the previous year ($489/$876 x $624 = $348). The calculation must be done on a
cumulative basis based on costs and profits recognized to date.
D is incorrect because it is the cumulative profit to date – see above. Since $133 has already
been recognized, it must be deducted from the $491 to arrive at the amount to be recognized this
year.
8. Correct answer is D.
The tax provision includes the current taxes ($32,100 answer C) plus the increase in the increase
in the deferred tax liability ($2,400). Thus the tax provision is $34,500.
Answer A is based solely on reported income before tax and does not consider adjustments to
determine taxable income and the deferred tax liability due to the temporary difference. Answer
B does not adjust for the non-deductible fine.
Deferred tax liability
Year
Carrying amount
Tax base
2012
120,000
2013
(150 – (15 x 2 yrs))
105,000
DT @ 30%
108,000
Temporary
difference
12,000
85,000
20,000
6,000
3,600
(130 – (15 x 3 yrs))
Increase
2,400
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)
Tax provision
Income before taxes
Add depreciation
Add non-deductible fine
Deduct CCA
Taxable income
Taxes payable at 30%
Increase in deferred tax liability
Tax provision
$ 100,000
15,000
12,000
(20,000)
107,000
32,100
2,400
$ 34,500
PERFORMANCE MEASUREMENT & REPORTING – ASPE
9: Correct answer is D.
“The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce and prepare the asset to be capable of operating in the manner
intended by management”. The costs of employee salaries, wages and benefits arising from the
generation of the new technology are examples of directly attributable costs. Refer to CPA
Canada Handbook – Accounting, Section 3064.50.
Answer A is false. No intangible asset arising from the research phase of an internal project
shall be recognized (3064.37). The amount should be recognized as an expense when it is
incurred, even if the technical feasibility of the internal project is determined at a later date. “In
the research phase of an internal project, an entity cannot demonstrate that an intangible asset
exists that will generate probable future economic benefits. Therefore, this expenditure is
recognized as an expense when it is incurred.” (3064.38).
Answer B is incorrect because these are examples of research activities (3064.39).
Answer C is incorrect because expenditure on internally generated brands cannot be
distinguished from the cost of developing the business as a whole. Therefore, it cannot be
recognized as an intangible asset (3064.48).
10: Correct answer is A.
See CPA Canada Handbook – Accounting, Part II, Section 3063, paragraph .05.
B is incorrect because the new cost base should be amortized (3063.06).
C is incorrect because there are circumstances where assets should be grouped to make an
appropriate assessment (3063.12).
D is incorrect because subsequent reversals are not recognized (3063.06).
Copyright © 2014 Chartered Professional Accountants of Ontario (The Institute of Chartered Accountants of Ontario)