Week 1

The separation of ownership and control in large organizations has resulted in: (p9)
 an audit expectation gap
 an agency problem
 the insurance hypothesis
 CLERP

The true statement is: (p24)

 most countries in the world have auditing standards that are legally
enforceable
 few countries in the world have auditing standards that are legally enforceable
 Australia is the only country in the world that has auditing standards that are
legally enforceable
 the IAASB produces accounting standards which are legally enforceable in
each country which adopts them.

In Australia, all of the following are required to have an annual audit, except: (p13)
 not-for-profit organizations
 statutory authorities
 small proprietary companies
 all of the above are required to have an annual audit with no exceptions

Which of these was not an Australian corporate collapse? (p12)

 HIH Insurance Ltd.
 One.Tel.
 Harris Scarfe.
 all were Australian corporate collapses

The auditing and accounting body with the highest number of members is: (p16-17)
 The National Institute of Accountants (22,000)
 CPA Australia (122,000)
 The Institute of Chartered Accountants in Australia (50,000)
 The International Federation of Accountants

The term audit expectation gap refers primarily to differences in expectations

between: (p30)
 auditors and users of audited financial reports.
 auditors and their clients.
 CPA Australia/ICAA and the ASIC.
 auditors and the ASIC.

It is not a requirement to be registered as an auditor in Australia to: (p14)

 be a fit and proper person
 be a member of CPA Australia, the ICAA or other approved body.
 have a degree or diploma from a course in accounting (including auditing) of
not less than 3 years duration and in commercial law (including company law)
of not less than 2 years duration or have other equivalent qualifications
acceptable to ASIC.
  all are requirements to be registered as an auditor in Australia.

ABC firm are the auditors of XYZ Company. The partner responsible for the audit
has recently spent a week working with XYZ as a paid consultant on their internal
control systems. The ethical principle that has been breached is:
 auditor independence.
 auditor appointment.
 auditor rotation.
 auditor competence.

Which body has a mission 'to develop, in the public interest, high-quality auditing and
assurance standards and related guidance to enhance the relevance, reliability and
timeliness of information provided to users of audit and assurance services'? (p25)
 the IAASB.
 the AASB.
 the AUASB.
 the FRC.

An area where auditors in Australia have generally not expanded their role is: (p31)
 reporting on internal controls
 detection of fraud
 evaluation of whether an entity is a going concern
 all of the above are areas in Australia where auditors have not expanded their
role.

The best test to decide I audits provide good value is: (p29)
 By examining how often audits are associated with company failure
 By examining whether the audit report is correct
 By examining the premium the market places on a share price for
independently audited information
 It is not possible to designate any one test as being the best to decide if audits
provide good value

Which of these actions is most likely to remove the audit expectation gap?
 Improving auditing standards.
 Educating of audit users about what are reasonable expectations.
 Improving auditor’s performance.
 It will require a comprehensive approach combining all three of the above

Investor shift financial responsibility for audited financial information to the auditor in
order to lower the expected loss from litigation or related settlements. This describes
which theory of auditing? (p12)
 explanatory
 agency
 information hypothesis
 insurance hypothesis

Under ASA 200/IAS 200 the primary objective of a financial report audit is to: (p6)
 ensure that the company is free from all fraud
 provide assurance about the future viability of the entity
  to express an opinion as to whether the financial report is prepared in all
material aspects, in accordance with a financial reporting framework
 ensure the company complies with all aspect of corporation’s law

Any situation where information is prepared by one party and then attested as to
its accuracy by another party is known as: (p14)
 an audit engagement
 agency theory
 an assurance engagement
 an assertion engagement

Week 2

Following the corporate collapses of the early 2000s, firms are:

 implementing more complicated modern audit techniques in order to minimise
audit risks.
 implementing simplified modern audit techniques in order to minimise audit
risks.
 reverting to complicated audit techniques such as substantive testing in order
to minimise audit risks.
 reverting to basic audit techniques such as substantive testing in order to
minimise audit risks

Which of these would not be a basis for disciplinary action by the National Council of
the CPA Australia?
 an auditor failed to observe a proper standard of professional care and skill.
 an auditor has become insolvent under administration.
 an auditor has breached the By-Laws of the CPA Australia.
 an auditor has resigned due to a dispute with a client over accounting policies.

According to Greenwood which of these is not necessarily an attribute of a

profession?
 self-regulation.
 a culture.
 Community sanction.
 authority.

Which of these jeopardises audit independence?

 extensive educational requirements for entry into the profession.
 monitoring and disciplinary procedures
 familiarity with a client and their systems.
 none of the above would jeopardise audit independence

In relation to specific threats to auditor independence, taxation services supplied to

audit clients are:
 generally, not seen to create a threat.
 create a threat.
 create a threat if they are performed by a subsidiary.
 create a threat only in public practice.
A possible form of discipline not found in CPA Australia's Articles of Association for
members failing to meet required standards is:
 forfeiture of membership.
 fines.
 imprisonment.
 all are possible forms of discipline found in CPA Australia's Articles of
Association

Threats to auditor independence can come from various sources. Which of these is
referred to in the Code of Ethics as self-review threat?
 the possibility of potential employment with the audit client
 preparation of original data used to generate a financial statement that is the
subject matter of the audit engagement
 concern on the part of the auditor about the possibility of losing the
engagement.
 pressure to reduce inappropriately the extent of work performed in order to
reduce fees.

What is not a category of safeguards that can be used by professional accountants?

 safeguards created by the profession, by legislation or by regulation.
 safeguards developed by CALDB.
 safeguards which are engagement specific.
 safeguards within the client's systems.

The purpose of ethical decision making models is to:

 direct the auditor on which action to take.
 help the auditor arrive at a well-informed and ethical decision.
 supplement the code of ethics.
 identify the appropriate standard to use.

Accepting a gift with the possibility of the acceptance subsequently being made
public is a form of what type of threat? Vs if the same situation in business would be
familiarity threats.
 self-interest.
 self-review.
 familiarity.
 intimidation.

Under the provisions in the Code of Ethics the statement that is not true in relation to
the technical competence of auditors is:
 members have a duty to maintain their level of competence throughout their
professional career.
 maximum annual hours of continuing professional education are prescribed
for all members, affiliates and members holding a certificate of public practice.
 public accountants should undertake only work in which they are competent.
 none of the statements is untrue

Which of the following is a fundamental principle of professional ethics?

 Confidentiality
  Objectivity
 Integrity
 all of the above

The term 'Expectation Gap' refers to differences in expectations between:

 auditors and users of audited financial reports.
 auditors and their clients.
 CPA Australia/ICAA and the ASIC.
 auditors and the ASIC

Which of the following is an example of an assurance service & non-assurance

relationship threat to auditor independence?
 the new position of the person at the assurance client
 an assurance team member has a material financial interest in a joint venture
with a senior manager of the assurance client.
 determining which recommendations of the firm should be implemented.
 obtaining an assurance engagement by charging a significantly lower fee than
the predecessor assurance professional

Which of the following is an example of an engagement-specific safeguard?

 a proper corporate governance structure within the client firm.
 involving another firm to perform or re-perform part of the engagement.
 audit firm leadership that emphasizes compliance and ethics
 all of the above are examples of engagement-specific safeguards.

The correct statement regarding the regulation of professional ethics for accountants
is:
 The government is the regulator.
 CPA Australia and the ICAA are the regulators.
 There is co-regulation between the professional bodies and the government.
 There is no current regulation.

Which of these views consider moral values to be relative in regard to a particular

environment?
 virtue ethics
 ethical relativism
 deontology
 teleology

Which of these is not identified as a type of threat to compliance with the

fundamental principles in the IFAC Code applicable to professional accountants in
public practice?
 Self-interest
 Advertising
 Self-review
 None of the above

John resigned from an assurance engagement because his independence was

impaired. He was concerned that if he did not resign then ASIC would have a case
against the firm and its reputation would suffer as a result. This is an example of:
  consequentialism.
 non-consequentialism.
 virtue ethics.
 ethical relativism.

Threats to auditor independence can come from various sources. Which of these is
referred to in the Code of Ethics as a self-interest threat?
 A loan or guarantee from an officer of an assurance client to the auditor.
 Undue dependence of the audit firm on total fees from an assurance client
 Long association of a senior member of an assurance team with the
assurance client
 A and B.

Which of these is a type of safeguard against threats to auditor independence

 Safeguard created by profession
 Safeguard within the audit firm’s own system
 Safeguards within the assurance clients own firm
 All of the above

The main areas of practice covered in the IFAC Code of Ethics for Professional
Accountants are:
 fundamental principles applicable to all professional accountants.
 fundamental principles applicable to professional accountants in public
practice.
 fundamental principles applicable to professional accountants in business.
 all the above

The view that ethics is not just a matter of what people do but what people are, is
known as: (p97) virtue ethics

Using the same senior personnel on an assurance engagement over a long period of
time may create what type of threat to audit independence? Familiarity

Week 3

The law regarding the liability by auditors to third parties for financial injury:
 is still not very clear.
 has never been tested.
 does not exist.
 is very clear

Which of these is not a characteristic of the current Australian legal environment for
auditors?
 there is a growing concern that auditors are sued following business failure
due to their requirement to have professional indemnity insurance.
 audit firms are not allowed to register as companies
 recent corporate and accounting failures have contributed to a 'hard insurance
market'.
  the emerging trend of multi-disciplinary practices raises important issues for
debate about auditor liability and conflict of interest situations.

The judgment in the Pacific Acceptance case was wide-ranging and covered
procedures that should exist in a normally competent audit. Which of the following is
not accurate concerning procedures listed in the judgment?
 promptly report fraud or warn of suspicion of fraud whether material or not
 closely supervise and review the work of inexperienced staff.
 be very wary about reporting bad news to shareholders always keeping in
mind it can affect the value of their investment
 audit the whole of the year, not just the year-end balances.

Which case does not appear to support the recent narrowing of the exposure of
auditors to third parties?
 Royal Bank of Scotland.
 Lowe Lippmann.
 Esanda Finance.
 Columbia Coffee

What is the term used when a failure on the part of a plaintiff to meet certain required
standards of care is a factor leading to a loss by the plaintiff?
 negligence.
 reasonable foreseeability.
 contributory negligence.
 damages.

The passage in the judgment by Cardozo, CJ in the Ultramares case, ' a liability in
an indeterminate amount for an indeterminate time to an indeterminate class' refers
to:
 an auditor's liability to exercise due care.
 an auditor's liability to the client.
 an auditor's liability to third parties.
 an auditor's statutory liability.

Auditors are accountable in law for their professional conduct. This accountability
arises under:
 Common law.
 Statute law.
 Tort law.
 all of the above.

In respect of the provision of auditing services, the auditor will be liable to

compensate the plaintiff if:
 a duty of care is owed to the plaintiff.
 the audit is negligently performed or the opinion negligently given.
 the plaintiff has suffered a quantifiable loss as a result of the auditor's
negligence.
 all of the above

The correct statement is: Litigation against auditors under the Trade Practices Act:
  does not require the 'negligence' factors of foreseeability and proximity.
 under section 52 requires professional service to be rendered with due care
and skill.
 has been ruled out by the Esanda judgment.
 is specifically excluded.

Which of these precautions taken by auditors would avoid or minimise the

consequences of litigation?
 using an engagement letter for all professional services offered by the firm.
 thoroughly investigating all potential clients before accepting an engagement.
 ensuring professional pronouncements are fully complied with by the firm.
 all the above

Under the Hedley Byrne principle, auditors’ liability to third parties to whom they owe
a duty of care:
 Is no different from their liability to clients.
 Is more onerous than their liability to clients.
 Does not exist.
 None of the above

The decision in the Caparo case (1990) reduced the duty of care of auditors to:
 all users known to the auditor.
 all users that ought reasonably to have been known to the auditor.
 the shareholders as a group.
 all users of the financial statements, except for investors

Which of these is not a primary element of a fiduciary relationship?

 the fiduciary has undertaken to act in the interests of another.
 the fiduciary is properly certified.
 the person to whom the fiduciary duty is owed is vulnerable to the fiduciary's
abuse of his or her position.
 all of the above are primary elements of a fiduciary relationship

Which case laid down the fundamental auditing principles of the 'watchdog' role and
the notion of taking reasonable skill and care?
 Kingston Cotton Mill.
 London and General Bank.
 Pacific Acceptance.
 AWA.

Which case prompted the development of more specific and comprehensive Auditing
Standards in Australia?
 McKesson and Robbins.
 Pacific Acceptance.
 Cambridge Credit.
 AWA.

Which of these is not a concern of the Australian Government in relation to the level
of insurance held by auditors?
 insurance premiums will reduce in value.
  consumers may not be able to access appropriate damages in the case of
negligence.
 as auditing is in the public interest any reduction adversely affects the
wellbeing of the community.
 all of the above are a concern

Under the Hedley Byrne principle, auditors' liability to third parties to whom they owe
a duty of care:
 does not exist.
 b. none of the above.
 is more onerous than their liability to their clients.

Which of these is not a condition that must be met in order for a company to be
registered as an authorized audit company?
 he company must not be under external administration
 one of the directors of the company must be a registered company auditor
 each share in the company must be held and beneficially owned by an
individual or the legal personal representatives of an individual.
 majority of the votes that may be cast at a general meeting of the company
attach to shares in the company that are beneficially owned by individuals
who are registered company auditors

Which of the following is not a condition that must be met in order for a company to
be registered as an authorized audit company?
 each of the directors of the company must be a registered company auditor.
 each share in the company must be held and beneficially owned by an
individual or the legal personal representatives of the individual.
 a majority of the votes that may be cast at a general meeting of the company
attach to shares in the company that are and beneficially owned by individuals
who are registered company auditors.
 the company must be under external administration

Week 4

When auditors issue an audit report that expresses an audit opinion what duty are
they fulfilling? (p246 6.2.3-the duty to report)
 the duty to use reasonable care and skill.
 the duty to be independent.
 statutory duty to report to members and to ASIC.
 a procedural duty.

The Corporations Act requires that auditors are competent. To be suitably qualified
the person must: (p244 6.1.3)
 be a member of the ICAA, CPA Australia, the National Institute of
Accountants or other prescribed body.
 hold a degree, diploma or certificate from a university or other prescribed
body.
 be a fit and proper person to be registered as an auditor.
 all of the above.
The Corporations Act does not require the audit of which of the following type of
entity, except in specified circumstances? (p242 6.1.1)
 a large proprietary company.
 a small proprietary company.
 a public company.
 a government company.

As a general rule, the auditor is appointed by the shareholders at the annual general
meeting. Which of the following is not true concerning the appointment of an auditor?
(p243 6.1.1)
 In practice the shareholders generally accept the recommendations of the
directors concerning the appointment
 the duration of the first appointment stands for 12 months until the next first
annual general meeting
 the company is liable to pay reasonable fees and expenses of the auditor.
 an auditor ceases to hold office after a company goes into liquidation.

S.308 of the Corporations Act requires certain implied conditions to be reported on in

an audit report if there is any deficiency, or failure to comply. Which of the following
is one of those implied conditions? (p246 6.2.3 The duty to report)
 whether the auditor has obtained all information, explanation and assistance
required.
 whether an audit has been carried out.
 whether the auditor is independent of the company.
 whether the financial statements are properly drawn up so as to give a true
and fair view of the company's financial affairs.

An engagement letter contains express or implied terms of the contractual

arrangement with the client. Which of the following is not one of those terms? (P245
6.2)
 to exercise a reasonable degree of skill and care.
 to report the duties of the auditor.
 to be independent of the company.
 to give an opinion on the truth and fairness of the financial statements of the
company.

The most common form of audit opinion is:

 an 'except for' opinion. (Qualified)
 an adverse opinion.
 an inability to form an opinion. (Disclaimer)
 an unqualified opinion.

S.294 of the Corporations Act requires a Directors' Declaration. Which of these is not
an inclusion in that declaration?
 that the financial statements and notes comply with accounting standards.
 that the financial statements and notes are correct and accurate.
 that the financial statements and notes comply with the Corporations Act.
 all are included in the declaration.
The Australian Securities Exchange (ASX) (p254 6.4.2)
 requires all listed companies to have an audit committee
 requires the Top 300 companies to have an audit committee
 recommends but does not require listed companies to have an audit
committee
 requires all listed companies with a capitalisation of more than $200 million to
have an audit committee

The words that best describes the relationship which should exist between the
external auditor and the management of the client company are: (p256 6.4.4)
 adversarial relationship.
 mutual trust and respect.
 advocacy of management's position.
 sceptical vigilance

During the course of the audit engagement, the external auditor suggests an
adjustment to the financial statements. The suggestion is accepted by management
without argument. This suggests that:
 the external auditor is primarily responsible for the fairness of the financial
statements.
 the internal auditor has assumed responsibility for the changes made.
 the external auditor has prepared the financial statements.
 the client has assumed responsibility for the changes made.

The primary reasons for the existence of Auditing Standards is: (p248 6.3.2)
 They are necessary to maintain a cost-effective service.
 They will safeguard the auditor when they are sued.
 They provide assurance of the minimum standards that should have been
employed by the auditor in arriving at the opinion.
 All of the above

Which of the following is a benefit of the ASIC register of company auditors? (p244
6.1.3)
 the register contains a code of ethics that auditors must follow
 the register provides assurance of the qualification, level of competence and
experience of the auditor.
 the register facilitates disciplinary procedures against auditors
 All

Audit committees are perceived to strengthen the independence of auditors. Which

of the following is normally an objective of an audit committee? (P254)
 ensuring that the entity operates in the best interests of the shareholders.
 assisting the board of directors to discharge (carry out) its responsibility to
exercise due care, diligence and skill.
 giving advice on the selection of the board of directors
 all are objectives of an audit committee

The lapse of time between the balance sheet date and the presentation of the audit
report: (p260 6.6.2)
 may be up to four months
  is on average two months
 is not a problem as the auditor is required to undertake a review of
subsequent events
 is increasing over time because of the greater number of auditing standards
that now apply to audits

Which of these is true concerning the audit report format? (P261)

 The standard format may not reflect fully the complexities involved in the audit
process and the decision about the audit opinion.
 The auditor is guaranteeing the accuracy of the financial statements and
solvency of the entity.
 The auditor is providing early warning signs of company failure.
 All of the statements are true

An auditor must be registered: (p244)

 by the Financial Reporting Council
 by the AUASB
 by the ASIC
 through CPA Australian, the ICAA or the National Institute of Accountants

Which of the following is not an inherent limitation of an audit?

 time lapse between the balance date and the presentation of the audit report.
 audit testing of selective samples.
 forming professional judgments in highly specialised areas.
 all

Which of the following are the international auditing standards? (p247 6.3.1)
 international standards on auditing (ISAs).
 international standards on assurance engagements (ISAEs).
 international standards on related services (ISRSs).
 all of the above.

The group which has the legal responsibility for removal of the auditor is:(p253 6.4.1)
 the board of directors
 management.
 the shareholders.
 the audit committee.

In a financial statement audit, the auditor maintains professional relationships with:

 shareholders and creditors (p254-256)
 the board of directors and ASIC
 the audit committee and the internal auditors
 management and the professional accounting bodies

It is regarded as best practice in regard to the composition of audit committees to

 have an executive director as chairperson.
 have the internal auditor as a member.
 have the external auditor as a member
  none of the above are regarded as best practice in regard to the composition
of audit committees

The body that prepares the auditing standards that apply in Australia is:
 The AUASB.
 the ASIC.
 the AASB.
 the IFAC.

The work of an internal auditor can be used to complement, but not substitute for,
the work of the independent auditor. Which of the following factors is not one of the
considerations listed by ASA 610 that is relevant in determining the effect of an
internal auditor's work on the audit? (p256 6.4.3)
 past communications of the internal auditors with management
 the organizational status
 he scope of the work
 technical training and proficiency of the internal auditor.

Week 5

Knowledge of the entity's financing activities includes understanding the entity's:

 debt structure.
 inventory management policies
 location of property, plant and equipment.
 all of the above

When assessing the industry conditions of a client, which of the following would not
normally be assessed?
 the market for the client's products.
 competitors.
 price competition.
 economy-wide factors.

Which of these would not be of direct interest to an auditor who was obtaining
knowledge of the entity's business operations?
 method of obtaining revenues.
 employment.
 stock exchange listing requirements
 transactions with related parties.

In accepting an engagement, an auditor takes on professional responsibilities to:

 the public.
 the client.
 the client and the public.
 the public, the client, and other members of the profession.

Which of the following is not normally found in the audit engagement letter?
 a disclaimer on detecting all material irregularities.
 the objective or purpose of the audit.
  a space for the client's approving signature.
 the use of binding arbitration in the case of a dispute

Before accepting an engagement, the auditor should identify special circumstances

and unusual risks. Which of these conditions is not directly part of a review of such a
circumstance or risk?
 reviewing industry and economic data.
 identifying intended users of the audited financial statements.
 assessing a prospective client's legal and financial stability.
 evaluating the entity's auditability.

Which of these steps in planning the audit is out of sequence?

 obtaining an understanding of the entity's internal control structure.
 obtaining an understanding of the entity and its environment.
 making preliminary judgments about materiality levels.
 considering the audit risk

In assessing independence, an audit firm may do which of the following?

 decline the engagement due to a lack of independence.
 circulate the name of a prospective client to staff to identify any relationships
inconsistent with independence.
 complete a professional independence questionnaire.
 all of the above.

Which of the following is not a consideration in the planning phase of the audit?
 obtaining an understanding of the entity's business and industry.
 assessing competence to perform the audit.
 considering audit risk.
 making preliminary judgments about materiality levels.

A common fee structure for audit engagements is:

 fixed fee from a tendering process.
 contingent fee.
 daily charge-out rates plus expenses.
 out-of-pocket plus normal profit.

When obtaining knowledge about the entity's objectives and strategies and the
related business risks, an auditor should consider:
 industry developments.
 new products and services.
 expansion of the business.
 all of the above.

The auditor should regularly evaluate clients in respect of specified events to

determine whether to continue the relationship. Which of the following is not a
specified event that should prompt an evaluation?
 the expiration of a time period.
 a significant change in the business.
 a change in the audit partner.
  the existence of conditions that would lead that auditor to reject a client had
those conditions existed at the time of the initial acceptance of the audit
engagement.

All of the following are ways in which an auditor can assess the integrity of
management except:
 arranging a police search on the police confidential data base
 making enquiries of third parties.
 communicating with the previous auditor.
 considering previous experience with the client's management

The main purpose of the audit engagement letter is to:

 avoid litigation.
 confirm the terms of the engagement
 outline the cost of the audit
 all of the above.

Which of these would not be part of a typical audit team?

 an audit partner.
 an audit manager.
 internal auditors.
 an audit senior.

Concerning errors, irregularities and illegal acts, the auditor should plan the audit
with an attitude of:
 cautious mistrust.
 seasoned pessimism.
 professional scepticism.
 adversarial pursuit

In the investigation of a potential new client, if the client refuses to give permission to
inquire of the existing auditor, or if the existing auditor does not respond fully, the
prospective auditor should:
 consider the implications in making the acceptance or rejection decision.
 not accept the engagement.
 request a CPA Australia/ICAA-sanctioned peer review of the predecessor.
 request assistance from the ASIC.

The reliance on client internal audit personnel on the audit is:

 strictly prohibited by professional standards.
 acceptable whenever a client has employed them.
 acceptable if the auditor reviews and tests their work.
 acceptable if the auditor re-performs all their work.

Which of these best describes the auditor's planning responsibilities concerning

related parties?
 review procedures for identifying related parties.
 identify the existence of related parties
 obtain a list of all board members and place in the working papers.
 investigate the background of all related parties.
The initial phase of a financial statement audit involves the acceptance decision for
the client in question. Which of the following is not a consideration during this phase
of the audit:
 ethical considerations.
 client evaluation.
 preparation of the engagement letter.
 determining the existence of related parties.

In the investigation of a potential new client, besides inquiring of the existing auditor,
the prospective auditor should make inquires of other third parties. Which of the
following is least likely to be included in this inquiry?
 legal advisers/solicitors.
 bankers.
 customers.
 the chamber of commerce.

Which of these is not an ethical consideration for the auditor in deciding whether to
accept an audit engagement?
 identifying intended users of the audited financial statements.
 evaluate circumstances that would compromise their independence.
 assessing their competence to perform the audit.
 determine their ability to use due care in performing the audit.

Which of these is not an example of an expert as defined by ASA 620 (ISA 620)?
 actuaries.
 internal auditors
 Appraisers
 all are examples of experts as defined by ASA620/ISA620

The least likely source of information for the auditor in obtaining an understanding of
the client's industry conditions is:
 industry Audit Guides.
 trade journals.
 industry statistics compiled by government or private agencies.
 data accumulated by the audit firm

Setting materiality levels, assessing audit risk and its components and obtaining an
understanding of the internal control structure are all part of which audit stage?
 client evaluation.
 audit planning.
 collecting audit evidence
 issuing the audit report.

Week 6

In determining the sufficiency of evidential matter, which of the following would not
normally be a factor?
 Materiality of the account.
  Audit risk.
 The sampling technique used.
 The size of the population.

The subject of the auditing procedure ‘observation’ is least likely to be:

 procedures.
 physical assets.
 processes
 inventory taking.

In making judgements about materiality at the account balance level, the auditor
must consider the relationship between it and overall materiality. This should lead
the auditor to plan the audit to detect misstatements that:
 are individually material to the statements taken as a whole.
 are individually immaterial to the statements taken as a whole.
 bring the cumulative total of known misstatements to the level of materiality
established by management.
 may be immaterial individually, but may aggregate with misstatements in
other accounts to a material level.

Which of the following is not a course of action an auditor may take if they discover
material misstatements in the accounts?
 Consider issuing an unqualified audit opinion.
 Consider issuing a qualified audit opinion.
 Perform additional audit procedures.
 Ask management to correct the errors.

What is the purpose of tests of control?

 To obtain an understanding of the control over assets.
 To provide evidence as to the fairness of management’s financial statement
assertions.
 To provide evidence about the effectiveness of the internal control structure,
policies and procedures.
 None of the above.

The statement that is most accurate about the procedures that can be performed by
computer-assisted audit techniques is:
 they can physically check the quantity of inventory on hand.
 they can check for the existence of non-current assets.
 they can observe the operation of control procedures throughout the period
under audit.
 they can re-perform a variety of calculations and perform calculations and
comparisons used for analytical procedures.

Which of these would not be considered corroborating information?

 The accountant’s work sheet.
 Cancelled cheques held by the client.
 Confirmation from vendors.
 Oral evidence obtained from client personnel.
“Tolerable error” (or tolerable misstatement) is the term used to indicate materiality at
the:
 balance sheet level.
 income statement level.
 account balance level.
 transactions level.

During the audit of XYZ Ltd the auditor found a misstatement that equated to 7% of
the base amount. According to the guidelines provided by AASB 1031 this amount is
deemed to be:
 material.
 not material.
 a matter of professional judgement whether it is considered material.
 none of the above.

The presentation and disclosure assertion often includes all of the following aspects
except:
 existence.
 completeness.
 occurrence, rights and obligations.
 classification and understandability.

In planning the audit, the auditor should assess materiality at two levels:
 the preliminary level and the final level.
 the company level and the divisional level.
 the financial report level and the account balance level.
 the account balance level and the transaction level.

Use of the auditing procedure 'confirmation' would normally involve all of the
following except:
 direct evidence being obtained from outsiders.
 auditor control of the mailing.
 written request and an oral response.
 a high degree of reliability

Which of these would generally be considered the least appropriate form of

evidence?
 the auditor's computation of earnings per share
 pre-numbered sales invoices prepared by the accounts receivable clerk
 the auditor's inspection of new machinery acquisitions for the current year
where the client is a computer manufacturer
 correspondence from the client's solicitor concerning litigation

All else being equal, as the level of materiality decreases, the amount of evidence
required will:
 increase.
 decrease.
 remain the same.
 change in an unpredictable fashion.
On each engagement, the specific audit objectives will normally be:
 the same for all clients in the same industry.
 equal to the number of categories of management's financial report
assertions.
 similar for all clients in the same industry.
 tailored to fit the individual client.

An auditor contacts an accounts receivable of the client directly in order to confirm

the balance owing. This is an example of:
 analytical procedure
 test of control
 test of details of balances
 test of details of transactions

An auditor has obtained an understanding of the internal control structure and has
decided that the appropriate controls are ineffective. The most appropriate audit
strategy is:
 the lower assessed level of control risk approach.
 the predominantly substantive approach.
 a combination of the lower assessed level of control risk approach and the
predominantly substantive approach.
 the analytical procedures approach.

The completeness assertion would be violated if:

 the allowance for doubtful accounts was understated.
 unbilled shipments had occurred during the period.
 the balance of accounts payable was overstated.
 all of the above would violate the completeness assertion

Another question is about underlying accounting data please read the page 431-432
and find the answer. We haven’t time to copy it.

The auditor has determined that, as the assessment of control risk is high, the audit
strategy adopted will be the predominantly substantive approach. What is the cost of
this audit likely to be?
 low.
 moderate.
 high.
 cannot be determined.

In general, as an account balance decreases, the amount of evidence required will:

 increase.
 decrease.
 remain the same.
 change in an unpredictable fashion.

If the bank reconciliation is incorrect the assertion violated would be:

 existence
 completeness.
 valuation and allocation.
  rights and obligations.

The recorded balance in an account generally represents:

 the lower limit on the amount by which it may be overstated.
 the upper limit on the amount by which it may be overstated.
 the lower limit on the amount by which it may be understated.
 the upper limit on the amount by which it may be understated.

The concept of materiality is defined in AASB 1031 in terms of the:

 auditor.
 preparer.
 CPA Australia/ICAA members.
 users of financial reports

Which of these is not a substantive procedure? (p441)

 tests of controls.
 analytical procedures.
 tests of details of transactions.
 all are substantive procedures

Week 7

Which of these would be a necessary control to prevent a cash payment being made
for an unauthorized purpose?
 invoices being required before cheques are issued.
 only authorized people being able to issue cheques.
 the duties of approving invoices and signing cheques are separated.
 all of the above.

When control risk is assessed at the maximum, the extent of documentation required
in the working papers is that:
 no documentation is necessary.
 the basis for the assessment and the conclusion must both be documented.
 only the conclusion needs to be documented.
 only the basis for the assessment must be documented.

The audit test that would normally be regarded as a test of controls is:
 enquiries of third parties
 test of the specific items making up the balance in a given general ledger
account.
 test of the additions to property, plant, and equipment by physical inspections.
 test of the signatures on purchase orders to a list of approved signatories.

In a computer information system control procedure that provide reasonable

assurance that the recording, processing and reporting of data are properly
performed for specific applications are known as:
 application controls
 general controls
 user controls
 integrated testing.
Tests of controls are auditing procedures performed to determine:
 whether required internal controls have been put in place.
 the efficiency of the information flow
 the effectiveness of the design and operation of internal controls.
 b and c

The name given to the test of control where the auditor reprocesses actual entity
data using auditor-controlled software is:
 test data approach.
 integrated test facility.
 parallel simulation.
 dual-purpose testing.

The relationship between the required understanding of the internal control structure
and the preliminary audit strategy is that:
 normally, greater understanding is required when the lower assessed level of
control risk approach is used.
 normally, greater understanding is required when the primarily substantive
approach is used.
 no understanding is required in the planning stage unless tests of controls are
a planned part of the strategy.
 normally, less understanding is required when the lower assessed level of
control risk approach is used.

Testing the work of the internal auditors is least likely when the external auditor has
decided that:
 the internal auditors will be used to directly assist in the conduct of the audit.
 the internal auditors have operating responsibilities as well as their auditing
role
 the internal auditors are full-time employees of the client.
 the reports of the internal auditors are consistent with the results of the work
performed.

To determine whether the internal control structure policies and procedures operate
effectively to minimize errors of failure to invoice a shipment, the auditor would select
a sample of transactions from the population represented by the:
 bill of lading file.
 customer order file.
 sales invoice file.
 subsidiary customer accounts ledger.

Based on a study and evaluation completed at an interim date, the auditor concludes
that no significant internal accounting control weaknesses exist. The records and
procedures would most likely be tested again at year-end if:
 the internal accounting control system provides a basis for reliance in
reducing the extent of substantive testing.
 tests of controls were not performed by the internal auditor during the
remaining period.
  inquiries and observations lead the auditor to believe that conditions have
changed.
 the auditor uses non-statistical sampling during interim compliance testing.

After performing additional tests of controls, the auditor reassesses control risk from
the initial planning level of slightly below maximum to moderate. The auditor should
now:
 decrease the level of detection risk, and decrease substantive testing
 increase the level of detection risk, and increase substantive testing.
 increase planned substantive testing.
 increase the level of detection risk, and decrease substantive testing.

Assessing control risk at a level below high most likely would involve:
 identifying specific internal controls relevant to specific assertions.
 changing the timing of substantive tests by omitting interim testing and
performing the tests at year-end.
 reducing inherent risk for most of the assertions relevant to significant account
balances.
 performing more extensive substantive tests with larger sample sizes than
originally planned.

When tests of controls are not performed while obtaining an understanding under the
primarily substantive approach:
 they must be performed at year-end.
 preliminary control risk must be assessed at the maximum.
 preliminary control risk must be assessed at below maximum.
 preliminary control risk must be assessed at the minimum.

The untrue statement concerning the communication of internal control matters to

management during a financial statement audit is: the duties relating to
communication are included in ASA 265/ISA 265
 the auditor shall communicate in writing significant deficiencies in internal
control identified
 circumstances where it may be inappropriate to communicate deficiencies in
the internal control system includes situations where there are other
deficiencies that are of sufficient importance to merit management's attention
 none of the statements are untrue, i.e. all are true statements

The test of control that is known as a dual-purpose test is:

 enquiring
 re-performing the control
 observing.
 inspecting.

The statement that is accurate concerning audit testing is:

 the test data approach involves dummy transactions prepared by and
processed under the control of the auditor.
 the test data approach is relatively complicated, time consuming and
expensive.
  the test data approach involves dummy transactions prepared by the client
and processed under the control of the auditor
 the test data approach involves dummy transactions prepared by the auditor
and processed under the control of the client.

The incorrect statement is:

 The external auditor may coordinate their audit work with that of the internal
auditor
 may use the internal auditors to provide direct assistance with some types of
audit work
 may delegate some of the substantive testing to the internal auditor
 none of the statements is incorrect, i.e. all are correct statements

Of the following, the procedure that would produce the most reliable evidence on the
segregation duties is:
 observation.
 analytical procedures
 reconciliation.
 re-performance.

After the auditor planned the audit based on the lower assessed level of control risk
approach it was found that the tests of control did not support this approach.
Although the controls were well designed they were not implemented and therefore
ineffective. What audit strategy should the auditor now pursue?
 adopt a predominantly substantive approach.
 perform more extensive tests of control than originally planned.
 reduce the level of substantive procedures.
 none of the above

What is the purpose of the preliminary assessment of control risk?

 to obtain a reasonable expectation of controls so as to decide on an
appropriate audit strategy.
 to determine the extent to which internal controls have been implemented
 to obtain the necessary information for developing the flowchart.
 to provide management with an opinion on the effectiveness of controls.

A disadvantage of the integrated test facility approach to computer assisted audit is:
 there is a risk that errors could be created in the client's data
 it does not overcome the limitations of the use of test data
 it is disruptive to the client.
 all the above are limitations.

If the auditor decides to seek a further reduction in control risk, this will require them
to:
 expand the scope of substantive testing during interim work.
 rely exclusively on analytical procedures.
 perform additional tests of control.
 increase, proportionately, assessed inherent risk.
Which of the following would be a necessary control to avoid an invoice being paid
twice?
 periodic bank reconciliations.
 segregating the duties of approving invoices and signing cheques.
 invoice stamped paid when the cheque is issued.
 making payments by cheque.

The timing of tests of controls refers to:

 whether they are performed earlier or later during the audit.
 whether they relate to part or the whole of the accounting period.
 the end of the year being audited.
 none of the above.

SESSION 8(CHPATER 12)

1.Which of these would not be considered to be a test of details of balances?

 accounts receivable confirmations.
 tracing an invoice to the sales journal.
 observing the entity's stocktake.
 inspecting plant assets.

2.. An auditor is examining the detailed debit and credit activity in an account. The
auditor is most likely performing:
 analytical procedures.
 tests of controls.
 tests of details of transactions.
 tests of details of balances.

3.Tests of details of balances focus on obtaining evidence:

 directly from an outside source.
 in the least costly manner.
 directly about an account balance.
 to refute instead of support an assertion.

4.Which of these would not necessarily be considered to be a risk factor for potential
misstatements?
 there is intense price competition in the industry of operation.
 profit margin has increased and inventory turnover days has decreased
 an employee in the cash office was passed over for a promotion.
 not D segregation of duties is not practiced.

5.When substantive procedures are performed before the balance sheet date the
auditor should, at or after the balance sheet date:
 obtain a letter from management stating that no significant changes occurred
in the account balances between the two dates.
 perform a comparison of the account balances at the two dates.
 confirm all balances that were not confirmed at interim.
 perform tests of reasonableness on all balances that were not confirmed at
interim.
6.The audit program is basically a list of:
 detailed audit objectives.
 audit procedures to be performed.
 account balances and their related assertions.
 control policies and procedures to be tested.

7.Which of these would be a reason for adopting a predominantly substantive

approach?
 accounts are affected by more than one transaction class.
 detection risk has been assessed as high.
 there are no significant control procedures that pertain to the assertion.
 control risk has been assessed as low.

8.Confirmation and direct knowledge by the auditor are most associated with:
 analytical procedures.
 tests of details of balances.
 tests of details of transactions.
 tests of controls.

9.An audit program should be sufficiently detailed to provide all of the following
except:
 evidential support for the audit opinion.
 an outline of the work to be done.
 a basis for controlling the audit.
 a basis for supervising the audit.

10.Compared to balance sheet accounts, the audit of income statement accounts

generally relies more heavily on:
 analytical procedures.
 tests of detail of balances.
 tests of detail of transactions.
 both tests of detail of balances and of transactions.

11.If the lower assessed level of control risk approach preliminary audit strategy is
used, planned detection risk will be:
 at the lower level.
 moderate or high.
 at the higher level.
 high or very high.

12.The auditor would be least likely to perform early substantive tests of details of
balances when:
 a number of significant deviations from control policies and procedures were
detected during tests of controls.
 variance reports do not distinguish between price and quantity variances.
 the client uses a financial business year instead of the calendar year.
 the taking of the client's inventory is performed at an early date.

13.Tests of details of transactions primarily involve:

 confirmation with outsiders.
  tracing and vouching.
 observation and inquiry.
 income statement accounts.

14.In practice, early substantive tests of details of balances is done only when:
 the client has a calendar year end.
 internal controls are weak.
 evidence indicates effective control policies and procedures.
 the primarily substantive approach is taken.

15.The least costly form of testing is usually:

 analytical procedures.
 tests of controls.
 tests of detail of transactions.
 tests of detail of balances.

16.Generalised audit software can be used for:

 performing calculations.
 selecting samples.
 identifying records meeting specified criteria.
 any of the above.

17.Tests of details of transactions generally use evidence from:

 documents found in the entity's files.
 documents obtained directly from external sources.
 direct observation on the part of the auditor.
 inquiry directed to top management personnel.

18.Which of these would not be considered to be a test of details of balances?

 accounts receivable confirmations.
 tracing an invoice to the sales journal.
 observing the entity's stocktake.
 inspecting plant assets.

19.The auditor is performing substantive procedures several months before the end
of the year. This most likely means that:
 inherent risk is set at high.
 detection risk is set at high
 control risk is set at maximum.
 none of the above are correct

20.An audit program should be sufficiently detailed to provide all of the following
except:
 evidential support for the audit opinion.
 an outline of the work to be done.
 a basis for controlling the audit.
 a basis for supervising the audit.
21.Each income statement account is linked to at least one balance sheet account.
Which of the following would be the related income statement account for the
balance sheet account of inventories?
 cost of sales.
 depreciation expense.
 sales.
 none of the above.

22.For small clients it is often more efficient to adopt the predominantly substantive
approach. Which of the following is a reason for this:
 they may not have adequate resources to implement all appropriate controls.
 controls may not be effective.
 the size of the entity may make it inefficient for the auditor to rely on these
controls.
 all of the above.

23.If the predominantly substantive approach preliminary audit strategy is used,

planned detection risk will be:
 moderate or high.
 at the higher level.
 high or very high.
 low or very low.

24.Which of the following is not true in regards to cut-off tests?

 they are related more to the transaction than to the closing balance.
 they ensure completeness.
 they ensure occurrence.
 they affect the income report and the balance sheet

25.Which of these is not considered a substantive procedure?

 analytical procedures.
 tests of controls.
 tests of detail of transactions.
 tests of detail of balances.

SESSION 8 CHAPTER 13
1.The risk of concluding control risk is lower than it actually is, is also known as:
 risk of overreliance.
 risk of under reliance.
 risk of incorrect acceptance.
 risk of incorrect rejection

2.The greatest impact on audit effectiveness comes from the risk(s) of:
 overreliance and incorrect rejection.
 under reliance and incorrect acceptance.
 overreliance and incorrect acceptance.
 under reliance and incorrect rejection

3.Sampling is involved whenever an audit procedure is applied to 100% of items

within a class of transactions:
False

4.Sampling risk is the possibility that the auditor's conclusion, based on a sample,
may be different from the conclusion reached if the entire population were subjected
to the same audit procedure
TRUE

5.A feature of statistical sampling is that no professional judgment is required in

evaluating the sample results.
FALSE

6.Which of the following would not be considered a method of audit sampling?

 random selection.
 systematic selection.
 haphazard selection.
 block selection.

7.Whenever sampling is used in an audit procedure, uncertainty will be present. The

two sources of this uncertainty are:
 audit risk and detection risk.
 inherent risk and control risk.
 sampling risk and non-sampling risk.
 detection risk and control risk.

8.The sample supports the conclusion that the recorded account balance is
materially misstated when it is actually not materially misstated. This is the:
 risk of assessing control risk too low.
 risk of assessing control risk too high.
 risk of incorrect acceptance.
 risk of incorrect rejection.

9.Statistical sampling is applied in auditing to replace judgment.

False

10.The sample supports the conclusion that the recorded account balance is
materially misstated when in fact it is. This is:
 the risk of incorrect acceptance.
 the risk of incorrect rejection.
 the correct decision.
 the risk of overreliance.

11.The main difference between statistical and non-statistical sampling is that

sampling risk can be quantified when using statistical sampling.
True

12.Sampling is a well-established auditing procedure, but this has not always been
the case.
True

13.The sampling unit is:

  the physical location of the population from which the sample will be drawn.
 an individual item in the population.
 the individual control procedure being tested.
 a population expressed as an attribute of interest.

14.Which of the following statements is most accurate about the terminology applied
to errors identified when applying tests of controls or substantive testing to an audit
sample?
 an error identified in substantive testing is referred to as an irregularity.
 an error identified in substantive testing is referred to as a control deviation.
 an error identified in a test of controls is referred to as a misstatement.
 an error identified in a test of controls is referred to as a control deviation.

15.Which of the following is not a type of sampling risk?

 risk of overreliance.
 risk of incorrect decision.
 risk of sample size.
 risk of under reliance.

SESSION 9

1.Which of the following is not normally considered a step in the credit sales
functions?
 accepting customer orders.
 approving credit.
 acquiring goods to fill the order.
 billing customers.

2.In a credit sales environment, the best place to vest credit approval is in:
 accounts receivable.
 the sales department.
 the cashier area where receipts will eventually be sent.
 an independent credit department.

3.To enhance controls in the credit sales area, the warehouse should be instructed
not to release (or dispatch) goods until:
 they received a faxed copy of the sales requisition.
 they have a completed sales invoice.
 they receive an approved sales order.
 the shipping department requests the goods.

4.Accounts receivable circularisation involves the auditor writing directly to

customers to confirm accounts receivable balances.
TRUE

5.Invoices provide evidence that goods were actually shipped and therefore confirm
the occurrence of the credit sale.
FALSE
6.When accepting customer orders, control procedures should ensure that only
orders meeting the entity's normal terms of business are accepted
TRUE

7.In a credit sales environment, which of the following documents usually initiates the
activity in the sales cycle?
 customer order.
 sales order.
 dispatch note.
 sales invoice.

8.An entry in the sales journal is vouched to the supporting documents. This test is
assessing control risk for the completeness assertion.
FALSE

9.Access controls should permit read-only access to transaction and master files
except for authorized individuals. Which of the following illustrates such an
exception?
 credit controller can override marginal breaches of a customer's credit limit.
 sales manager can amend a price for a sales transaction.
 sales manager can amend a discount for a customer.
 any of the above.

10.Use of an authorised price list in preparing the sales invoices meets primarily the:
 existence or occurrence assertion.
 completeness assertion.
 accuracy, valuation or allocation assertion.
 rights and obligations assertion

11.All cash receipts must be deposited intact daily.

TRUE

12.Inherent risks for the financial statements assertions include the overstatement of
sales transactions and accounts receivable balances, and the understatement of the
provision for bad debts balance.
TRUE

13.The number and dollar value of sales adjustment transactions is consistent

between entities.
FALSE

14.Which of the following is not a specific audit objective for sales and receivables?
 existence or occurrence.
 completeness.
 representation.
 presentation and disclosure

15.The assessment of inherent and control risks as less than high has the effect of
increasing the level of substantive procedures.
FALSE
SESSION 10(CHAPTER 15)

1.A responsibility not normally assigned to receiving department personnel is to:

 compare goods received with description of goods ordered.
 prepare a pre-numbered receiving report for every order received.
 enter cheque requisition data and verify batch total.
 file the purchase order copy pending arrival of goods.

2.The quantity ordered is generally not displayed on the copy of the purchase order
sent directly to the:
 requesting department.
 vouchers payable department.
 receiving department.
 accounts receivable department

3.Responsibility for determining that unpaid supplier's invoices are processed for
payment on their due dates generally lies with the:
 treasurer's department.
 accounts department.
 purchasing department.
 internal audit department.

4.Which of the following is not directly affected by purchases and payments

transactions?
 plant assets.
 work-in-process inventory.
 accounts payable.
 prepaid expenses.

5.A special supervisor's password is required in order to add a new employee to the
personnel data master file. This control relates primarily to the:
 existence or occurrence assertion.
 completeness assertion.
 Presentation and disclosure.
 valuation or measurement assertion.

6.A copy of the receiving report should be sent directly by the receiving department
to the:
 accounts (receivable) department.
 treasurer.
 purchasing department.
 accounts (payable) department.

7.For goods and services supplied on credit, the supplier is usually instructed by the
purchase order to send the invoice directly to the accounts department.
True

8.The cash (cheque) payment functions of paying the liability and recording the cash
payment should be performed by the same department.
False

9.The hiring of employees should be done in the payroll department.

False

10.A valid purchase requisition represents the authorisation for the receiving
department to accept goods delivered by suppliers.
False

11.Copies of unpaid suppliers' invoices are maintained in the purchasing department

pending their subsequent payment.
False

12.Because purchase requisitions may originate in any department, they are usually
renumbered within each originating department.
True

13.The receiving department should be instructed to accept no goods without having

on file a properly authorised:
 purchase requisition.
 invoice.
 receiving report.
 purchase order.

14.The balance in accounts payable produced by credit purchase transactions is

nearly always material to the balance sheet.
True

15.Prior to recording purchases transactions, supplier's invoices are checked and

approved in the accounts department. Controls over this function include all of the
following except:
 marking all supporting documentation as paid
 approving the supplier's invoice for payment by having an authorised person
sign the invoice.
 agreeing the details of the supplier's invoice with the related receiving report
and purchase order.
 determining the mathematical accuracy of the supplier's invoice.

SESSION 10(CHAPTER 16)

1.Cyclical inventory counts involve a stocktake but do not require a comparison with
records.
False

2.Testing the inventory pricing relates primarily to the:

 valuation or measurement assertion.
 completeness assertion.
 rights and obligations assertion.
 presentation or disclosure assertion.
3.If the auditor was inspecting receiving reports for the receiving employee’s initials,
the assertion being tested would be:
 completeness.
 rights and obligations.
 existence or occurrence.
 occurrence and completeness.

4.The comparison of inventory count schedules and perpetual records primarily

addresses the:
 completeness assertion.
 rights and obligations assertion.
 valuation or measurement assertion.
 existence assertion.

5.Where perpetual inventory records are maintained the auditor needs to obtain an
understanding of the internal control systems relating to such records.
True

6.Which of the following audit strategies would be most appropriate when an auditor
has assessed a predominantly substantive approach is necessary to determine
inventory quantity?
 inventory quantities determined by physical count at or within a few days of
balance date.
 inventory quantities determined by physical count near balance date, adjusted
by reference to perpetual records.
 inventory quantities determined by reference to perpetual records, without a
physical count at or near balance date.
 none of the above.

7.Analytical procedures of inventory turnover and gross profit contribute evidence as

to the existence of the inventory balance.
False

8.When a significant proportion of inventory is stored in a public warehouse, the

auditor may not be satisfied with its existence by merely obtaining a confirmation
from the warehouseman.
True

9.The principal inherent risks for inventory relate to existence and disclosure.
False

10.The pricing of inventory involves testing against costing records and verifying any
write-downs to net realisable value.
True

11.When the lower of cost or net realisable value rule is used to value inventory, only
the lower value need be verified.
False

12.Observation of inventories is a required audit procedure whenever:

  inventories are material.
 it is practicable to do so.
 inventories are material and it is practicable to do so.
 inventories are material and the auditor considers it to be necessary.

13.During the observation of the inventory count, the auditor has no responsibility to:
 observe the taking of the inventory by client personnel.
 make some test counts of inventory quantities.
 supervise the taking of the inventory.
 watch for damaged and obsolete inventory items.

14.Reviewing data pertaining to inventory quality relates primarily to the:

 existence or occurrence assertion.
 completeness assertion.
 rights and obligations assertion.
 valuation or measurement assertion.

15.The adequate segregation of the recording and custody functions for inventory
primarily provides evidence about which assertions?
 existence, occurrence and completeness.
 existence, occurrence and valuation or measurement.
 completeness and valuation or measurement.
 completeness and rights and obligations.

SESSION 11

1.A contingency is an existing condition, situation or set of circumstances that

involves uncertainty as to possible gain or loss that will be resolved when one or
more future events occur or fail to occur.
True

2.By definition, subsequent events occur between:

 interim and year-end.
 year-end and the audit report date.
 the audit report date and the date the financial statements are issued.
 year-end and the date the financial statements are issued.

3.Financial statements are usually prepared on the going concern basis. The auditor
is required by ASA 570 (ISA 570) to assess the risk of going concern problems at
which stage(s) of the audit?
 ASA 570 (ISA 570) does not require the assessment of the risk of going
concern problems.
 during the final review.
 the planning stage.
 the planning stage and during the final review.

4.Which of the following is not among the characteristics of the procedures

performed in completing the audit?
 they are optional since they have only an indirect impact on the opinion to be
expressed.
  they involve many subjective judgements by the auditor.
 they do not relate to specific transaction cycles or accounts.
 they are usually performed by audit managers or seniors.

5.Failure by management to record or properly disclose subsequent events in the

financial statements will not require the auditor to issue a modified audit report.
False

6.Which of the following is not among the specific auditing procedures the auditor
performs to obtain additional audit evidence?
 making subsequent events review.
 reviewing for contingent liabilities.
 reviewing evidence already gathered concerning litigation, claims, and
unrecorded or contingent liabilities.
 obtaining management representation letter.

7.Which of the following events in a subsequent period is an example of a condition

existing at the reporting date?
 casualty loss resulting from a flood.
 discovery of fraud or errors.
 purchase of a business.
 issuance of preferred stock.

8."Material subsequent events that relate to conditions existing at reporting date

normally require disclosure, and those that relate to conditions arising after the
reporting date normally require adjustment".
False

9.Contingent liabilities are of relevance to the auditor because they are unlikely to be
recorded in the accounting records until the occurrence of an uncertain future event.
True

10.Subsequent events, as described in ASA560, are events occurring between the

end of the reporting period and the date of the report, and facts discovered after this
date.
True

11.After the auditor's report has been signed, the auditor:

 does not have a responsibility to detect subsequent events.
 does have a responsibility to detect subsequent events.
 has provided absolute assurance that all significant events occurring up to
that date have been identified.
 will issue a bill to the client.

12.If the auditor discovers that management intends to liquidate the entity:
 the going concern basis is inappropriate.
 it is irrelevant if they did not intend to liquidate the entity at reporting date.
 it requires inclusion as a disclaimer of opinion.
 it requires inclusion as an 'except for'
13.The initial source of information on the existence of material legal contingencies
should be management.
True

14.Obtaining appropriate management representations is an optional audit

procedure.
True

15.In working with the minutes of meetings of shareholders, those charged with
governance, and their subcommittees, the auditor should:
 read the minutes of all important meetings.
 scan the minutes of all meetings.
 read the minutes of all meetings.
 read the minutes of all members' meetings

SESSION 12(CHAPTER 7)

1.Circumstances where the auditor is justified in qualifying the audit report because
of an inability to obtain sufficient appropriate audit evidence would not include which
of the following?
 the auditor is appointed after the count of physical inventories has occurred
 the auditor runs out of time to follow normal auditing procedures because it
has scheduled too many clients for audit in the final month of the audit period.
 where a fire has destroyed the entity's accounting records
 the auditor is not able to obtain sufficient appropriate audit evidence about an
associated entity

2.Which of these would not be considered a scope limitation?

 The client would not permit confirmation of receivables with their best
customers for fear of annoying the customers.
 Access to the board of director’s meetings was limited to those meetings
taking place before the balance sheet date.
 The auditor is appointed to the engagement too late to observe the client's
counting of the inventory.
 The auditor is forced to call upon an outside expert to properly value antiques
that are held in the client's vault as investments.

3.ASA 700 provides explanatory guidance on all of these points except:

 The form and content of the auditor's report.
 The matters the auditor usually considers in forming an opinion.
 The training of junior audit staff.
 The auditor's performance and reporting responsibilities.

4.The auditor's opinion is expressed in reference to the financial statements as a

whole. This means that the auditor must:
 not be overly concerned about individual amounts on the financial statements,
 consider whether the firm has made a profit or a loss
 consider whether the statements create an impression that is consistent with
the auditor's intimate knowledge of the entity and its financial condition.
  decide whether the statements are a complete set of financial statements as
required by Accounting Standards.

5.The addition of an emphasis of matter paragraph in an audit report

 does not affect the auditor's opinion.
 does affect the auditor's opinion.
 is required by the standards to be included in all audit reports.
 is only included for going concern uncertainties.

6.Which of these items does not form part of the financial report, as defined in the
Corporations Act (s.295)
 A statement of cash flows for the year.
 Notes required by Accounting Standards.
 Any additional disclosures necessary to give a true and fair view.
 The directors' report.

7.Section 302 of the Corporations Act prescribes that disclosing entities must:
 prepare half-year financial statements and a directors' report.
 have the half-year financial statements audited.
 have the half-year financial statements reviewed
 not lodge the half-year financial statements with ASIC

8.Comparatives refer to amounts or disclosures of one or more previous periods that

are presented on a comparative basis with those of the current period. ASA 710 (ISA
710) states that the auditor:
 is required to determine whether the comparatives take into account the
change of auditor.
 is required to determine whether the comparatives meet the requirements of
the applicable financial reporting framework.
 is not required to investigate the comparatives
 is required to add an 'emphasis of matter' to the audit report

9.The auditor of a reporting entity for which consolidated accounts are required has:
 the right of reliance on the work of the controlled entity's auditor.
 the right of access to the accounting records of controlled entities.
 the right to appoint the auditor of the controlled entity.
 all of the above.

10.If the previous period's financial statements are unaudited, and sufficient
appropriate evidence is unavailable, then the current auditor's report will be:
 qualified on the basis of scope limitation.
 unqualified on the basis that the comparatives are unaudited and no opinion is
expressed on them.
 qualified on the basis that the comparatives are unaudited and an opinion is
expressed on them.
 qualified on the basis that the comparatives are unaudited and no opinion is
expressed on them.

11.A standard unqualified audit report is not required to have which of the elements
set out below?
  a heading 'Auditors Opinion'.
 an opinion paragraph.
 matters the auditor wishes to emphasise.
 the opinion of the auditor on the financial statements.

12.The opinion expressed on the consolidated statements of a company is the sole

responsibility of:
 those charged with governance.
 the audit senior.
 the principal auditor.
 the managing director.

13.Which of these factors could not be the cause of a material misstatement?

 selection of inappropriate accounting policies
 inadequate disclosure.
 disagreement with those charged with governance in relation to the financial
statements
 none of the above, i.e. all could be the cause of material misstatement

14.The form and content of the auditor's report is specified within:

 sec 295 of the Corporations Act.
 charter of the ICAA.
 AUS 708.
 ASA 700.

15.An emphasis of matter section in an audit report is:

 not a qualification.
 a qualification.
 an adverse opinion.
 used very commonly

16.When the auditor issues a disclaimer of opinion on a set of financial statements,

the audit report should:
 be unqualified.
 begin with the term "except for".
 express an adverse opinion.
 have a paragraph headed 'disclaimer of opinion'.

17.The emphasis of matter paragraph in an audit report would normally refer to the
fact that the auditor's opinion is:
 qualified in this respect.
 not qualified in this respect.
 a disclaimer of opinion.
 an adverse opinion.

18.Which statement would not be found in a directors' declaration?

 That the financial statements and notes give a true and fair view.
 That the financial statements are free from material misstatement whether
due to fraud or error
  That in the directors' opinion there are reasonable grounds to believe that the
company will be able to pay its debts as and when they fall due.
 That in the directors' opinion the financial statements and notes are in
accordance with the law.

19.When the auditor performs an audit or review of half-year financial statements,

they are not required to:
 circulate the audit report to entity members.
 consider aspects of the audit process relevant to the current audit for the
forthcoming full-year financial statements.
 treat each half-year as a discrete reporting period.
 conduct the review in accordance with auditing standards.

20.Which of these statements concerning audit reporting on consolidated accounts is

the least accurate?
 The opinion expressed on the consolidated accounts is the sole responsibility
of the principal auditor.
 It may be necessary for more than one audit firm to participate in the
examination.
 The auditor of the parent entity has very limited rights to access the
accounting records and registers of the controlled entity
 If the auditor concludes that reliance cannot be placed on the work of another
auditor, alternative procedures should be attempted before qualifying the
opinion.