01 Key

1. Which of the following is not an element of an assurance engagement?

A. Three-party relationship.
B. Approved assurance standards.
C. Suitable criteria.
D. A written assurance report.

Chapter 1: Learning Objective 1: Understand the assurance framework.

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2. The relationship between audit and assurances services is best described by which
of the following:
A. The relationship will depend on the terms of the contract.
B. The audit function is a subset of assurance services.
C. Assurance services are a subset of the audit function.
D. The audit function and assurance services are the same.

Chapter 1: Learning Objective 1: Understand the assurance framework.

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3. Who is the responsible party for the adequacy of the disclosure in the financial
report and accompanying footnotes?
A. Auditor in charge of fieldwork.
B. Management of the entity.
C. Auditor who signs the audit report.
D. Audit clerk who assists in preparing the report and footnotes.

Chapter 1: Learning Objective 1: Understand the assurance framework; Chapter 13:

Learning Objective 1: Obligations to report.

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4. Independent auditors are referred to as 'independent' because:

A. their offices are not at the entity's place of business.
B. they are not employees of the entity being audited.
C. they are paid by parties outside of the audited entity.
D. they report to users outside of the audited entity.

Chapter 1: Learning Objective 1: Understand the assurance framework.

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5. The auditor's judgment concerning the overall fairness of the presentation of
financial position, results of operations, and cash flows is applied within the
framework of:
A. Australian Auditing Standards which include the concept of materiality.
B. Quality control.
C. The agreed reporting framework.
D. The auditor's assessment of the audited entity's level of control risk.

Chapter 1: Learning objective 1: Understand the assurance framework.

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6. The highest level of assurance is provided by:
A. compiling financial reports.
B. agreed-upon procedures.
C. review.
D. audit.

Chapter 1: Learning objective 2: Understand the structure of assurance standards and

pronouncements.

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7. Which of the following is a necessary precondition for a practitioner to undertake
an attest engagement to examine and report on an entity's internal control over
financial reporting?
A. Management presents its written assertion about the effectiveness of internal
control.
B. The practitioner anticipates relying on the entity's internal control in a financial
report audit.
C. Management agrees not to present the practitioner's report in a general-use
document to shareholders.
D. The practitioner is a continuing auditor who previously has audited the entity's
financial report.

Chapter 1: Learning objective 2: Understand the structure of assurance standards and

pronouncements; Chapter 14: Learning Objective 5: Legislation or regulation on
prospective financial information and internal control reports

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8. Which of the following would be suitable criteria for an assurance engagement?
A. An indicative list of corporate governance practices prescribed by ASIC for
providing assurance on corporate governance practices.
B. An organisation's internal documents prescribing what constitutes satisfactory
internal control for providing assurance on internal controls.
C. Both an indicative list of corporate governance practices prescribed by ASIC for
providing assurance on corporate governance practices, and an organisation's internal
documents prescribing what constitutes satisfactory internal control for providing
assurance on internal controls.
D. Neither an indicative list of corporate governance practices prescribed by ASIC for
providing assurance on corporate governance practices, nor an organisation's internal
documents prescribing what constitutes satisfactory internal control for providing
assurance on internal controls.

Chapter 1: Learning objective 2: Understand the structure of assurance standards and

pronouncements; Chapter 12: Learning objective 4: Reviewing the audit working
papers and the financial report.

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9. To which type of assurance engagement does the umbrella standard ASAE 3000
(ISAE 3000) "Assurance Engagements other than Audits and Reviews of Historical
Financial Information" not apply?
A. A performance audit on a government department.
B. A review of a half-yearly financial report.
C. A limited assurance report on the effectiveness of internal control.
D. A limited assurance engagement on prospective financial information.

Chapter 1: Learning objective 2: Understand the structure of assurance standards and

pronouncements.

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10. Which of the following can be the subject matter of the audit:
A. The financial report of a company.
B. The Australian accounting standards.
C. The Australian auditing standards.
D. The auditor's report.

Chapter 1: Learning objective 3: Define auditing.

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11. An audit of the financial report of Campbell Ltd, an Australian listed company, is
being conducted by an external auditor. The external auditor is expected to:
A. Express an opinion as to the attractiveness of Campbell for investment purposes.
B. Express an opinion as to whether the financial report is prepared in accordance
with an applicable financial reporting framework
C. Make a 100% examination of Campbell's records.
D. Certify the correctness of Campbell's financial report.

Chapter 1: Learning objective 3: Define auditing.

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12. The essence of a financial report audit is to:
A. Examine individual transactions so that the auditor may certify as to their validity.
B. Detect fraud.
C. Assure the consistent application of correct accounting procedures.
D. Determine whether the client's financial reports are fairly stated.

Chapter 1: Learning objective 3: Define auditing.

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13. The ASOBAC definition of auditing refers to auditing as a 'systematic process of

objectively obtaining and evaluating evidence regarding assertions...'. What is meant
by 'systematic process'?
A. All audits involve evaluating evidence in the same manner.
B. All audits involve obtaining the same evidence.
C. All assertions are equally important for all audits.
D. There should be a well-planned approach for conducting the audit.

Chapter 1: Learning objective 3: Define auditing.

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14. The independent auditor adds credibility to the client's financial report by:
A. testifying under oath about client financial information.
B. attaching an auditor's opinion to the client's financial report.
C. maintaining a clear-cut distinction between management's representations and the
auditor's representations.
D. stating in the auditor's communication of internal-control-related matters that the
audit was made in accordance with Australian auditing standards.

Chapter 1: Learning objective 3: Define auditing; Chapter 13: Learning Objective 1:

Obligations to report.

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15. Financial report auditing can best be described as:
A. a regulatory function that prevents the issuance of improper financial information.
B. a professional activity that measures and communicates financial and business
data.
C. a discipline that attests to the results of accounting and other functional operations
and data.
D. a branch of accounting.

Chapter 1: Learning objective 3: Define auditing; Chapter 13: Learning Objective 1:

Obligations to report.

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16. Which of the following statements is not true concerning assurance services?
A. Assurance services focus on improving the quality of information, or its context,
for decision makers.
B. The growth in assurance services has been driven in part by users' demands for
more relevant and reliable information.
C. Auditing services can be viewed as a subset of assurance services.
D. Unlike audit engagements, an engagement to perform assurance services does not
require the auditor to consider information reliability.

Chapter 1: Learning objective 3: Define auditing.

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17. Which of the following is not a fundamental principle underlying the objective of
an audit?
A. The auditor should represent their client in any matters identified by the financial
regulator.
B. The auditor should follow quality control procedures.
C. The auditor should obtain sufficient appropriate evidence.
D. The auditor should perform the audit with an attitude of professional scepticism.

Chapter 1: Learning objective 4: Appreciate the fundamental principles underlying an

audit.

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18. Which of the following is not one of the fundamental principles of professional
ethics underlying an audit?
A. Confidentiality.
B. Scepticism.
C. Integrity.
D. Objectivity.

Chapter 1: Learning objective 4: Appreciate the fundamental principles underlying an

audit.

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19. Which of the following is not one of the fundamental principles underlying the
objective of an audit?
A. Knowledge.
B. Communication.
C. Evidence.
D. Client satisfaction.

Chapter 1: Learning objective 4: Appreciate the fundamental principles underlying an

audit.

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20. The primary responsibility for the adequacy of disclosures in the financial report
of a publicly held company rests with the:
A. Management of the company.
B. Partner assigned to the audit engagement.
C. Securities and Exchange Commission.
D. Auditor in charge of the field work.

Chapter 1 Learning objective 5: Distinguishing between accounting and auditing and

understanding the relationship between financial reporting and financial report
auditing.

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21. Below are a number of potential characteristics that information may possess:
I: Comparability.
II: Periodicity.
III: Relevance.
IV: Reliability.
Which combination of these is identified in the financial reporting framework to
enable the financial reporting system to meet the fundamental objectives of financial
reporting?
A. III and IV only.
B. I, III and IV only.
C. II, III and IV only.
D. I, II, III and IV.

Chapter 1: Learning objective 5: Distinguishing between accounting and auditing and

understanding the relationship between financial reporting and financial report
auditing.

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22. The accuracy of information included in footnotes that accompany the audited
financial report of a company whose shares are traded on a stock exchange is the
primary responsibility of:
A. The independent auditor.
B. The stock exchange officials.
C. The Securities and Exchange Commission.
D. The company's management.

Chapter 1 Learning objective 5: Distinguishing between accounting and auditing and

understanding the relationship between financial reporting and financial report
auditing.

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23. The value of an assurance service lies in its ability to:
A. Improve information relevance and reliability.
B. Report on the assurance process.
C. Improve the consistency of information.
D. Provide a professional service that is valued by the responsible party.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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24. In the context of agency theory, information asymmetry refers to the idea that:
A. Information can vary in its reliability.
B. Information can vary in its relevance.
C. Management has more information about the entity's true financial position than do
the absentee owners.
D. Management will not act in the best interests of the absentee owners.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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25. The public has turned to auditors to provide assurance services primarily because:
A. There is a need to develop new revenue streams for accounting firms.
B. The integrity and objectivity of auditors increases the public's trust that the
underlying information is not materially misstated.
C. Auditors have been proactive in identifying new types of assurance services to
market to customers.
D. Audits do not provide reliable information for decision makers.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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26. Users of financial reports demand independent audits because:
A. management relies on the auditor to improve the internal control.
B. users expect auditors to correct management errors.
C. management may not be objective in reporting.
D. users demand assurance that fraud does not exist.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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27. Which of the following best describes why an independent auditor is asked to
express an opinion on a financial report?
A. To relieve management of the responsibility for the financial report.
B. To provide increased assurance to users as to the fairness of the financial report.
C. To guarantee that there are no misstatements in the financial report.
D. To provide management with information to efficiently and effectively manage the
company.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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28. Which of the following best describes the reason why an independent auditor
reports on financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the statements and
the parties using the statements.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditor's work.
D. A poorly designed internal control system may be in place.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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29. Which of the following best describes why an independent auditor is asked to
express an opinion on the true and fair presentation of a financial report?
A. It is management's responsibility to seek available independent aid in the appraisal
of the financial information shown in its financial report.
B. It is difficult to prepare a financial report that fairly presents a company's financial
position and changes in cash flows without the expertise of an independent auditor.
C. It is a customary courtesy that all shareholders of a company receive an
independent report on management's stewardship in managing the affairs of the
business.
D. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial report.

Chapter 1: Learning objective 6: Understand the reasons giving rise to demand for
assurance.

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30. Which of the following would not be included in a recommendation by the
assurance provider in regards to the efficiency and effectiveness of operations?
A. An explanation of the problem.
B. Suggested possible improvements in performance.
C. A statement that the assurance provider has reasonable assurance that they have
identified all material matters with regards to efficiency and effectiveness that are of
interest to management.
D. Recommendation of investigating specific areas of the entity's business processes.

Chapter 1: Learning objective 7: Other benefits of an assurance service

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31. Below are a number of potential additional benefits arising from assurance:
I: Recommendations to improve the efficiency of operations.
II: A positive influence on the behaviour of people whose activities are being assured.
III: Recommendations to improve the effectiveness of operations.
Which combination of these is identified in the book as additional benefits?
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Chapter 1: Learning objective 7: Other benefits of an assurance service

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32. What approach best describes the risk concept which currently underpins the
auditing standards?
A. The inherent risk approach.
B. The financial risk approach.
C. The systems risk approach.
D. The business risk approach.

Chapter 1: Learning objective 8: The evolution of the audit function.

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33. Which sequence of approaches best describes the way that audits have evolved?
A. Audit Risk approach to Transactions Cycle approach to Statement of Financial
Position approach.
B. Statement of Financial Position approach to Audit Risk approach to Transactions
Cycle approach.
C. Statement of Financial Position approach to Transactions Cycle approach to Audit
Risk approach.
D. Transactions Cycle approach to Statement of Financial Position approach to Audit
Risk approach.

Chapter 1: Learning objective 8: The evolution of the audit function.

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34. When an auditor expresses an opinion on the financial report, the auditor's
responsibilities extend to:
A. An ongoing responsibility for the entity's solvency in accordance with the
requirements of the Corporations Act 2001.
B. The underlying wisdom of the management's decisions.
C. Active participation in the implementation of advice given.
D. Whether the entity's results are fairly presented in the financial report in
accordance with approved accounting standards.

Chapter 1: Learning objective 9: Understand the relationship between the auditor, the
client and the public.

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35. It is very hard for auditors to remain independent of their clients, given that they
are paid by their clients. Below are a number of possible mechanisms:
I: Ethical rules.
II: Auditing and other professional standards.
III: Audit committees.
Which of these mechanisms can help the auditor maintain their independence?
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Chapter 1: Learning objective 9: Understand the relationship between the auditor, the
client and the public.

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36. Users of financial reports in Australia might reasonably expect the auditor to
have:
A. Checked all transactions undertaken by the entity.
B. Determined that the entity is a sound investment.
C. Performed the audit in accordance with Australian Auditing Standards.
D. Ensured that the entity will continue in existence for at least another year.

Chapter 1: Learning objective 10: Explain the concept of the expectation gap.

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37. Below are a number of potential areas where a gap between society's expectations
of auditors and the perceived performance of auditors has been identifieD.
I: Compliance with laws and regulations.
II: The detection and reporting of earnings management and fraud.
III: The messages contained in the audit report.
Which combination of these has been identified as an expectations gap?
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Chapter 1: Learning objective 10: explain the concept of the expectation gap.

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38. Who establishes Australian auditing standards?
A. Australian Auditing and Assurance Standards Board
B. Australian Accounting Standards Board
C. Australian Securities and Investments Commission
D. The professional bodies together (CPA Australia, The Institute of Chartered
Accountants in Australia and the National Institute of Accountants)

Chapter 1: Learning objective 11: Appreciate the role of auditing standards.

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39. Choose the best answer regarding Auditing Standards (ASAs) and Guidance
Statements (GSs).
A. The auditor is expected to comply with the requirements contained in the ASAs in
all but rare and exceptional circumstances.
B. ASAs need only be applied to audits undertaken in accordance with legislation.
C. GSs are more extensive in details than ASAs and therefore would provide a greater
defence to the auditor in a Court case.
D. Both ASAs and GSs are mandatory for all audits.

Chapter 1: Learning objective 11: Appreciate the role of auditing standards.

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40. An auditor of a company finds that there are rare and exceptional circumstances
where they are unable to comply with a relevant requirement in an auditing standard.
They are however able to perform appropriate alternative audit procedures. To whom
do they have to report or document these circumstances?
A. The auditor must report these circumstances to either management or the audit
committee and obtain their agreement that the alternative procedures are appropriate.
B. If the auditor can use appropriate alternative audit procedures, no reporting or
documentation required.
C. The auditor is required to document the circumstances in the audit report.
D. The auditor is required to document the circumstances in the audit working papers.

Chapter 1: Learning objective 11: Appreciate the role of auditing standards.

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41. Which of the following statements best describes the distinction between the
auditor's and director's responsibilities for an audit undertaken in accordance with the
Corporations Act 2001?
A. Directors have responsibility for maintaining and adopting sound accounting
policies, and the auditor has responsibility for establishing and maintaining the
internal control structure.
B. Directors have responsibility for the basic data underlying the financial report, and
the auditor has responsibility for drafting the financial report.
C. The auditor's responsibility is confined to expressing an opinion, but the financial
report remains the responsibility of directors.
D. The auditor's responsibility is confined to the audited portion of the annual report,
and the directors' responsibility is confined to the unaudited portions.

Chapter 1: Learning objective 12: Audits under the Corporations Act 2001.

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42. Under the Corporations Act 2001, if a company's financial report, when prepared
in accordance with accounting standards, would not otherwise give a true and fair
view:
A. The auditors are required to add such information and explanations in the financial
report so as to give a true and fair view.
B. The directors are required to add such information and explanations in the financial
report so as to give a true and fair view.
C. The directors should refer to this situation in their Director's Declaration.
D. No additional information should be added to the financial report.

Chapter 1: Learning objective 12: Audits under the Corporations Act 2001.

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43. Assurance services would include which of the following?
A. Working with a client to develop a more efficient method of processing financial
transactions.
B. Preparing a report representing a client's position during a tax audit.
C. Assisting a client in identifying potential sources of capital for acquisitions.
D. Providing an opinion concerning the accuracy of statements made on a client's web
site.

Chapter 1: Learning objective 12: Audits under the Corporations Act 2001.

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44. What is the general character of the work conducted in performing a forensic
audit?
A. Detecting or deterring fraudulent activity.
B. Providing assurance that the financial report is not materially misstated.
C. Identifying the causes of an entity's financial difficulties.
D. Offering an opinion on the reliability of the specific assertions made by
management.

Chapter 1: Learning objective 13: Other applications of the assurance function.

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45. What is the general character of the work conducted in performing a forensic
audit?
A. Identifying the causes of an entity's financial difficulties.
B. Offering an opinion on the reliability of the specific assertions made by
management.
C. Detecting or deterring fraudulent activity related to the financial report.
D. Providing assurance that the financial report is not materially misstated.

Chapter 1: Learning objective 13: Other applications of the assurance function.

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46. In comparison to the external financial report auditor, an internal auditor is more
likely to be concerned with:
A. Undertaking a debtors' confirmation procedure.
B. Physically sighting property, plant and equipment.
C. Determining that the various divisions in the department are running efficiently
and effectively.
D. Confirming with the bank the account balances at year end.

Chapter 1: Learning objective 13: Other applications of the assurance function.

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47. Below are different types of audits:
I: Compliance audit.
II: Financial report audit.
III: Internal audit.
IV: Performance audit
Which combination of these types of audits can be collectively integrated and
described as a comprehensive audit?
A. I, II and III only.
B. I, II and IIV only.
C. I, III and IV only.
D. II, III and IV only.

Chapter 1: Learning objective 13: Other applications of the assurance function.

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03 Key
1. Which of the following statements is correct?
A. Ethics is concerned primarily with the well-being of your client.
B. Ethics is principally an attitude of mind.
C. Ethics is principally concerned with having a set of rules which must be complied
with.
D. Ethics is concerned with creating an environment which allows entities to make an
equitable profit.

Chapter 3: Learning objective 1: Professional ethics

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2. Which of the following is not a doctrine or theory of ethics?

A. Deontology.
B. Virtues.
C. Egoism.
D. Theology.

Chapter 3: Learning objective 2: Ethical theory

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3. Which of the following is an example of teleological ethics?
A. Utilitarianism.
B. Justice.
C. The principle of beneficence.
D. Virtues.

Chapter 3: Learning objective 2: Ethical theory

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4. Which of the following is an example of deontological ethics?

A. Egoism.
B. Utilitarianism.
C. The principle of beneficence.
D. Virtues.

Chapter 3: Learning objective 2: Ethical theory

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5. Which of the following is an example of Utilitarianism?
A. Greatest benefit for the individual.
B. Do unto others as you would have them do unto you.
C. Greatest benefit for the greatest number.
D. Equal rights for all.

Chapter 3: Learning objective 2: Ethical theory

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6. Which of the following is not a principle of professional conduct as defined by

APES 110?
A. Integrity.
B. Professional competence and due care.
C. Reporting.
D. Professional behaviour.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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7. Which fundamental ethical principle provides that the auditor should safeguard the
interests of their clients provided it does not conflict with their duties and loyalties to
the community and its laws?
A. Confidentiality.
B. Objectivity.
C. Whistleblowing.
D. Public interest.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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8. With respect to records in an auditor's possession:
A. Copies of client records incorporated into audit work papers must be returned to
the client upon request.
B. Work sheets in lieu of a general ledger belong to the auditor and need not be
furnished to the client upon request.
C. An extensive analysis of inventory prepared by the client at the auditor's request
are work papers which belong to the auditor and need not be furnished to the client
upon request.
D. The auditor who retains copies of client records must return the original records
upon request.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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9. Competence as an independent auditor includes all of the following except:
A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise and evaluate the quality of staff work.
C. Guaranteeing the accuracy of the work performed.
D. Doing additional research or consulting others.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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10. APES 110:

A. Prohibits tendering for an audit currently done by another audit firm.
B. Encourages but does not require auditors to refrain from unwanted solicitation.
C. Requires auditors to act in the public interest.
D. Prohibits offers of employment to employees of another audit firm without notice.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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11. Auditors are required to complete engagements competently. Competency
embraces all of the following except:
A. An unbiased mental attitude.
B. The technical qualifications of the audit staff.
C. The capacity to exercise judgment.
D. The ability to research subject matter and consult with others.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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12. If the resignation of an auditor of a public company is to take place outside the
company's annual general meeting, the Australian Securities and Investments
Commission (ASIC) must provide consent. This consent will only be given in
exceptional circumstances. A circumstance that would NOT be considered
'exceptional' is when:
A. The company is not audited by the auditor of the parent company.
B. A negligence claim has been filed against the auditor by the company.
C. The auditor loses his/her independence.
D. The auditor's health is failing.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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13. Sky Ltd has a year-end of 30 June 20X0. The audit work was completed and the
audit report signed on 30 September 20X0. On 15 October the company called for
tenders from prospective auditors for the 20X1 year. The tender process indicated that
new auditors should be appointed. The current auditors wrote a resignation letter
dated 20 October that was received by the company on 25 October. This letter advised
that the auditor's resignation was effective from 30 September 20X0. The resignation
letter was also forwarded to ASIC, requesting its confirmation of the resignation.
ASIC approved the resignation in a letter dated 30 November. There are no other
exceptional circumstances.
The effective date of the resignation is:
A. 30 September 20X0.
B. 20 October 20X0.
C. 25 October 20X0.
D. 30 November 20X0.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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14. East & Co. is a small firm with four partners. The audit partner, being the only
registered company auditor in the firm, retired from the firm on 15 August 20X0. On
this date the partner wrote a letter to ASIC requesting permission to resign as auditor
of all of his clients. ASIC gave its consent to the resignation effective from 30
November 20X0. The auditor of the audit clients in the period from 15 August to 30
November is:
A. The retiring partner.
B. East & Co. Chartered Accountants.
C. Australian National Audit Office as nominee.
D. The next most senior partner of East & Co.

Chapter 3: Learning objective 3: Accounting bodies' code of ethics

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15. Which of the following is not an ethical decision-making model?
A. Laura Nash model.
B. American Accounting Association model.
C. Mary Guy model.
D. IFAC model.

Chapter 3: Learning objective 4: Applying ethics

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16. Ethical decision models:

A. Provide a framework for decision making.
B. Provide the correct decision for different ethical situations.
C. Are mandatory for members of the two major accounting bodies.
D. None of the given answers.

Chapter 3: Learning objective 4: Applying ethics

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17. Which of the following organisations has developed an ethical decision-making
model?
A. Auditing and Assurance Standards Board.
B. American Accounting Association.
C. Business Council of Australia.
D. Australian Securities Exchange.

Chapter 3: Learning objective 4: Applying ethics

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18. Which of the following best describes the role of corporate governance?
A. Management decides which accounting principles are the most appropriate.
B. Shareholders vote to decide who should be members of the board of directors.
C. An independent board of directors holds the management team accountable to
shareholders and other constituents.
D. Management is compensated based on the company's profitability.

Chapter 3: Learning objective 5: Corporate governance

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19. The audit committee of a publicly-held company should be made up of:
A. Representatives of the major shareholders.
B. The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
C. Representatives from the client's management, investors, suppliers and customers.
D. Members of the board of directors who are not employees.

Chapter 3: Learning objective 5: Corporate governance

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20. Corporate governance procedures generally involve policies concerning which of
the following matters?
A. Compensation arrangements for senior management and non-executive directors.
B. Ensuring the board of directors is composed of persons with an appropriate mix of
skills and experience.
C. Nomination of and communication with the external auditors.
D. All of the given answers.

Chapter 3: Learning objective 5: Corporate governance

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21. Which of the following is not one of the key areas covered by the OECD
Principles of Corporate Governance?
A. Protection of shareholder's rights.
B. Responsibilities of the board.
C. Disclosure and transparency.
D. Responsibilities of the auditor.

Chapter 3: Learning objective 5: Corporate governance

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22. Which of the following is not one of the recommendations of the ASX Corporate
governance Council?
A. All the Board should be independent directors.
B. The Board should establish a code of conduct for directors.
C. The roles of chairperson and chief executive should not be exercised by the same
person.
D. The Board should establish an audit committee.

Chapter 3: Learning objective 5: Corporate governance

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23. Which of the following is not normally a part of an audit committee's
responsibilities?
A. Discussing the detailed audit programs of the independent auditors.
B. Nominating the independent auditors.
C. Discussing the problems of the independent auditors in completing the audit of the
annual financial report.
D. Discussing the meaning and significance of the audited financial report.

Chapter 3: Learning objective 5: Corporate governance

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24. Auditors may have a whistleblowing role under:

A. The Corporations Act.
B. The Crimes Act.
C. Auditing standards.
D. All of the given answers.

Chapter 3: Learning objective 6: Whistleblowing

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25. Independence implies that the auditor:
A. Be impartial with respect to the client.
B. Must adopt the attitude of a detective during the audit.
C. Has an obligation solely to third parties.
D. Cannot provide any other professional services to an audit client.

Chapter 3: Learning objectives 7-10: Audit independence

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26. An auditor is independent if s/he is:

A. Intelligent.
B. Independent in fact and in appearance.
C. Independent in fact and honest.
D. Logical and consistent.

Chapter 3: Learning objectives 7-10: Audit independence

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27. Which of the following most completely describes auditor independence?
A. Performing an audit from the viewpoint of the public.
B. Avoiding the appearance of significant interests in the affairs of an audit client.
C. Performing the audit with integrity and objectivity.
D. Accepting the responsibility of acting professionally.

Chapter 3: Learning objectives 7-10: Audit independence

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28. Which of the following is a correct statement with respect to a listed company?
A. The Australian Securities and Investments Commission does not have to be given
notice of the removal of an auditor.
B. An auditor does not have to have the approval of the Australian Securities and
Investments Commission to resign.
C. An auditor must be appointed within three months of incorporation.
D. Once the auditor is re-appointed at the first annual general meeting, it is not
necessary for the auditor to be re-appointed each following year.

Chapter 3: Learning objectives 7-10: Audit independence

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29. Which of the following statements is not true?
A. The auditor has a right of access to all books and records at all reasonable times.
B. The auditor must report all situations where inadequate records are being kept.
C. The auditor has a right to attend and be heard at all board meetings.
D. The auditor must review other information attached to the financial report to
ensure consistency with the financial report.

Chapter 3: Learning objectives 7-10: Audit independence

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30. A violation of the profession's ethical standards would be least likely to occur
when an auditor:
A. Holds the position of company secretary with an audit client which is a public
company.
B. Refers life insurance assignments to the auditor's spouse, who is a life insurance
agent.
C. Undertakes a management advisory engagement and decides on the most
appropriate computer system for a client.
D. Is a member of the same golf club as the managing director.

Chapter 3: Learning objectives 7-10: Audit independence

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31. To emphasise auditor independence from management, many entities follow the
practice of:
A. Appointing a partner of the audit firm conducting the audit to the entity's audit
committee.
B. Having the auditor report to an audit committee of external members of the board
of directors.
C. Requesting that a representative of the auditor be on hand at the annual general
meeting.
D. Establishing a policy of discouraging social contact between employees of the
entity and the staff of the auditor.

Chapter 3: Learning objectives 7-10: Audit independence

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32. Tegan Walker is about to begin a recurring annual audit engagement. As the
continuing auditor, her independence would ordinarily be considered to be impaired if
the previous year's audit fee:
A. Was only partially paid and the balance is being disputed.
B. Has not been paid and will not be paid for at least twelve months.
C. Has not been paid and the client has filed voluntary bankruptcy.
D. Was settled by litigation.

Chapter 3: Learning objectives 7-10: Audit independence

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33. It would not be appropriate for the auditor to initiate discussion with the audit
committee concerning:
A. The extent to which the work of internal auditors will influence the scope of the
audit.
B. Details of the procedures that the auditor intends to apply.
C. The extent to which change in the company's organisation will influence the scope
of the audit.
D. Details of potential problems that the auditor believes might cause a qualified
opinion.

Chapter 3: Learning objectives 7-10: Audit independence

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34. Phillippa Thompson was offered the engagement to audit Stump Ltd for the year
ended 30 June 20X2. She had served as a director of Stump Ltd until 30 June 20X0,
and her spouse currently owns 1000 of the 10 000 outstanding shares of Stump Ltd.
She shoulD.
A. Accept the engagement.
B. Let her partner accept and conduct the engagement.
C. Refuse the engagement because she had served as a director.
D. Refuse the engagement because of her spouse's share ownership.

Chapter 3: Learning objectives 7-10: Audit independence

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35. Under APES 110, a member may not:
A. Be a member of the same club as any directors.
B. Perform bookkeeping services for an audit client.
C. Perform advisory services for an audit client.
D. Have any joint, closely held investment with a principal shareholder of an audit
client during the period of the audit engagement.

Chapter 3: Learning objectives 7-10: Audit independence

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36. The ethical rules state that independence of the external audit firm is considered to
be impaired if:
A. The audit firm provides management advisory services to the client.
B. The audit partner purchases the client's product at normal retail prices.
C. The audit firm has served as the external auditor for many years.
D. A near relative of one of the partners is the beneficial owner of shares forming a
material part of the share capital of the client.

Chapter 3: Learning objectives 7-10: Audit independence

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37. An auditor strives to achieve independence in appearance to:

A. Maintain public confidence in the auditor.
B. Maintain an unbiased mental attitude.
C. Comply with the Corporations Act.
D. Become independent in fact.

Chapter 3: Learning objectives 7-10: Audit independence

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38. Which of the following impairs an auditor's independence regarding the client?
A. The client has not paid fees related to the previous year's audit.
B. The audit firm also prepares the client's tax return.
C. The audit firm trains client personnel during the implementation of a new computer
system.
D. The audit firm recommends a job description and candidate specifications for the
position of financial controller of a client.

Chapter 3: Learning objectives 7-10: Audit independence

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39. One of the partners in your audit firm holds one per cent of the shares in an audit
client. This is not material to the partner's wealth. This is a breach of:
A. APES 110.
B. The Corporations Act.
C. Both APES 110 and the Corporations Act.
D. Neither APES 110 nor the Corporations Act.

Chapter 3: Learning objectives 7-10: Audit independence

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40. Inclusion of which of the following in a promotional brochure published by an

audit firm would be most likely to result in a violation of the ethical rules?
A. Details of types of services offered.
B. Testimonials and endorsements by existing clients.
C. Educational and professional qualifications of partners.
D. List of fees for services, including hourly rates and fixed fees.

Chapter 3: Learning objective 11: Fee determination and obtaining clients

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41. APES 110 would be violated if an auditor accepted a fee for services and the fee
was:
A. Fixed by a public authority.
B. Based on a price quotation submitted in competitive bidding.
C. Based on time spent at standard charge rates.
D. Payable after a specified finding was attained in a review of a financial report.

Chapter 3: Learning objective 11: Fee determination and obtaining clients

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42. In determining the fees for an attestation service, an auditor may take into account
each of the following, except the:
A. Value of the service to the client.
B. Attainment of specific findings.
C. Skills required to perform the service.
D. Degree of responsibility assumed by the auditor in undertaking the engagement.

Chapter 3: Learning objective 11: Fee determination and obtaining clients

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43. The profession's ethical standards most likely are violated when an auditor
represents that specific management consulting services will be performed for a stated
fee and it is apparent at the time of the representation that the:
A. Actual fee will be substantially higher.
B. Actual fee will be substantially lower than the fees charged by others for
comparable services.
C. Auditor will not be independent.
D. Fee is a competitive bid.

Chapter 3: Learning objective 11: Fee determination and obtaining clients

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04 Key
1. An auditor's duty of due care to a client most likely will be breached when the
auditor:
A. Gives a client incorrect advice based on an honest error of judgment.
B. Gives a client an oral instead of a written report.
C. Fails to detect all of a client's fraudulent activities.
D. Fails to follow generally accepted auditing standards.

Chapter 4: Learning objective 1: Reasonable care and skill

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2. Simon & Co issued an unqualified opinion on the 20X0 financial report of Explorer
Ltd. Late in 20X1, Explorer Ltd determined that its treasury manager had embezzled
over $2 000 000. Simon & Co was unaware of the embezzlement. Explorer Ltd has
decided to sue Simon & Co to recover the $2 000 000. Explorer Ltd's suit is based
upon Simon & Co's failure to discover the missing money while performing the audit.
Which of the following is Simon & Co's best defence?
A. The audit was performed in accordance with the auditing standards.
B. Simon & Co had no knowledge of the embezzlement.
C. The embezzlement was cleverly concealed.
D. The treasury manager was Explorer Ltd's agent and as such had designed the
control procedures that facilitated the embezzlement.

Chapter 4: Learning objective 1: Reasonable care and skill

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3. Tiger wishes to recover in a common law action based upon fraud against an
auditor, Lion. With regard to an audit of the financial report, the plaintiff Tiger must
prove, among other things:
A. A contractual relationship between Lion and Tiger.
B. There was no contributory negligence by the client.
C. That there was a sale or purchase of securities within a six-month period that
resulted in a loss.
D. Reliance on the financial report.

Chapter 4: Learning objective 2: Negligence

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4. Privity is:
A. A duty in contract arising from an agreement between the parties.
B. Flagrant or reckless departure from the standard of due care.
C. The duty of due care and skill owed to a client.
D. A breach of an implied obligation.

Chapter 4: Learning objective 2: Negligence

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5. The auditor's duty of care to a client arises in:

A. The contract.
B. The tort of negligence.
C. Both the contract and the tort of negligence.
D. The law of joint and several liability.

Chapter 4: Learning objective 3: Liability to clients

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6. Which of the following cases established that negligence was redressable despite
the lack of a contractual relationship between the two parties?
A. Candler.
B. Hedley Byrne.
C. Donoghue v. Stevenson.
D. London and General Bank.

Chapter 4: Learning objective 3: Liability to clients

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7. Which of the following cases established that contributory negligence was a valid
defence in Australia for reducing the auditor's liability for damages?
A. AWA.
B. Pacific Acceptance.
C. Esanda.
D. Cambridge Credit.

Chapter 4: Learning objective 4: Contributory negligence

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8. Contributory negligence means that:
A. The plaintiff failed to meet the standards of care for their own protection and
therefore is responsible for part of their own loss.
B. Only the audit partner who signed the audit report is liable for the damages.
C. All partners in an audit firm are liable for the damages.
D. Although the auditor is able to claim contribution from other parties, the auditor is
liable to pay the full amount of the loss if the other parties are unable to pay.

Chapter 4: Learning objective 4: Contributory negligence

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9. The decision in the Esanda case established that the auditor owes a duty of care to a
third party if the auditor:
A. Knew that the third party was going to rely on the audited financial report.
B. Held themselves out as an expert.
C. Induced the third party to rely on the audited financial report.
D. Ought to have been able to reasonably foresee that the third party would rely on
the audited financial report.

Chapter 4: Learning objective 5: Liability to third parties

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10. In the Caparo case, the court held that the auditor owes a duty of care to:
A. All users of the published financial report.
B. Only those parties specified in the engagement letter.
C. The shareholders as a body but not individual shareholders or third parties.
D. All shareholders but not third parties.

Chapter 4: Learning objective 5: Liability to third parties

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11. An auditor, Sam Cade, failed to follow generally accepted auditing standards in
auditing Sun Ltd's financial report. Sun's management had told Cade that the audited
report would be submitted to several banks to obtain financing. Relying on the report,
New Bank gave Sun a loan. Sun defaulted on the loan. If New Bank sues Cade, Cade
will most likely:
A. Lose because Cade knew that banks would be relying on the financial report.
B. Win because there was insufficient proximity between Cade and New Bank.
C. Lose because Cade was negligent in performing the audit.
D. Win because New Bank was contributorily negligent in granting the loan.

Chapter 4: Learning objective 5: Liability to third parties

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12. FMC Electronics Ltd engaged the accounting firm of Crosby, Seals & Anderson to
perform its annual audit. The firm performed the audit in a competent, non-negligent
manner and billed FMC for $16 000, the agreed fee. Shortly after delivery of the
audited financial report, Robert Hightower, the assistant controller, disappeared,
taking with him $28 000 of FMC's funds. It was then discovered that Hightower had
been engaged in a highly sophisticated, novel defalcation scheme during the past year.
He had previously embezzled $35 000 of FMC's funds. FMC has refused to pay the
auditor's fee and is seeking to recover the $63 000 that was stolen by Hightower.
Which of the following is correct?
A. The auditor cannot recover the audit fee and is liable for $63 000.
B. The auditor is entitled to collect the audit fee and is not liable for $63 000.
C. FMC is entitled to recover the $28 000 defalcation, and is not liable for the $16
000 fee.
D. FMC is entitled to rescind the audit contract and thus is not liable for the $16 000
fee, but it cannot recover damages.

Chapter 4: Learning objective 5: Liability to third parties

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13. Smith & Jones rendered an unqualified opinion on the financial report of a
company that sold shares in a public offering. Based on a false statement in the
financial report, Smith & Jones is being sued by an investor who purchased shares in
this public offering. Which of the following represents a viable defence?
A. The investor has not met the burden of proving fraud or negligence by Smith &
Jones.
B. The false statement is immaterial in the overall context of the financial report.
C. Detection of the false statement by Smith & Jones occurred after the audit report
date.
D. The investor did not actually rely upon the false statement.

Chapter 4: Learning objective 5: Liability to third parties

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14. If an audit firm is being sued by a third party for common-law fraud based upon a
materially false financial report, which of the following is the best defence which the
auditors could assert?
A. Lack of a contractual relationship.
B. Contributory negligence on the part of the client.
C. Disclaimer contained in the engagement letter.
D. Lack of causation.

Chapter 4: Learning objective 5: Liability to third parties

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15. The Second Report of the Inquiry into the Law of Joint and Several Liability
recommended the introduction of:
A. A statutory cap for auditor's liability.
B. Limited liability partnerships for auditors.
C. Incorporation of audit firms.
D. Proportionate liability for auditors.

Chapter 4: Learning objective 6: Limitation of liability

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16. Which of the following is not an argument in favour of limiting auditors' liability?
A. Auditors are not necessarily able to resign their appointment.
B. Loss of reputation and disciplinary actions provide sufficient incentives for
auditors to maintain high standards.
C. Other service providers are able to limit their liability.
D. Limiting the liability of auditors would set a precedent for other professionals.

Chapter 4: Learning objective 6: Limitation of liability

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17.
A. Proportionate liability in all circumstances.
B. Proportionate liability when the plaintiff is partly at fault.
C. Proportionate division of insolvent defendant's share.
D. Proportionate liability and defendant's degree of fault.
E. Ans: A

Chapter 4: Learning objective 6: Limitation of liability

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18. The CLERP 9 reforms now provide for limitation of auditor's liability through:
A. A statutory cap.
B. Proportionate liability.
C. Incorporation.
D. All of the given answers.

Chapter 4: Learning objective 6: Limitation of liability

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19. ASA 240 (ISA 240) requires the auditor to plan to conduct the audit in such a way
as to:
A. Have a reasonable expectation of detecting all errors and fraud.
B. Detect all errors and fraud.
C. Search for all material errors and fraud.
D. Have a reasonable expectation of detecting all material errors and fraud.

Chapter 4: Learning objective 7: Fraud

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20. ASA 240 (ISA 240) provides that primary responsibility for fraudulent reporting
rests with:
A. The board of directors.
B. Management.
C. The external auditor.
D. The audit committee.

Chapter 4: Learning objective 7: Fraud

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21. When the auditor becomes aware of the existence of fraud, reporting this
information to parties outside the entity is required.
A. When s. 311 of the Corporations Act applies, or in the public interest.
B. When the Directors' Report fails to disclose the irregularity.
C. In no circumstances, due to confidentiality requirements.
D. In all cases.

Chapter 4: Learning objective 7: Fraud

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22. If an illegal act is discovered during the audit of a publicly held company, the
auditor should.
A. Notify the regulatory authorities.
B. Determine who was responsible for the illegal act.
C. Intensify the audit.
D. Report the act to high-level personnel within the client's organisation.

Chapter 4: Learning objective 7: Fraud

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23. Which of the following statements best describes the auditor's responsibility
regarding the detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure
clearly results from non-performance of audit procedures specifically described in the
engagement letter.
B. The auditor must extend auditing procedures to actively search for evidence of
fraud in all situations.
C. The auditor should design auditing procedures to provide reasonable assurance that
fraud material to the financial report is detected.
D. The auditor is responsible for the failure to detect fraud only when an unqualified
opinion is issued.

Chapter 4: Learning objective 7: Fraud

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24. An auditor finds evidence that warehouse staff are fraudulently claiming overtime.
The auditor should.
A. Further investigate the matter and report it to management when concrete evidence
has been obtained.
B. Report the matter to management in the year-end management letter.
C. Report the matter to management immediately if the expected financial effect of
the fraud is material.
D. Report the matter to management immediately.

Chapter 4: Learning objective 7: Fraud

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25. The auditor should assess the risk that errors and fraud may cause the financial
report to be materially misstated and, based on that assessment:
A. Design the audit to provide reasonable assurance of detecting errors and fraud that
are material to the financial report.
B. Plan the audit to search for errors or fraud that could be material to the financial
report.
C. Perform the audit with an awareness that errors or fraud could occur and cause a
material misstatement of the financial report.
D. Apply substantive tests to detect material misstatements except those perpetrated
by means of
E. forgery or collusion.

Chapter 4: Learning objective 7: Fraud

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05 Key

1. Which of the following statements is correct? A. The auditor

measures and records accounting data.B. The auditor prepares the
financial report.C. The auditor analyses and reviews accounting
data.D. The auditor posts adjusting journal entries for errors
uncovered as part of the audit.

Chapter 5: Learning objective 1: Accounting and auditing contrasted

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2. The stage(s) of the accounting process of primary interest to the

auditor is(are): A. Collection of original accounting data.B. Allocation
and reclassification of accounting data.C. Presentation of accounting
data in the financial report.D. All of the given answers.

Chapter 5: Learning objective 1: Accounting and auditing contrasted

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3. Which audit assertion ensures that all recorded sales are valid?
A. DocumentationB. VouchingC. OccurrenceD. Valuation and
allocation

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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4. Which of the following audit objectives relates primarily to the

financial report assertion, valuation and allocation? A. Inventory
listings are accurately compiled and the totals are properly included
in the inventory accountsB. Inventory quantities include all
products, materials and supplies owned by the company that are in
transit.C. Slow-moving, excess, defective and obsolete items
included in inventories are properly identified.D. Inventories exclude
items billed to customers or owned by others.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives
Difficulty: MediumGay - Chapter 05 #4learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo:

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5. Which of the following is not a financial report assertion?

A. Inspection.B. Rights and obligations.C. Valuation and allocation.
D. Existence.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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6. Which of the following procedures would an auditor most likely

rely on to verify management's assertion of completeness?
A. Comparing a sample of shipping documents to related sales
invoices.B. Reviewing a standard bank confirmation.C. Confirming a
sample of recorded receivables by direct communication with the
debtors.D. Observing the client's distribution of payroll cheques.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Learning objectives 3 and 4: Audit procedures;
Chapter 5: Learning objective 5: Audit evidence; Chapter 10:
Learning objective 2: Financial report assertions for tests of
transactions and balances

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7. Your client is a manufacturer of CDs and music tapes. Theft has

been an ongoing problem. The key audit risk to be addressed at
year-end is: A. Valuation and allocation of inventory.B. Existence of
inventory.C. Rights and obligations in relation to inventory.
D. Completeness of inventory.
Chapter 5: Learning objective 2: Financial report assertions and
audit objectives

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8. Which of the following audit objectives relates primarily to the

financial report assertion, completeness? A. Inventories are reduced,
when appropriate, to net realisable value.B. Inventory quantities
include all products, materials and supplies owned by the company
that are in transit.C. Slow-moving, excess, defective and obsolete
items included in inventories are properly identified.D. Inventories
exclude items billed to customers or owned by others.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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9. Which of the following audit objectives relates primarily to the

financial report assertion, rights and obligations? A. Inventories are
properly classified in the balance sheet as current assets.
B. Inventories exclude items billed to customers or owned by others.
C. Slow-moving, excess, defective and obsolete items included in
inventories are properly identified.D. Inventory quantities include all
products, materials and supplies owned by the company.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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10. While undertaking the audit of the inventory balance, you use
your audit software to extract, from the inventory master file, a
report that shows those with a negative gross margin. The financial
report assertion at which such a report is aimed is: A. Existence.
B. Valuation and allocation.C. Occurrence.D. Completeness.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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11. Which of the following audit objectives relates primarily to the

financial report assertion of presentation and disclosure?
A. Inventories are properly classified in the balance sheet as current
assets.B. Inventories exclude items billed to customers or owned by
others.C. Slow-moving, excess, defective and obsolete items
included in inventories are properly identified.D. Inventory
quantities include all products, materials and supplies owned by the
company that are in transit.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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12. Which of the following audit objectives does not relate primarily
to the financial report assertion of completeness? A. Inventories are
reduced, when appropriate, to net realisable value.B. Inventory
quantities include all products, materials and supplies on hand.
C. Inventory listings are accurately compiled, and the totals are
properly included in the inventory accounts.D. Inventory quantities
include products and materials owned by the company that are in
transit or stored at outside locations.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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13. When reviewing a loan agreement to ascertain whether the

bank's security over any of the client's assets has been included in
the financial report, the audit assertion being achieved is:
A. Valuation and allocation.B. Completeness.C. Presentation and
disclosure – accuracy and valuation.D. Presentation and disclosure –
completeness.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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14. Which of the following does NOT assist in the achievement of

the audit assertion of existence in relation to an investment in listed
shares? A. A confirmation of shares held on the client's behalf.B. A
review of share prices quoted at the financial year-end.C. A test of
details of transactions of share purchases and sales during the year.
D. An analytical review of rate of return on investments.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

perfu
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15. In testing the existence assertion for an asset, an auditor

ordinarily works from the: A. Potentially unrecorded items to the
financial report.B. Financial report to the potentially unrecorded
items.C. Supporting evidence to the accounting records.
D. Accounting records to the supporting evidence.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives

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16. Selecting a sample of quantities of inventory in the warehouse

and tracing each item to the final stock sheets helps address which
of the following assertions in respect of inventory? A. Completeness.
B. Valuation and allocation.C. Existence.D. Rights and obligations.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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17. Auditors are most likely to use focused audit procedures to

examine: A. Routine transactions.B. Low-risk assertions.C. Only the
rights and obligations assertion.D. High-risk assertions.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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18. Your audit client is under intense pressure to meet an earnings

target. Which audit procedure are you most likely to use when
auditing purchases? A. VouchingB. TracingC. Recalculation
D. Confirmation

Chapter 5: Learning objectives 3 and 4: Audit procedures

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19. In the context of an audit of a financial report, substantive tests

are audit procedures that: A. May be eliminated under certain
conditions.B. Are designed to discover significant subsequent
events.C. May be either tests of details of transactions, tests of
details of account balances, tests of disclosure, or analytical
procedures.D. Will increase proportionately with the auditor's
reliance on internal control.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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20. Most of the independent auditor's work in formulating an opinion

on a financial report consists of: A. Obtaining an understanding of
the internal control.B. Obtaining and examining audit evidence.
C. Examining cash transactions.D. Comparing recorded
accountability with assets.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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21. You are concerned about whether all sales have occurred. The
procedure that will be most effective in verifying this assertion is:
A. Selecting a sample of invoices and tracing them to delivery
dockets.B. Selecting a sample of customers' orders and tracing them
to delivery dockets.C. Checking the sequence of delivery dockets
and tracing them to customers' orders.D. Selecting a sample of
delivery dockets and tracing them to invoices.

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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22. Which of the following ultimately determines the specific audit

procedures necessary to provide an independent auditor with a
reasonable basis for the expression of an opinion? A. The audit
program.B. The auditor's judgment.C. Generally accepted auditing
standards.D. The auditor's working papers.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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23. The audit trail includes all of the following except: A. Journals
and journal files.B. Segregation of duties.C. Ledgers and ledger files.
D. Source documents and transaction files.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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24. Which of the following is not an auditing procedure? A. Physical

examination.B. Disclosure.C. Vouching.D. Confirmation.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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25. In a financial report audit, substantive tests are audit procedures

that: A. Are designed to discover significant subsequent events.
B. May be either tests of transactions, tests of balances, tests of
disclosure or analytical procedures.C. Will decrease proportionately
with the auditor's assessed level of control risk.D. May be eliminated
under certain conditions.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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26. Which of the following best describes the primary purpose of

audit procedures? A. To comply with the accounting standards.B. To
gather corroborative evidence.C. To verify the accuracy of the
account balance.D. To detect errors or irregularities.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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27. Which of the following procedures would provide the most
reliable audit evidence? A. Inquiries of the entity's internal audit
staff held in private.B. Inspection of pre-numbered client purchase
orders filed in the accounts payable department.C. Analytical
procedures performed by the auditor on the entity's trial balance.
D. Inspection of bank statements obtained directly by the auditor
from the entity's financial institution.

Chapter 5: Learning objectives 3 and 4: Audit procedures

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28. Which of the following is the least persuasive type of evidence?

A. Bank statements obtained from the client.B. Computations made
by the auditor.C. Pre-numbered client invoices.D. Suppliers'
invoices.

Chapter 5: Learning objective 5: Audit evidence

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29. Which of the following is an essential factor in evaluating the

sufficiency of evidence? The evidence must: A. Be well documented
and cross-referenced in the audit documents.B. Be based on sources
that are considered reliable.C. Bear a direct relationship to the audit
objective.D. Be of sufficient quantity to enable the auditor to form
an opinion.

Chapter 5: Learning objective 5: Audit evidence

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30. In testing plant and equipment balances, an auditor may inspect
new additions listed on the analysis of plant and equipment. This
procedure is designed to obtain evidence concerning management's
assertions about classes of transactions and events, and specifically,
which assertion? A. OccurrenceB. CutoffC. AccuracyD. Classification

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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31. Tracing is used primarily to test which of the following assertions

about classes of transactions? A. OccurrenceB. Completeness
C. CutoffD. Classification

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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32. Vouching is used primarily to test which of the following

assertions about classes of transaction? A. Occurrence
B. CompletenessC. AuthorisationD. Classification

Chapter 5: Learning objective 2: Financial report assertions and

audit objectives; Chapter 5: Learning objectives 3 and 4: Audit
procedures; Chapter 5: Learning objective 5: Audit evidence;
Chapter 10: Learning objective 2: Financial report assertions for
tests of transactions and balances

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33. In determining whether transactions have been recorded, the

direction of the audit testing should be from the: A. General ledger
balances.B. Adjusted trial balance.C. Original source documents.
D. General journal entries.

Chapter 5: Learning objective 5: Audit evidence

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34. Which of the following presumptions is correct about the

reliability of audit evidence? A. Information obtained indirectly from
outside sources is the most reliable audit evidence.B. To be reliable,
audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative
evidence obtained.D. An effective internal control provides more
reliable audit evidence.

Chapter 5: Learning objective 5: Audit evidence

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35. A. 'I am seldom convinced beyond all doubt with respect to all
aspects of the reports being examined.'B. 'I would not undertake
that procedure because at best the results would only be persuasive
and I'm looking for convincing evidence.'C. 'I evaluate the degree of
risk involved in deciding the kind of evidence I will gather.'D. 'I
evaluate the usefulness of the evidence I can obtain against the
cost of obtaining it.'

Chapter 5: Learning objective 5: Audit evidence

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36. Which of the following statements concerning audit evidence is

correct? A. Competent evidence supporting management's
assertions should be convincing rather than persuasive.B. An
effective internal control contributes little to the reliability of the
evidence created within the entity.C. The cost of obtaining evidence
is not an important consideration to an auditor in deciding what
evidence should be obtained.D. A client's accounting data cannot be
considered sufficient audit evidence to support the financial report.

Chapter 5: Learning objective 5: Audit evidence

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37. Which of the following statements concerning evidence is

correct? A. Appropriate evidence supporting management's
assertions must be convincing rather than merely persuasive.B. A
client's accounting data cannot be considered sufficient audit
evidence to support the financial report.C. The cost of obtaining
evidence is not an important consideration to an auditor in deciding
what evidence should be obtained.D. Effective internal control
contributes little to the reliability of the evidence created within the
entity.

Chapter 5: Learning objective 5: Audit evidence

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38. A. Schedules of details of physical inventory counts conducted

by the client.B. Notation of inferences drawn from ratios and trends.
C. Notation of appraisers' conclusions documented in the auditor's
work papers.D. Lists of negative confirmation requests for which no
response was received by the auditor.E. Ans: A

Chapter 5: Learning objective 5: Audit evidence

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39. Which of the following factors is most important in determining

the appropriateness of audit evidence? A. The reliability of the
evidence in meeting the audit objective.B. The sampling method
used by the auditor.C. The quantity of the evidence obtained.D. The
objectivity of the auditor gathering the evidence.

Chapter 5: Learning objective 5: Audit evidence

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40. To be appropriate, evidence must be both: A. Reliable and well

documented.B. Reliable and relevant.C. Useful and independent.
D. Extensive and timely.

Chapter 5: Learning objective 5: Audit evidence

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41. A. A letter of representation from management.B. Confirmation
of an inter-company receivable from a related company.C. A letter of
representation from the client's solicitors.D. A bank statement.
E. Ans: A

Chapter 5: Learning objective 5: Audit evidence

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42. The risk that an auditor's procedures will lead to the conclusion
that a material misstatement does not exist in an account balance
when, in fact, such a misstatement does exist is: A. Audit risk.
B. Detection risk.C. Control risk.D. Inherent risk

Chapter 5: Learning objective 6: The audit risk model

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43. Which of the following audit risk components may be assessed

in non-quantitative terms?

Control Detectio Inheren

risk n risk t risk

A Yes Yes Yes

B Yes No Yes

C Yes Yes No

D No Yes Yes

Ans: A
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44. Auditors can eliminate engagement risk: A. Under no

circumstances.B. By establishing policies for client acceptance and
continuance.C. By lowering audit risk.D. By lowering materiality.

Chapter 5: Learning objective 6: The audit risk model

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45. The risk that an auditor will conclude, based on substantive

tests, that a material error does not exist in an account balance
when, in fact, such error does exist is referred to as: A. Sampling
risk.B. Detection risk.C. Non-sampling risk.D. Inherent risk.

Chapter 5: Learning objective 6: The audit risk model

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46. The acceptable level of detection risk is inversely related to the:

A. Preliminary judgment about materiality levels.B. Risk of failing to
discover material misstatements.C. Assurance provided by
substantive tests.D. Risk of misapplying auditing procedures.

Chapter 5: Learning objective 6: The audit risk model

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47. On the basis of audit evidence gathered and evaluated, an

auditor decides to increase the assessed level of control risk from
that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor
woulD. A. Decrease substantive testing.B. Decrease detection risk.
C. Increase inherent risk.D. Increase materiality levels.

Chapter 5: Learning objective 6: The audit risk model

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48. As the acceptable level of detection risk decreases, an auditor

may change the: A. Timing of substantive tests by performing them
at an interim date rather than at balance date.B. Assessed level of
inherent risk to a higher amount.C. Timing of tests of controls by
performing them at several dates rather than at one time.D. Nature
of substantive tests from a less effective to a more effective
procedure.

Chapter 5: Learning objective 6: The audit risk model

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49. As the acceptable level of detection risk decreases, an auditor

may change the: A. Timing of substantive tests by performing them
at an interim date rather than at year-end.B. Nature of substantive
tests from less effective to more effective procedures.C. Timing of
tests of controls by performing them at several dates rather than at
one time.D. Assessed level of inherent risk to a higher amount.

Chapter 5: Learning objective 6: The audit risk model

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50. As the acceptable level of detection risk decreases, the
assurance directly provided from: A. Substantive tests should
increase.B. Substantive tests should decrease.C. Tests of controls
should increase.D. Tests of controls should decrease.

Chapter 5: Learning objective 6: The audit risk model

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51. As the acceptable level of detection risk increases, an auditor

may change the: A. Assessed level of control risk from less than high
to high.B. Assurance provided by tests of controls by using a larger
sample size than planned.C. Timing of substantive tests from year-
end to an interim date.D. Nature of substantive tests from less
effective to more effective procedures.

Chapter 5: Learning objective 6: The audit risk model

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52. The auditor faces a risk that the audit will not detect material
misstatements that occur in the accounting process. In regard to
minimising this risk, the auditor primarily relies on: A. Substantive
tests.B. Tests of controls.C. Internal control.D. Statistical analysis.

Chapter 5: Learning objective 6: The audit risk model

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53. The situation and circumstances can dictate the level of certain
risks no matter what the auditor does. However, the auditor is
always able to decide to reduce one of the following risks: A. Control
risk.B. Risk of management fraud.C. Detection risk.D. Inherent risk.

Chapter 5: Learning objective 6: The audit risk model

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54. The extent of substantive tests for an assertion in relation to the

assessed level of inherent risk varies in a relationship that is
ordinarily: A. Opposite.B. Inverse.C. Direct.D. Unequal.

Chapter 5: Learning objective 6: The audit risk model

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55. Failure to detect material dollar misstatements in the financial

report is a risk that the auditor primarily mitigates by: A. Performing
substantive tests.B. Performing tests of controls.C. Understanding
internal control.D. Obtaining a client representation letter.

Chapter 5: Learning objective 7: Types of audit tests

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56. Which of the following is intended to detect deviations from

prescribed Accounting Department procedures? A. Substantive tests
specified by a standardised audit program.B. Tests of controls
designed specifically for the client.C. Analytical tests as designed in
the industry audit guide.D. Computerised analytical tests tailored for
the configuration of CIS equipment in use.

Chapter 5: Learning objective 7: Types of audit tests

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57. Alex Kostas, an auditor, examines a sample of copies of sales

invoices for the initials of the person who verified the quantitative
data. This is an example of A. A. Test of controls.B. Substantive test.
C. Cutoff test.D. Statistical test.

Chapter 5: Learning objective 7: Types of audit tests

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58. Which of the following would be least likely to be included in an

auditor's test of controls? A. Observation.B. Inquiry.C. Confirmation.
D. Inspection.

Chapter 5: Learning objective 7: Types of audit tests

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59. All of the following are substantive tests except: A. Analytical

procedures.B. Tests of approvals on invoices.C. Direct tests of sales
transactions.D. Confirmation of bank balances at year-end.

Chapter 5: Learning objective 7: Types of audit tests

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60. In which of the following instances would an auditor be least

likely to require the assistance of an expert? A. Assessing the
valuation of inventories of artworks.B. Determining the quantities of
materials stored in piles on the ground.C. Determining the value of
unlisted securities.D. Ascertaining the assessed valuation of fixed
assets.

Chapter 5: Learning objective 8: Using the work of an expert or

another auditor

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61. In using the work of an expert, an understanding should exist

among the auditor, the client and the expert as to the nature of the
work to be performed by the expert. Preferably, the understanding
should be documented and would include all of the following
except: A. The objectives and scope of the expert's work.B. The
expert's representations as to any relationship to the client.C. The
expert's understanding of the auditor's corroborative use of the
expert's findings in relation to the representations in the financial
report.D. A statement that the methods or assumptions to be used
are not inconsistent with those used by the client.

Chapter 5: Learning objective 8: Using the work of an expert or

another auditor

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62. Audit documentation prepared on audits of publicly-held clients

is the property of the: A. Shareholders.B. Auditor.C. Management of
the entity being audited.D. ASIC.

Chapter 5: Learning objective 9: Audit working papers

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63. A. Adjusting journal entries.B. Copies of the audit report.

C. Chart of accounts.D. Copies of minutes of important committee
meetings.

Chapter 5: Learning objective 9: Audit working papers

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64. Audit documents record the results of the auditor's evidence-

gathering procedures. When preparing audit documents, the auditor
should remember that: A. Audit documents should be kept on the
client's premises so that the client can have access to them for
reference purposes.B. Audit documents should be the primary
support for the financial report being examined.C. Audit documents
should be considered as a substitute for the client's accounting
records.D. Audit documents should be designed to meet the
circumstances and the auditor's needs on each engagement.

Chapter 5: Learning objective 9: Audit working papers

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65. Audit documents that record the procedures used by the auditor
to gather evidence should be: A. Considered the primary support for
the financial report being examined.B. Viewed as the connecting
link between the accounting records and the financial report.
C. Designed to meet the circumstances of the particular
engagement.D. Destroyed when the audited entity ceases to be a
client.

Chapter 5: Learning objective 9: Audit working papers

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66. Audit documentation: A. Must be in electronic form.B. Must be

only in paper form.C. Is not required, but is strongly recommended.
D. May be in paper, electronic, or some other form.

Chapter 5: Learning objective 9: Audit working papers

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67. Which of the following is not a factor affecting the independent

auditor's judgment as to the quantity, type and content of audit
working papers? A. The need, in the particular circumstances, for
supervision and review of the work performed by any assistants.
B. The nature and conditions of the client's records and internal
control.C. The expertise of client personnel and their expected audit
participation.D. The type of financial report, schedules, or other
information upon which the auditor is reporting.

Chapter 5: Learning objective 9: Audit working papers

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68. In planning an audit engagement, which of the following is a

factor that affects the independent auditor's judgment as to the
quantity, type and content of working papers? A. The estimated
occurrence rate of attributes.B. The preliminary evaluations based
upon initial substantive testing.C. The content of the client's
representation letter.D. The anticipated nature of the auditor's
report.

Chapter 5: Learning objective 9: Audit working papers

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69. Which of the following factors will least affect the independent
auditor's judgment as to the quantity, type and content of working
papers desirable for a particular engagement? A. Nature of the
auditor's report.B. Nature of the financial report, schedules, or other
information upon which the auditor is reporting.C. Need for
supervision and review.D. Number of personnel assigned to the
audit.

Chapter 5: Learning objective 9: Audit working papers

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70. An auditor's working papers will generally be least likely to

include documentation showing how the: A. Client's schedules were
prepared.B. Engagement had been planned.C. Client's internal
control had been understood and the level of control risk assessed.
D. Unusual matters were resolved.

Chapter 5: Learning objective 9: Audit working papers

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71. The current file of an auditor's working papers is most likely to

include a copy of the: A. Superannuation fund contract.
B. Constitution.C. Flowcharts of the internal control activities.
D. Bank reconciliation.

Chapter 5: Learning objective 9: Audit working papers

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72. Which of the following is not a primary purpose of audit working

papers? A. To assist in preparation of the audit report.B. To support
the financial report.C. Report to provide evidence of the audit work
performed.D. To co-ordinate the audit.

Chapter 5: Learning objective 9: Audit working papers

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73. Which of the following eliminates voluminous details from the

auditor's working trial balance by classifying and summarising
similar or related items? A. Account analyses.B. Lead schedules.
C. Control accounts.D. Supporting schedules.

Chapter 5: Learning objective 9: Audit working papers

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74. An auditor's permanent files are most likely to include:

A. Schedules that support the current year's adjusting entries.
B. Analyses of share capital and other owners' equity accounts.
C. Documentation indicating that the audit work was adequately
planned and supervised.D. Previous years' accounts receivable
confirmations that were classified as exceptions.

Chapter 5: Learning objective 9: Audit working papers

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06 Key

1. Before accepting an engagement to audit a new client, an auditor is required to:

A. Make inquiries of the predecessor auditor after obtaining the consent of the
prospective client.
B. Obtain the prospective client's signature on the engagement letter.
C. Prepare a memorandum setting forth the staffing requirements and documenting
the preliminary audit plan.
D. Discuss the management representation letter with the prospective client's audit
committee.

Chapter 6: Learning objective 1: Client acceptance and continuance

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2. In assessing whether to accept a client for an audit engagement, an auditor should
consider the:
Entity's Business Risk Auditor's Engagement Risk
A. Yes, Yes
B. Yes, No
C. No, Yes
D. No, No

Chapter 6: Learning objective 1: Client acceptance and continuance

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3. The following questions relate to client acceptance and communication with a
predecessor auditor. Select the best response.
A. (a) A prospective client's refusal to give permission to communicate with the
previous auditor and review certain portions of the previous auditor's working papers
will bear directly on the auditor's decision concerning the:
B. Ability to establish consistency in application of accounting principles.
C. Apparent scope limitation.
D. Integrity of management.
E. Adequacy of the planned audit program.

Chapter 6: Learning objective 1: Client acceptance and continuance

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4. Inquiry of the previous auditor is:
A. Required about matters that have a bearing on acceptance of the client.
B. Required after acceptance of a new client regarding matters the successor believes
may affect the conduct of his or her audit.
C. Helpful to the successor and may facilitate the successor's audit, but is not required
either before or after acceptance of the client.
D. Required only if the change in auditors resulted from a disagreement between the
client and previous auditors.

Chapter 6: Learning objective 1: Client acceptance and continuance

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5. When an auditor is approached to perform an audit for the first time, the auditor
should make inquiries of the previous auditor. This is a necessary procedure because
the predecessor may be able to provide the successor with information that will assist
the successor in determining:
A. Whether the predecessor's work should be utilised.
B. Whether the company follows the policy of rotating its auditors.
C. Whether the predecessor's assessment of control risk has been high.
D. Whether the engagement should be accepted.

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6. What is the responsibility of an auditor with respect to communicating with the
previous auditor in connection with a prospective new audit client?
A. The auditor has no responsibility to contact the previous auditor.
B. The auditor should contact the previous auditor regardless of whether the
prospective client authorises contact.
C. The auditor need not contact the previous auditor if the successor is aware of all
available facts.
D. The auditor should obtain permission from the prospective client to contact the
previous auditor.

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7. An auditor's inquiries of the previous auditor prior to acceptance should cover the
previous auditor's:
A. Evaluation of all matters of continuing accounting significance.
B. Opinion of any events occurring since the previous audit report was issued.
C. Understanding as to the reasons for the change of auditors.
D. Awareness of the consistency in the application of accounting principles between
periods.

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8. Which of the following should an auditor obtain from the previous auditor prior to
accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on the integrity of management.

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9. Which of the following factors most likely would cause an auditor to not accept a
new audit engagement?
A. An inadequate understanding of the entity's internal control.
B. The close proximity to the end of the entity's fiscal year.
C. The conclusion that the entity's management probably lacks integrity.
D. An inability to perform preliminary analytical procedures before assessing control
risk.

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10. The understanding between the client and the auditor as to the responsibilities to
be assumed by each are normally set forth in:
A. An engagement letter.
B. A management letter.
C. A comfort letter.
D. A representation letter.

Chapter 6: Learning objective 2: Engagement letter

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11. Engagement letters include all of the following except:

A. A list of additional services that will be provided.
B. A list of adjusting journal entries.
C. Information about the audit fee.
D. Arrangements involving the use of experts.

Chapter 6: Learning objective 2: Engagement letter

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12. The understanding between the client and the auditor as to the degree of
responsibility to be assumed by each are normally set forth in a(an):
A. Representation letter.
B. Engagement letter.
C. Management letter.
D. Comfort letter.

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13. The scope and nature of an auditor's contractual obligation to a client ordinarily is
established in the:
A. Engagement letter.
B. Corporations Act.
C. Management letter.
D. Client's Constitution.

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14. Because of the risk of material misstatement, an audit of a financial report in
accordance with the auditing standards should be planned and performed with an
attitude of:
A. Objective judgment.
B. Independent integrity.
C. Professional scepticism.
D. Impartial conservatism.

Chapter 6: Learning objective 3: Audit planning

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15. During preliminary audit planning:
A. The auditor considers the possibility of business failure.
B. The auditor designs the audit to search for evidence to support the company's
continued existence.
C. The auditor does not need to consider the possibility of business failure because
that is a procedure performed during the overall evaluation at the end of the audit.
D. The auditor inquires of the company's legal advisers concerning the possibility of
going concern problems.

Chapter 6: Learning objective 3: Audit planning

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16. Early appointment of the independent auditor will enable:
A. A more thorough audit to be performed.
B. A sufficient understanding of internal control to be obtained.
C. Sufficient competent evidential matter to be obtained.
D. A more efficient audit to be planned.

Chapter 6: Learning objective 3: Audit planning

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17. Adequate planning should.

A. Ensure that appropriate attention is devoted to important areas of the audit and that
potential risk areas and problems are promptly identified.
B. Automatically lead to a reduction in the amount of test of controls undertaken.
C. Ensure that directors and senior management are involved in all major aspects of
the audit process.
D. Result in a reduction of the audit fee.

Chapter 6: Learning objective 3: Audit planning

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18. Which of the following situations would most likely require special audit planning
by the auditor?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client's tax return differ from those used on the
books.
C. Assets costing less than $500 are expensed even though the expected life exceeds
one year.
D. Inventory is comprised of precious gemstones.

Chapter 6: Learning objective 3: Audit planning

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19. In designing written audit programs, an auditor should establish specific audit
objectives that relate primarily to the:
A. Cost-benefit of gathering evidence.
B. Timing of audit procedures.
C. Selected audit techniques.
D. Financial report assertions.

Chapter 6: Learning objective 4: Developing an overall audit strategy

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20. An audit program should be designed for each individual audit and should include
audit steps and procedures to:
A. Detect and eliminate all fraud.
B. Increase the amount of management information available.
C. Provide assurances that the objectives of the audit are met.
D. Ensure that only material items are audited.

Chapter 6: Learning objective 4: Developing an overall audit strategy

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21. An audit program should be designed for each individual audit and should include
audit steps and procedures to:
A. Ensure only material items are audited.
B. Detect and eliminate all fraud.
C. Increase the amount of management information available.
D. Provide assurances that the objectives of the audit are met.

Chapter 6: Learning objective 4: Developing an overall audit strategy

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22. Time budgets are used for which of the following reasons?
A. Monitor actual audit hours incurred.
B. Assist in the staff scheduling process.
C. Estimate the costs and fee for the engagement.
D. All of the given answers.

Chapter 6: Learning objective 5: Assigning and scheduling audit staff

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23. An auditor obtains knowledge about a new client's business and its industry in
order to:
A. Make constructive suggestions concerning improvements to the client's internal
control.
B. Develop an attitude of professional scepticism concerning management's financial
report assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial
report taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client's
financial report.

Chapter 6: Learning objective 6: Knowledge of the client's business

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24. Prior to beginning the work on a new audit engagement when the auditor does not
possess expertise in the industry in which the client operates, the auditor shoulD.
A. Reduce audit risk by lowering the preliminary levels of materiality.
B. Obtain knowledge of matters that relate to the nature of the entity's business.
C. Engage financial experts familiar with the industry.
D. Design special substantive tests to compensate for the lack of industry expertise.

Chapter 6: Learning objective 6: Knowledge of the client's business

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25. An auditor obtains knowledge about a new client's business and its industry to:
A. Make constructive suggestions concerning improvements in the client's internal
control.
B. Understand the events and transactions that may have an effect on the client's
financial report.
C. Evaluate whether the aggregation of known misstatements causes the financial
report taken as whole to be materially misstated.
D. Develop an attitude of professional scepticism concerning management's financial
report assertions.

Chapter 6: Learning objective 6: Knowledge of the client's business

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26. To ascertain the exact name of the corporate client, the auditor relies primarily on:
A. Corporate minutes.
B. By-laws.
C. Company Constitution.
D. Tax returns.

Chapter 6: Learning objective 6: Knowledge of the client's business

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27. An auditor searching for related-party transactions should obtain an understanding
of each subsidiary's relationship to the total entity because:
A. Intercompany transactions may have been consummated on terms equivalent to
arm's length transactions.
B. This might reveal whether particular transactions would have taken place if the
parties had not been related.
C. The business structure may be deliberately designed to obscure related-party
transactions.
D. This might permit the audit of intercompany account balances to be performed as
of concurrent dates.

Chapter 6: Learning objective 6: Knowledge of the client's business

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28. Which of the following events most likely indicates the existence of related
parties?
A. Selling real estate at a price that differs significantly from its book value.
B. Making a loan without scheduled terms for repayment of the funds.
C. Discussing merger terms with a company that is a major competitor.
D. Borrowing a large sum of money at a variable rate of interest.

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29. Which of the following is not a threat in a SWOT analysis?

A. New restrictive government legislation.
B. Additional export tariffs.
C. Price-cutting by competitors.
D. Poor distribution network.

Chapter 6: Learning objective 7: Assessing business risk

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30. Analytical procedures used in planning an audit should focus on identifying:
A. The predictability of financial data from individual transactions.
B. The various assertions that are embodied in the financial report.
C. Areas that may represent specific risk relevant to the audit.
D. Material weaknesses in internal control.

Chapter 6: Learning objective 8: Analytical procedures

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31. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant non-financial
information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of the financial information with budgeted amounts.

Chapter 6: Learning objective 8: Analytical procedures

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32. Analytical procedures may be classified as being primarily:
A. Tests of control.
B. Detailed tests of balances.
C. Tests of ratios.
D. Substantive tests.

Chapter 6: Learning objective 8: Analytical procedures

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33. Analytical procedures used in planning an audit should focus on identifying:

A. Material weaknesses in the internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial report.
D. Areas that may represent specific risks relevant to the audit.

Chapter 6: Learning objective 8: Analytical procedures

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34. Analytical procedures are:
A. Never required.
B. Required for planning, substantive testing, and overall review of the financial
report.
C. Required for planning and overall review of the financial report.
D. Required during planning only.

Chapter 6: Learning objective 8: Analytical procedures

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35. The auditor generally gives most emphasis to ratio and trend analysis in the
examination of:
A. Retained earnings.
B. Income.
C. Financial position.
D. Cash flows.

Chapter 6: Learning objective 8: Analytical procedures

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36. An example of an analytical procedure is the comparison of:
A. Recorded amounts of major disbursements with appropriate invoices.
B. Results of a statistical sample with the expected characteristics of the actual
population.
C. Computer-generated data with similar data generated by a manual accounting
system.
D. Financial information with similar information regarding the industry in which the
entity operates.

Chapter 6: Learning objective 8: Analytical procedures

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37. Which of the following tends to be most predictable for purposes of analytical
procedures applied as substantive tests?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.

Chapter 6: Learning objective 8: Analytical procedures

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38. Analytical procedures that are required in all audits of financial reports are
analytical procedures:
A. Relevant to achieving important audit objectives related to particular assertions.
B. Expected to be efficient and effective in the circumstances.
C. Based on available and reliable financial data.
D. Used in the planning and overall review stages.

Chapter 6: Learning objective 8: Analytical procedures

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39. Which of the following is not a typical analytical procedure?
A. Study of relationships between financial and relevant nonfinancial information.
B. Comparison of recorded amounts of major disbursements with budgeted amounts.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of financial information with similar information regarding the
industry in which the entity operates.

Chapter 6: Learning objective 8: Analytical procedures

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40. In applying analytical procedures, the identification of the relationships and types
of data used, as well as conclusions reached when recorded amounts are compared to
expectations, requires:
A. Judgment by the auditor.
B. Participation by senior audit team members.
C. Understanding of complex models.
D. Advanced training in plausibility formulation.

Chapter 6: Learning objective 8: Analytical procedures

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41. An auditor compares this year's revenues and expenses with those of the previous
year and investigates all changes exceeding 10 per cent. By carrying out this
procedure the auditor would be most likely to learn that:
A. An increase in property tax rates has not been recognised in the client's accrual.
B. The provision for uncollectible accounts is inadequate because of worsening
economic conditions.
C. Fourth-quarter payroll taxes were not paid.
D. The client changed its capitalisation policy for small tools.

Chapter 6: Learning objective 8: Analytical procedures

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42. Which of the following is NOT a benefit of analytical procedures?
A. Assists in understanding a client's business and identifying areas of potential risk.
B. Enables the auditor to review the financial and non-financial information of a
client.
C. May reduce the level of detailed audit testing if the control system surrounding the
reliability of the information is strong.
D. Provides adjustments to error levels during tests of control.

Chapter 6: Learning objective 8: Analytical procedures

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43. Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of the
following possibilities?
A. Unrecorded sales.
B. Merchandise purchases charged to selling and general expense.
C. Fictitious sales.
D. Unrecorded purchases.

Chapter 6: Learning objective 8: Analytical procedures

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44. One reason why the independent auditor performs analytical procedures of the
client's operations is to identify:
A. Deficiencies of a material nature in the internal control.
B. Unusual transactions.
C. Non-compliance with prescribed control procedures.
D. Improper separation of accounting and other financial duties.

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45. The auditor is most likely to rely on analytical procedures alone if a balance is:
A. Material and internal controls are good.
B. Immaterial and internal controls are poor.
C. Immaterial and inherent risk is high.
D. Immaterial and internal controls are good.

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46. Which result of an analytical procedure suggests the existence of obsolete
inventory
A. Decrease in the inventory turnover rate.
B. Decrease in the ratio of inventory to accounts receivable.
C. Decrease in the ratio of inventory to accounts payable.
D. Decrease in the ratio of gross profit to sales.

Chapter 6: Learning objective 8: Analytical procedures

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47. Significant unexpected differences identified by analytical procedures will usually

necessitate:
A. A review of internal control.
B. An explanation in the representation letter.
C. Investigation by the auditor.
D. Addition of an 'emphasis of matter' paragraph to the audit report.

Chapter 6: Learning objective 8: Analytical procedures

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