Auditing and Assurance Services II

Multiple Choices

1- Accounting estimate is ISA 540

2- Audit Sampling is ISA 530
3- Using of work of internal audit is ISA 610
4- Using of work of an auditor’s expert is ISA 620
5- Audit considerations relating to entities using service organisations is ISA 402
6- Substantive procedures are tests to detect material misstatements in the financial statements.
7- There are four types of Substantive Procedures are:
 Analytical procedure
 Tests of detail of transactions
 Tests of detail of account balances
 Tests of detail of disclosures

8- Audit sampling is the application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection.

9- Four main methods to select sampling area are:

 random selection
 systematic selection
 haphazard selection
 block selection

10- Example of Account Estimate include:

 Allowance for doubtful accounts
 Work-in-progress inventory
 Warranty obligations
 Depreciation method or asset useful life
 Accrued revenue
 Recoverability provision against the carrying amount of investments
 Fair value of goodwill and other intangibles………………

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11- Analytical procedures When significant fluctuations or unexpected relationships are
identified, the auditors shall:
 Make enquiries of directors
 Consider management response in light of knowledge or evidence
 Carry out additional audit procedures where necessary.

12- Audit should control sampling risk by

 Random selection of samples
 The use of probability theory to evaluate sample results, including measurement of
sampling risk
 test applied in the same way to all items in the account balance or class of
transactions.

13- Using one’s own judgement criteria instead of random selection an example of direct sample
selection.

14- Which of the following is a key component is using systematic sample selection?
Internal

15- Documentation on sample methods, tests, perform and conclusions are required for:
 Statistical sampling
 Non- statistical sampling

16- Non-Statistical sampling and attribute sampling are similar in that both require the auditor to
define the sample unit.

17- Which is the following tests would provide the audit evidence as to existence of tangible non-
current asset?
Physically inspecting the asset.

18- Inspecting title deeds of a building provide audit evidence concern, which one of the following
financial statement assertions?
rights and obligation.

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19- What are the key financial assertions for another non-current asset?
 Valuation and allocation
 Existence

20- State the key financial assertions for tangible non-current asset
 Completeness
 Valuation and allocation
 Rights and obligations
 Existence

21- Which the following is not an intangible asset?

 PPE (Plant, Property, Equipment). These assets include: land, inventory,
equipment, machinery, vehicles, furniture…………

22- The methods of inventory valuation include:

 Cost method (FIFO, Historical cost, Production cost….)
 Average cost method (Weighted Average Method....)
 Net realisable value (NRV)

23- Management responsibilities in relation to inventories ensure inventories figure in financial

statements represents inventories that exist / are owned, keep inventory count records.

24- Auditors responsibilities in relation to inventories is:

 Management: Ensure inventories figure in financial statements represents
inventories that exist / are owned, keep inventory count records.
 Auditors:
- Obtain sufficient audit evidence about inventories and attend inventory
count if inventories are material
- Ensure inventories are counted annually, records are adequate and all
material differences are investigated by management.

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25- Audit process of inventory consists
 Observe the physical inventory count
 Cut-off testing
 Valuation

26- Conducting Planning inventory count auditors should consider:

 The risks of material misstatement of inventory
 Internal controls related to inventory
 Whether adequate procedures are expected to be established and proper
instructions issued for counting
 The timing of the count
 Whether the entity maintains a perpetual inventory system Audit and Assurance
 Locations at which inventory is held (including materiality at different locations)
 Whether the assistance of an auditor’s expert is required

27- Review inventory count instructions auditors should consider to ensure there is provision
for:
 Organization of count: supervision, marking of inventories, control during the
process, identification of obsolete inventories
 Counting: systematic counting ensures all inventories are counted, teams of two
counters or two independent counts
 Recording: control over inventory sheets, ink used, signed by counters.

28- During inventory count auditors should focus on:

 Check instructions are followed
 Make test counts for accuracy
 Check procedures for obsolete inventories
 Confirm third party inventories separate
 Conclude whether inventory count has been properly carried out
 Gain overall impression of inventories

29- Audit evidence – Specific considerations for selected items is Systematic selection.

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30- After inventory count auditors should consider that final inventory sheets have been
properly compiled from count records and that book inventory has been appropriately
adjusted.
 Trace test count items to final inventory sheets
 Check all count records have been included in final total
 Confirm cut-off using final goods in and out records
 Check replies from third parties
 Confirm valuation

31- Cut-off procedure at inventory count is

 Record the relevant movements (last and first goods despatched and received
numbers).
 Observe whether cut-off procedures are being followed during count
 Discuss procedures with management.

32- Cut-off procedures at final audit is

 Match goods received notes with purchase invoices and goods despatched notes
with sales invoices and ensure all in the correct period.
 Match materials requisitions with work in progress figures to ensure cut-off
correct.

33- Inventories should be valued at the lower of cost and net realisable value.

34- Auditors should consider original cost of all types of inventories include:
 The auditors must ensure that the method is allowed under law and standards,
consistent, calculated correctly.
 Actual costs can be checked by referring to supplier invoices.
 The auditor should bear in mind the age of inventories when considering cost.

35- Types of inventory includes:

 Raw material
 Work in progress
 Finished goods
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36- Auditors should consider production cost (work in progress and finished goods):
 Cost is the cost of purchase plus cost of conversion
 The auditors may be able to use analytical procedures to assess the costs of
conversion
 Material: Verify to invoices and price lists
 Labour: Verify to wage records and time summaries
 Overheads: Ensure allocation is consistent and based on normal production

37- Net Realizable value is likely to be lower than cost where there has been:
 An increase in costs or a fall in selling price
 Physical deterioration
 Obsolescence of products
 A marketing decision to manufacture and sell products at a loss
 Errors in production or purchasing

38- The inventory count should count inventory by one or a combination of the following
methods:
 Physical inventory counts at the year end
 Physical inventory counts before or after the year end
 Continuous (or perpetual) inventory where management has a programme of
inventory counting throughout the year

39- Sale cut-off involves with goods in inventory are not treated as sales in the year
 Review goods despatched and returns inward around the year end to ensure:
- Invoices and credit notes dated in the same period
- Invoices and credit notes posted to the sales ledger in the same period
 Review the sales ledger control account for unusual items near the year end and
review material after-date invoices and credit notes to see if in correct period.

40- Account Receivable is an asset account on the balance sheet that represents money due to
a company in the short-term.

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41- Auditors analytical procedures should consider Account Receivables tested in conjunction
with sales as below:
 Level of sales, year on year
 Effect of changing quantities sold
 Effect of changing prices
 Levels of goods returned and discounts
 Efficiency of labour and sales.

42- For accuracy (audit objective) of account receivable (A/R) require auditors to check:
 Pricing and additions on invoices
 Discounts properly calculated
 Sales tax added correctly
 Casts in sales ledger
 Control account reconciliation
 Trace debits in sales ledger to credit notes.

43- Base on International Standards on Auditing, External Confirmations is ISA 505

44- For the completeness and cut-off of receivable listing/age analysis, auditors should be carried
out as below:
 Reconcile balances from sales ledger to list of balances and vice versa
 Reconcile the total of the list to sales ledger control account
 Cast the list of balances to ensure it is correct
 Confirm whether the list reconciles to the sales ledger control account.

45- Verification of trade receivables by direct circularization is the normal method of getting audit
evidence to check the existence and rights and obligations of trade receivables.

46- ISA 505 – External Confirmations provides guidance on the auditor’s use of external
confirmations as a means of obtaining audit evidence.

47- Sample selection of circularization, auditors must focus on maintain control over the
preparation and despatch of confirmation letters.
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48- Auditors must follow up the circularization where:
 Customers disagree with the balance
 Customers do not respond.

49- Some reasons of circularization disagree include:

 Disputes between customer and client
 Cut-off problems
 Receipt sent before year-end but received afterwards
 Mis-posting, for example, to the wrong account
 Customers netting off credits and debits
 Teeming and lading frauds.

50- Auditor should consider the receivable listing/age analysis as below:

 Much of the detailed work will be carried out on a sample of receivables’ balances
chosen from a list of sales ledger balances
 Ideally, this will be aged, showing amounts owed and from when they are owed.

51- What is the Cash represent in financial statements?

Cash in financial statements represent cash in hand & cash on deposit in bank accounts.

52. What is the bank reconciliation?

Bank reconciliation is the process of matching the balance in an entity’s accounting
records for a cash account to the corresponding information on a bank statement.

53. What are the Bank balances?

Bank balance are usually confirmed directly with the bank in question.

54. What will the audit of bank balance need to cover?

 Completeness
 Valuation
 Rights and obligations
 Existence
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55. What is the bank confirmation letter can be used for?
The bank confirmation letter can be used for asking a variety of questions, including
queries about outstanding interests, contingent liabilities and guarantees.

56. What is the control over the content and dispatch of confirmation requests?
The control over the content and dispatch of confirmation requests is the responsibility
of auditors.

57. What is the most commonly requested information?

The most commonly requested information is in respect of balances due to or from the
client entity on current, deposit, loan and other accounts.

58. Where are the standard bank confirmations from?

The standard bank confirmations are from each bank with which the client conducted
business during the audit period.

59. The planning decisions will need to be recorded on the current audit file, including:
 The precise time of the count and location
 The names of the audit staff conducting the counts
 The names of the client staff intending to be present at each location.

60. What are we examine for the Chapter 16?

1. Introduction
2. Procedures for trade payables, accruals and expenses
3. Non-current liabilities
4. Provisions and contingencies
5. Capital and other issues
6. Directors' emoluments

61. What is the purchase tested in?

The purchases are tested in conjunction with the audit of trade payables and so are
included in the section on trade payables.

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62. What is the audit of payables is closely linked to?
The audit of payable is closely linked to the purchases system.

63. What are the Recalculate the mathematical accuracy of a sample of suppliers' invoices to
confirm the amounts are correct?
Recalculate the mathematical accuracy of a sample of suppliers' invoices to confirm the
amounts are correct are:
 Accuracy
 Valuation and allocation.

64. How the auditor can test trade payables?

Auditor can test trade payables by examining reliable, independent evidence in the form
of suppliers' invoices and suppliers' statements.

65. How the non-current liabilities are usually authorized?

Non-current liabilities are usually authorized by the board and should be well
documented.

66. What is the provision?

Provision is a liability of uncertain timing or amount.

67. Consider the adequacy of disclosure of provisions, what is contingent assets and contingent
liabilities in accordance with ISA 37.

68. Auditors should check carefully whether clients have complied with local legislation about
share issues or purchase of own shares.

69. Under UK legislation director's emoluments must be disclosed in the financial statements.

70. Companies listed in the UK have to disclose details of directors’ emoluments as part of their
Directors' Remuneration report.

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71- One of the problems of auditing a Not for profit organization is that often donations don't have
invoice or equivalent documentation.

72- Auditing not for profit organizations often means concentrating on

 Consider understatement/incompleteness in income
 Overstatement of grants or assets
 Misanalysis or misuse of funds
 Misstatement of assets like donated properties
 Existence of restricted funds in foreign branches
 Consider if accounting policies are appropriate
 Analytical procedures might be restricted due to lack of predictable income etc,
but NFPOs should have budget or strategy information available.

73- Which of the following is a potential problem in auditing not for profit organizations?
 Donations
 Legacies
 Grants or government funding
 Restricted funds
 Grants to beneficiaries
 Branches

74- Not for profit organization usually have small staff and less formalized systems because a
charity is a common form of not-for-profit organization.

75- All not-for-profit organizations must have a statutory audit because auditor report on the
truth and fairness of the financial statement.

76- The audit engagement partner has concluded that the disclosure included in the financial
statements in relation to the loan negotiations is adequate. Additionally, the audit partner has
commented that this disclosure is fundamental to the users’ understanding of the financial
statements. Which of the following correctly identifies the opinion that should be issued and
the appropriate report modification, if any, that should be included in the report of Oak Co.
Unmodified opinion - Emphasis of matter paragraph
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77- According to ISA 701, which TWO of the following should be included in the Key Audit
Matters section of the auditor’s report?
 Matter already appropriately presented or disclosed in the financial statements
 The auditor’s responsibilities in relation to the financial statement audit.

78- Which of the following statements best describes the auditor’s responsibilities in respect of
other information?
To respond appropriately when documents containing audited financial statements
include other information that could undermine the credibility of the financial
statements and the auditor's report.

79- The auditor’s report is due to be signed in the next week or so. You have concluded that the
disputed balance is likely to be irrecoverable, but the directors have not made any changes to
the financial statements in respect of this. Which of the following options correctly
summarizes the impact on the auditor’s report if the issue remains unresolved?
The auditor to provide a Modified opinion – Qualified opinion.

80- The financial statements are material misstated and the misstatement is pervasive to other
items in the financial statements and the auditor is unable to gather sufficient appropriate
auditor evidence. Thus, the auditor shall issue:
Qualified Opinion

81- Report to management or management letter is the main forms of formal communication
between the auditors and management (the engagement letter, and another written
communication) usually sent at the end of the audit.

82- It is now 13 December 20X1. The auditor’s report has been signed. The financial statements
are due to be issued on 25 December 20X1. Which of the following statements correctly
describes the auditor’s responsibility in relation to subsequent events occurring between now
and 25 December?
Passive duty

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83- Assuming the matter is considered material but not pervasive and the client’s directors have
refused to adjust the financial statements, what is the appropriate opinion to be issued?
Unmodified opinion

84- Under which circumstance should a company NOT prepare financial statements using the
break up basis?
The auditor concludes that the financial statements as a whole are not free from material
misstatement or cannot obtain sufficient appropriate audit evidence to make this
conclusion.

85- What will be the impact on the auditor’s report if the auditor believes the basis of preparation
of the financial statements is incorrect?
These may impact on the auditor’s opinion on financial statement.

86- Due to disruptions caused by the recent transition to a new accounting system, one month of
ABC Co's inventory records have been lost. The auditors performing the statutory audit for the
twelvemonth period have determined that the possible effects of undetected misstatements
could be material, but not pervasive. What form of audit opinion would the auditor give?
Qualified Opinion

87- Where the auditor disclaims an opinion on the financial statements, the auditor’s report must
not include a key audit matters section.
Relationship with the auditor’s opinion

88- The statement of financial position of R Co includes a material amount of $200,000 in respect
of costs capitalized in the year as development expenditure. The auditor has concluded that
these costs are research expenditure. If the auditor is to issue an unmodified opinion which
financial statements will require adjustment?
 Statement of profit and loss
 Statement of financial position

89- A disagreement which is material and pervasive is of such significance that the financial
statements do not give a true and fair view. In this case, the auditor will most likely issue
Adverse opinion
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90- The type of modified but still unqualified report draws attention to fundamental issue in the
financial statements.
 A qualified opinion
 An adverse opinion
 A disclaimer of opinion

91- IAS 10 Subsequent Events defines an adjusting event. Which of the following is true of a non-
adjusting event?
A non-adjusting event is an event that happened after reporting period.
 Dividends declared after the year end
 Fire causing destruction of major plant
 Announcement of a major restructuring

92- IAS 10 Subsequent Events defines an adjusting event. Which of the following is true of an
adjusting event?
An adjusting event is an events that occur after the date of financial statements but
before the date of their issuance that provide evidence of conditions that existed at the
end of the reporting period.
 Settlement of a court case
 Sale of inventory after year end providing evidence of its net realisable value at
year end
 Fraud or error showing the accounts are incorrect

93- Which of the following is the best definition of an non-adjusting event in respect of events
occurring after the reporting period?
Those that are indicative of conditions that arose after the year-end date.

94- After the financial statements with an unmodified audit report have been issued to members, it
is discovered that they contain a material misstatement. What is the appropriate action for the
auditors to take?
 Discuss with management and those charged with governance
 Determine if financial statements need amending

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  Review management’s procedures to inform readers
 Issue new auditor’s report with emphasis of matter paragraph
 If steps not taken, prevent reliance on report

95- Which International Auditing Standard (ISA) deals with the auditing of the use of the going
concern in the financial statements.
ISA 570 Going concern provides guidance to auditors in this area.

96- When the auditor is evaluating the management's assessment of going concern for a small
entity that has not prepared detailed budgets and cash flow forecasts, it should:
 The auditor shall ask management to extend its assessment period to at least 12
months from that date.
 The auditor shall also enquire of management its knowledge of events or
conditions beyond the period of the assessment that may cast significant doubt on
the entity's ability to continue as a going concern.

97- If the auditor has concluded that a material uncertainty exists and that the use of the going
concern is nevertheless appropriate but the accounts do not include adequate disclosures about
the uncertainty and the management's plans to deal with it, the auditor shall: consider
whether a material uncertainty exists related to events or conditions which may cast
doubt on the entity's ability to continue as a going concern, as this will have an impact on
the opinion issued in the auditor's report because the uncertainty must be disclosed.

98- Which of the following procedures must the auditor perform to identify factors that may
affect Z Co's ability to continue as a going concern beyond 30 June 20X5?
Inquiry of management

99- Which of the following would NOT typically be found in a letter of representation?
Other than these points, it cannot be found in the letter of representation.
 Addressed to the auditors
 Contains specified information
 Appropriately dated
 Approved by those with specific knowledge

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  Signed by senior financial office.......

100- Which of the following is true about written representations?

 Written statements by management provided to the auditor to confirm certain
matters or to support other audit evidence
 They do not include the financial statements, assertions or supporting books and
records
 Auditors receive many representations from management during the course of an
audit
 Some of these may be critical to obtaining sufficient, appropriate audit evidence

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