Mid term

Question 1

Which shows the correct ranking of audit evidence from most persuasive to least persuasive:

a. (i) Management representation letter, (ii) Solicitor’s representation letter, (iii) Client prepared bank reconciliation, (iv) Bank statement.
b. (i) Bank statement, (ii) Solicitor’s representation letter, (iii) Client prepared bank reconciliation, (iv) Management representation letter.
c. (i) Solicitor’s representation letter, (ii) Management representation letter, (iii) Client prepared bank reconciliation, (iv) Bank statement.
d. (i) Bank statement, (ii) Management representation letter, (iii) Client prepared bank reconciliation, (iv) Solicitor’s representation letter.

Answer 1

B

Question 2

An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that depicts the auditor’s:

a. Understanding of the system.
b. Assessment of control risk.
c. Identification of weaknesses in the system.
d. Assessment of the control environment’s effectiveness.

Answer 2

A

Question 3

Which of the following would most likely indicate the existence of related parties:

a. Writing down obsolete inventory just before year-end.
b. Failing to correct previously identified internal control deficiencies.
c. Depending on a single product for the success of the entity.
d. Borrowing money at an interest rate significantly below the market rate.

Answer 3

D

Question 4

Which of the following papers would normally be retained on the permanent file maintained for a company audit client:

a. Completed checklist of financial reporting disclosure compliance.
b. Extracts of minutes of meetings of the directors.
c. Copy of the company’s Constitution.
d. Written representations from management.

Answer 4

C

Question 5

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

a. Inquiry and analytical procedures.
b. Re-performance and observation.
c. Comparison and confirmation.
d. Inspection and verification.

Answer 5

B

Question 6

Audit programs should be designed so that:

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditor’s conclusions.

Answer 6

D

Question 7

Because of the risk of material misstatement, an audit of financial statements in accordance with auditing standards should be planned and performed with an attitude of:

a. Objective judgment.
b. Independent integrity.
c. Professional scepticism.
d. Impartial conservatism.

Answer 7

C

Question 8

Can an auditor hire a systems analyst who specialises in developing computer systems to assist on a client audit:

a. Yes, provided the systems analyst is qualified to perform each of the specialised tasks.
b. Yes, provided the auditor is able to supervise the specialist and evaluate the specialist’s end product.
c. No, because only properly trained auditors are permitted to complete audit tasks.
d. No, because a systems analyst who develops computer systems would not be independent.

Answer 8

B

Question 9

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities:

a. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
b. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.
c. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.
d. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.

Answer 9

A

Question 10

Analytical procedures used in planning an audit should focus on:

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.

Answer 10

C

Question 11

Cut-off tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management’s assertion of:

a. Valuation.
b. Existence or occurrence.
c. Completeness.
d. Presentation and disclosure

Answer 11

C

Question 12

In determining whether transactions have been recorded, the direction of the audit testing should be from the:

a. Original source documents.
b. Adjusted trial balance.
c. General ledger balances.
d. General journal entries.

Answer 12

A

Question 13

A client uses a balance sheet suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year end, the auditor would be most concerned about:

a. Suspense debits that management believes will benefit future operations.
b. Suspense debits that the auditor verifies will have realisable value to the client.
c. Suspense credits that management believes should be classified as “Current liability”.
d. Suspense credits that the auditor determines to be customer deposits

Answer 13

A

Question 14

Independence is the cornerstone of the auditing profession. Which of the following is a familiarity threat:

a. A guarantee from a director of an audit client.
b. A long association of a senior member of an audit team with the audit client.
c. Performing services for an audit client that directly affects the subject matter of the audit engagement.
d. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Answer 14

B

Question 15

The term ‘Expectation Gap’ refers to differences in expectations between:

a. Auditors and users of audited financial statements.
b. Auditors and their clients.
c. CAANZ and the FMA (Financial Markets Authority).
d. Auditors and CAANZ.

Answer 15

A

Question 16

Reclassifying entries pertain primarily to the assertion:

a. Completeness.
b. Valuation or measurement.
c. Presentation and disclosure.
d. Rights and obligations.

Answer 16

C

Question 17

Use of point-of-sale terminals to record over-the-counter cash sales provides all of the following except:

a. Assurance that all cash sales are processed through the system.
b. An immediate visual display for the customer to verify the accuracy of price and cash tendered.
c. A printed receipt for the customer.
d. Printed control totals of the day’s receipts processed on the device.

Answer 17

A

Question 18

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality:

a. The anticipated sample size of the planned substantive tests.
b. The results of the internal control questionnaire.
c. The contents of the management representation letter.
d. The entity’s annualised interim (Prior years) financial statements.

Answer 18

D

Question 19

Auditing receivables usually focuses most heavily on:

a. Existence and occurrence.
b. Completeness.
c. Rights and obligations.
d. Presentation and disclosure.

Answer 19

A

Question 20

Which of the following is correct concerning requirements about auditor communications about fraud:

a. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Financial Markets Authority and Registrar of Companies.
b. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor in the audit management letter.
c. Fraud that involves senior management should be reported directly to the directors regardless of the amount involved.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Answer 20

C

Question 21

Which of the following is an example of fraudulent financial reporting:

a. The accounts payable clerk makes payments to his personal bank account, concealing his actions by debiting an expense account, thus overstating expenses.
b. The client’s management changes inventory count sheets and overstates ending inventory, while understating cost of goods sold.
c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
d. An employee takes small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Answer 21

B

Question 22

In an audit of financial statements in accordance with auditing standards, an auditor is required to:

a. Document the auditor’s understanding of the entity’s internal control.
b. Search for significant deficiencies in the operation of internal control.
c. Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
d. Determine whether controls are suitable designed to prevent or detect material misstatements.

Answer 22

A

Question 23

While observing a client’s annual physical inventory count, an auditor recorded test counts for several items and noticed that certain test counts were higher than
the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to record:
a. Purchase discounts.
b. Purchase returns.
c. Sales.
d. Sales returns.

Answer 23

D

Question 24

A statement made by a reviewer that ‘nothing has come to our attention that causes us to believe that the financial report of XYZ for the [period] ended does not present fairly the financial position and the results of operations, and its cash flows for the year then ended in accordance with an identified financial reporting framework’ is known as:

a. Negative assurance.
b. Reasonable assurance.
c. Positive assurance.
d. No assurance.

Answer 24

A

Question 25

In the final analysis, the amount and kinds of evidential matter required to support the auditor’s opinion should be determined by:

a. Professional standards.
b. The audit committee.
c. Rigorous statistical analysis.
d. Auditor judgement.

Answer 25

D

Question 26

Tests of controls must be performed:

a. If inherent risk is high.
b. If control risk is high.
c. To ensure that for controls that are to be relied upon that these are operating effectively throughout the period under review.
d. To ensure that there is adequate segregation of duties.

Answer 26

C

Question 27

An internal auditor is typically appointed by:

a. Shareholders.
b. A funder such as a bank.
c. The board of directors.
d. A receiver.

Answer 27

C

Question 28

After the preliminary judgment about materiality has been established at the planning stage of an audit, auditors may:

a. Not adjust it.
b. Adjust it downward only.
c. Adjust it upward only.
d. Adjust it either downward or upward.

Answer 28

D

Question 29

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the:

a. Inherent risk.
b. Acceptable audit risk.
c. Statistical risk.
d. Financial risk.

Answer 29

B

Question 30

The auditor is likely to accumulate more evidence when the audit is for a company:

a. Whose shares are publicly listed.
b. Which has extensive indebtedness.
c. Which is to be sold in the near future.
d. All three of the above.

Answer 30

D

Question 31

Management is often unwilling to implement an ideal system of internal controls because:

a. Control failures are infrequent.
b. Such a system is considered too expensive.
c. Sufficient technology does not exist to afford an ideal system.
d. The estimation of risks are often overstated.

Answer 31

B

Question 32

A major control available in a small company, which might not be feasible in a large company, is:

a. A wider segregation of duties.
b. A petty cash system.
c. The owner-manager’s personal interest in the company.
d. Fewer transactions to process.

Answer 32

C

Question 33

When should an auditor obtain an engagement letter:

a. During the interim audit period, after the auditor has evaluated the client’s internal control and estimated the amount of time required for the audit.
b. When a new client is accepted by the auditor.
c. Whenever a prospective client offers to hire the audit firm.
d. Just prior to signing the audit report

Answer 33

B

Question 34

Misstatements:

a. Are documented in the audit working papers.
b. Can be categorised as errors or judgemental misstatements.
c. Must be categorised for their effect on the financial statements both individually and in aggregate.
d. All of the above.

Answer 34

D

Question 35

Which of the following is not an expense account that is ordinarily tested as part of the testing of asset balances:

a. Bad debt expense.
b. Purchases.
c. Interest received.
d. Depreciation.

Answer 35

C

Question 36

Which of the following audit objectives relates primarily to the financial report assertion of completeness:

a. Inventories are reduced, when appropriate, to net realisable value.
b. Inventories exclude items billed to customers or owned by others.
c. Inventory quantities include all products, materials and supplies owned by the company that are in transit.
d. Slow-moving, excess, defective and obsolete items included in inventories are properly identified.

Answer 36

C

Question 37

Which of the following statements best describes the distinction between the auditor’s and directors’ responsibilities for an audit undertaken in accordance
with the Companies Act:
a. Directors have responsibility for the basic data underlying the financial report, and the auditor has responsibility for drafting the financial report.
b. Directors have responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for establishing and maintaining the internal control structure.
c. The auditors’ responsibility is confined to the audited portion of the financial report, and the directors’ responsibility is confined to the unaudited portions.
d. The auditors’ responsibility is confined to expressing an opinion, but the financial report remains the responsibility of directors.

Answer 37

D

Question 38

If an expert is engaged to assist with the audit:

a. It means the auditor does not have the requisite skill and knowledge to assess the item.
b. It means the auditor should not have taken on the audit because they are not qualified.
c. CAANZ should be contacted and permission obtained before the expert starts work.
d. The auditor does not have to take responsibility for the fair statement of the item in the financial report.

Answer 38

A

Question 39

All else being equal, as the level of materiality decreases, the amount of evidence required will:

a. Decrease.
b. Remain the same.
c. Change in an unpredictable fashion.
d. Increase.

Answer 39

D

Question 40

The warehouse should be instructed not to accept goods without having a properly authorised:

a. Purchase requisition.
b. Purchase order.
c. Invoice.
d. Delivery docket.

Answer 40

B

Question 41

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests.
A. Review the cash receipts journal for the month prior to the year-end
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.

Answer 41

D

Question 42

The audit expectation gap occurs when:

a) Auditors perform their duties appropriately and satisfy users’ demands.
b) Peer reviews of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfies user’s demands.
c) The public is well educated about auditing.
d) User beliefs do not align with what an auditor has actually done

Answer 42

D

Question 43

Auditing payables usually focuses most heavily on:
A) completeness, and valuation and allocation.
B) existence.
C) rights and obligations.
D) existence, and rights and obligations.

Answer 43

A) Completeness, and valuation and allocation.

Question 44

If reported purchases for 2015 erroneously include purchases that occurred in 2016, the assertion violated in the 2015 financial statements would be:
A) Completeness.
B) Existence or Occurrence.
C) Valuation or measurement.
D) Rights and obligations.

Answer 44

A

Question 45

Management’s responsibility for the financial report includes:
A) Selecting and applying appropriate accounting policies.
B) Selecting internal controls tests.
C) Selecting samples for audit testing.
D) Selecting experts to assist with testing asset valuations.

Answer 45

A) Selecting and applying appropriate accounting policies.

Question 46

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence:
A) Interest expense.
B) Account receivable.
C) Accounts payable.
D) Travel and entertainment expense.

Answer 46

A) Interest expense.

Question 47

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as:
A) Sampling risk
B) Detection risk.
C) Non-sampling risk.
D) Whether the control has been implemented consistently

Answer 47

B

Question 48

An auditor obtains knowledge about a new client’s business and its industry to:

a) Make constructive suggestions concerning improvements to the client’s internal control.
b) Develop an attitude of professional skepticism concerning management’s financial statement assertions.
c) Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
d) Understand the events and transactions that may have an effect on the client’s financial statements.

Answer 48

D

Question 49

Proper segregation of functional responsibilities calls for separation of the functions of:
A) authorization, execution, and payment.
B) authorization, recording, and custody.
C) custody, execution, and reporting.
D) authorization, payment, and recording.

Answer 49

B

Question 50

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:
A) Valuation.
B) Classification.
C) Existence.
D) Completeness.

Answer 50

C) Existence.

Question 51

Before accepting an engagement to audit a new client, an auditor is required to obtain:
A) An understanding of the prospective client’s industry and business.
B) The prospective client’s signature to the engagement letter.
C) A preliminary understanding of the prospective client’s control environment.
D) The prospective client’s consent to make inquiries of the predecessor auditor, if any.

Answer 51

D) The prospective client’s consent to make inquiries of the predecessor auditor, if any.

Question 52

The objective of performing analytical procedures in planning an audit is to identify the existence of:
A) Unusual transactions and events.
B) Illegal acts that went undetected because of internal control weaknesses.
C) Related party transactions.
D) Recorded transactions that were not properly authorised.

Answer 52

A) Unusual transactions and events.

Question 53

The concept of materiality would be least important to an auditor when considering the:
A) Adequacy of disclosure of a client’s illegal act.
B) Discovery of weaknesses in a client’s internal control.
C) Effects of a direct financial interest in the client on the auditor’s independence.
D) Decision whether to use positive or negative confirmations of accounts receivable.

Answer 53

C) Effects of a direct financial interest in the client on the auditor’s independence.

Question 54

Inherent risk and control risk differ from detection risk in that they:
A) Arise from the misapplication of auditing procedures.
B) May be assessed in either quantitative or non-quantitative terms.
C) Exist independently of the financial statement audit.
D) Can be changed at the auditor’s discretion.

Answer 54

C) Exist independently of the financial statement audit

Question 55

The confirmation of an audit client’s accounts receivable from its customers rarely provides reliable evidence about the completeness assertion because:
A) Many customers merely sign and return the confirmation without verifying its details.
B) Recipients usually respond only if they disagree with the information on the request.
C) Customers may not be inclined to report understatement errors in their accounts.
D) Auditors typically select many accounts with low recorded balances to be confirmed.

Answer 55

C) Customers may not be inclined to report understatement errors in their accounts.

Question 56

What is the meaning of the requirement for the auditor to be independent:
A) The auditor must be without bias with respect to the client under audit.
B) The auditor must adopt a critical attitude during the audit.
C) The auditor’s sole obligation is to third parties.
D) The auditor may have a direct ownership interest in the client’s business if it is not material.

Answer 56

A) The auditor must be without bias with respect to the client under audit.

Question 57

An auditor would be most likely to learn of slow-moving inventory through:
A) Inquiry of sales staff.
B) Inquiry of warehouse staff.
C) Purchase orders.
D) Review of perpetual inventory records.

Answer 57

D) Review of perpetual inventory records.

Question 58

An auditor’s engagement letter most likely would include a statement that:
A) Lists potential significant deficiencies discovered during the prior year’s audit.
B) Explains the analytical procedures that the auditor expects to apply.
C) Describes the auditor’s responsibility to evaluate going concern issues.
D) Limits the auditor’s responsibility to detect errors and fraud.

Answer 58

B) Explains the analytical procedures that the auditor expects to apply.

Question 59

Can an auditor hire an analyst who specialises in data analytics to assist on a client audit:

a. No, because only properly trained and supervised auditors are permitted to complete audit tasks.
b. Yes, provided the auditor is able to supervise the specialist and evaluate the specialist’s end product.
c. No, because a data analyst who analyses client data would not be independent.
d. Yes, provided the analyst is qualified to perform each of the specialised tasks.

Answer 59

B

Question 60

The audit expectation gap occurs when:

a. Auditors perform their duties appropriately and satisfy users’ demands.
b. Peer reviews of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfies user’s demands.
c. The public is well educated about auditing.
d. User beliefs do not align with what an auditor has actually done.

Answer 60

D

Question 61

Independence is the cornerstone of the auditing profession. Which of the following is a familiarity threat:

a. A long association of a senior member of an audit team with the audit client.
b. A guarantee from a director of an audit client.
c. Performing services for an audit client that directly affects the subject matter of the audit engagement.
d. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Answer 61

A

Question 62

Because of the risk of material misstatement, an audit of financial statements in accordance with auditing standards should be planned and performed with an
attitude of:
a. Objective judgment.
b. Professional scepticism.
c. Independent integrity.
d. Impartial conservatism.

Answer 62

B

Question 63

Cut-off tests designed to detect purchases made before the end of the year that have been recorded in the financial statements in the subsequent year most
likely would provide assurance about management’s assertion of:
a. Valuation.
b. Existence or occurrence.
c. Completeness.
d. Presentation and disclosure.

Answer 63

C

Question 64

All else being equal, as the level of materiality increases, the amount of evidence required will:

a. Decrease.
b. Increase.
c. Remain the same.
d. Change in an unpredictable fashion.

Answer 64

A

Question 65

Self-interest threat arises when:

a. An audit team member has recently been an employee of the client.
b. The auditor encourages others to buy shares in the client.
c. The auditor owns shares in the client.
d. The client threatens to use a different auditor next year

Answer 65

C

Question 66

For an audit, the auditor can control:

a. Detection risk.
b. Inherent risk.
c. Control risk.
d. Financial risk.

Answer 66

A

Question 67

When an auditor gathers documentary evidence or physical evidence to support an entry in the client’s records, the auditor is gathering evidence to support the:

a. Completeness assertion.
b. Existence assertion.
c. Both a. and b.
d. Neither a. nor b

Answer 67

C

Question 68

The amount of evidence required to support the auditor’s opinion should be determined by:

a. Audit standards.
b. CA ANZ
c. Auditor judgement.
d. Rigorous statistical analysis.

Answer 68

C

Question 69

An auditor most likely would analyse inventory turnover rates to obtain evidence concerning management’s assertions about:

a. Valuation (and/or allocation)
b. Existence or occurrence.
c. Rights and obligations.
d. Presentation and disclosure.

Answer 69

A

Question 70

The definition of internal control developed by the Committee of Sponsoring Organisations (COSO) includes the reliability of financial reporting, the
effectiveness and efficiency of operations and:
a. Effectiveness of the prevention of fraudulent occurrences.
b. Safeguarding of entity assets.
c. Incorporation of ethical business practice standards.
d. Compliance with applicable laws and regulations.

Answer 70

D

Question 71

Which of the following is an inherent limitation in internal control:

a. Human error.
b. Incompatible duties.
c. Lack of segregation of duties.
d. Lack of an audit committee.

Answer 71

A

Question 72

A self-review threat arises when:

a. The auditor has a loan from the client.
b. The auditor performs services for the client that is then audited.
c. The auditor represents the client in negotiations with a third party.
d. There is a long association between the audit firm and its client.

Answer 72

B

Question 73

Which of the following is a general principle relating to the reliability of audit evidence:
a. Audit evidence obtained from knowledgeable independent sources outside
the client company is more reliable than audit evidence obtained from non-independent sources.
b. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor.
c. Audit evidence provided by copies is more reliable than that provided by e-mail.
d. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls.

Answer 73

A

Question 74

To provide the greatest degree of independence in performing internal auditing functions, an internal auditor should probably report to the:

a. Financial Controller.
b. Chief Executive.
c. Board of directors.
d. Shareholders.

Answer 74

C

Question 75

The so-called ‘deep-pockets’ theory in relation to alleged audit failures, refers to:

a. The requirement for auditors to hold a public practice certificate.
b. The auditor being the only party left with sufficient funds to indemnify the plaintiff’s losses.
c. Several widely reported business failures that resulted in significant loss to investors.
d. The gap between the potential liability and available insurance cover.

Answer 75

B

Question 76

Which of the following is not an audit procedure:

a. Observation.
b. Inspection.
c. Confirmation.
d. Disclosure.

Answer 76

D

Question 77

The recorded balance in a general ledger account generally represents:

a. The lower limit on the amount by which it may be overstated.
b. The upper limit on the amount by which it may be overstated.
c. The lower limit on the amount by which it may be understated.
d. The upper limit on the amount by which it may be understated.

Answer 77

B

Question 78

Financial statement audits may have a direct effect on a number of items. Such
audits are least likely to have a direct effect on:
a. The market price of a company’s shares.
b. Employee honesty and efficiency.
c. A company’s cost of capital.
d. Control and operational improvements.

Answer 78

C

Question 79

Incompatible duties are those that allow an irregularity to be perpetrated:

a. And concealed through collusive actions.
b. By a single employee.
c. And concealed by a single employee.
d. By accounting staff.

Answer 79

C

Question 80

If the auditor decides to seek a further reduction in Control Risk, this will require the auditor to:

a. Expand the scope of substantive testing during the planning stage of the audit.
b. Rely exclusively on confirmation procedures.
c. Perform additional tests of control.
d. Increase, proportionately, assessed inherent risk.

Answer 80

C

Question 81

Every audit engagement involves both auditing standards and auditing procedures. The relationship between the two may be illustrated by how they
apply from engagement to engagement. The best representation of this application is that, from one audit engagement to the next,
Auditing Standards, Auditing Procedures
a. Apply uniformly, Apply uniformly.
b. Apply uniformly, May vary.
c. May vary Apply, uniformly.
d. Apply uniformly, Are optional.

Answer 81

B

Question 82

On each engagement, the specific audit objectives will normally be:

a. The same for all clients in the same industry.
b. Equal to the number of categories of management’s financial statement assertions.
c. Similar for all clients in the same industry.
d. Tailored to fit the individual client.

Answer 82

D

Question 83

Which one of the following is the service in which the accounting firm issues a written opinion that expresses a conclusion about the reliability of a written
assertion that is the responsibility of another party.
a. Assurance service.
b. Consulting service.
c. Accounting service.
d. Compilation service.

Answer 83

A

Question 84

When tests of controls are not performed while obtaining an understanding under a primarily substantive approach:

a. Control risk must be assessed initially at the maximum.
b. They must be performed at year-end.
c. Control risk must be assessed initially at slightly below maximum.
d. Control risk must be assessed initially at the minimum.

Answer 84

A

Question 85

Controls over approving credit to customers relate to the:

a. Existence or occurrence assertion.
b. Completeness assertion.
c. Valuation assertion.
d. Presentation assertion.

Answer 85

C

Question 86

In the context of an audit of financial information, substantive procedures are audit procedures that:

a. May be eliminated under certain conditions.
b. Are designed to discover significant events after balance date.
c. May either be detail tests of transactions, detail tests of balances or analytical procedures.
d. Will increase proportionately with the auditor’s reliance on internal control structure.

Answer 86

C

Question 87

Establishing and maintaining an internal control structure is the ultimate responsibility of the:

a. Internal auditor.
b. Independent auditor.
c. Management.
d. Audit committee.

Answer 87

C

Question 88

Which of the following is most likely to be so serious that the auditor concludes that a financial statement audit cannot be conducted.

a. The entity has no formal written code of conduct.
b. The integrity of the entity’s management is suspect.
c. Procedures requiring segregation of duties are subject to management override.
d. Management fails to action control improvement recommendation the auditor has made in prior years.

Answer 88

B

Question 89

Audit programs should be designed so that.

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditor’s conclusions.

Answer 89

D

Question 90

Which of the following statements concerning audit evidence is correct.

a. To be competent, audit evidence should be either persuasive or relevant, but need not be both.
b. The measure of the validity of audit evidence lies in the auditor’s judgement.
c. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
d. A client’s accounting data can be sufficient audit evidence to support the financial statements.

Answer 90

B

Question 91

An inventory turnover analysis is useful to the auditor because it may detect?

a. Inadequacies in inventory pricing.
b. Methods of avoiding cyclical holding costs.
c. The existence of obsolete merchandise.
d. The optimum automatic reorder points.

Answer 91

C

Question 92

Why do auditors establish a preliminary judgment about materiality?

a. To assist the auditor plan the appropriate evidence to accumulate.
b. So that the client can know what records to make available to the auditor.
c. To determine what level of staffing (i.e. work experience) is required for the audit.
d. None of the above.

Answer 92

A

Question 93

If an auditor establishes a relatively low level for materiality, then the auditor will?

a. Accumulate more evidence than if a higher level had been set.
b. Accumulate less evidence than if a higher level had been set.
c. Accumulate approximately the same evidence as would be the case where a higher level set.
d. Accumulate an undetermined amount of evidence

Answer 93

A

Question 94

Audit procedures are normally performed?

a. Early in the accounting period being examined
b. Throughout the accounting period being examined, but with emphasis on the transaction near the end.
c. Within one to three months after the close of the accounting period
d. During all three of the above periods

Answer 94

D

Question 95

Which of the following forms of evidence is most reliable?

a. General ledger account balances.
b. Confirmation of a bank balance received from a client’s bank.
c. Internal memo explaining the issuance of a credit note.
d. Copy of a supplier invoice.

Answer 95

B

Question 96

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the?

a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

Answer 96

B

Question 97

The auditor is likely to accumulate more evidence when the audit is for a company?

a. whose shares are publicly listed.
b. which has extensive indebtedness.
c. which is to be sold in the near future.
d. All three of the above.

Answer 97

A

Question 98

Which of the following parties is responsible for establishing an entity’s internal controls?

a. Management.
b. Auditors.
c. Management and auditors.
d. Committee of Sponsoring Organisations.

Answer 98

A (And financial statement auditors)

Question 99

Most auditors assess inherent risk as high for related parties and related-party transactions because?

a. of the accounting disclosure requirement.
b. of the lack of independence between the parties.
c. both a and b.
d. it is required by GAAP.

Answer 99

C

Question 100

For an internal audit function to be effective, it is essential that the internal audit staff?

a. be independent of the operating departments.
b. be independent of the accounting department.
c. report directly to a high level of authority within the organisation such as the audit committee.
d. achieve all the above.

Answer 100

D

Question 101

Management is often unwilling to implement an ideal system of internal controls because?

a. control failures are infrequent.
b. such a system is too expensive.
c. sufficient technology does not exist to afford an ideal system.
d. risks are often overstated.

Answer 101

B

Question 102

An auditor’s attempt to gain an understanding of the accounting system is typically accomplished and documented by?

a. a narrative description of the system.
b. a flowchart.
c. a questionnaire.
d. using any of the above.

Answer 102

B

Question 103

Analytical procedures used in the overall review stage of an audit generally include;

a. Considering unusual or unexpected account balances that were not previously identified.
b. Performing tests of transactions to corroborate management’s financial statement assertions.
c. Gathering evidence concerning account balances that have not changed from the prior year.
d. Retesting control procedures that appeared to be ineffective during the assessment of control risk.

Answer 103

A

Question 104

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

a. Cash flows from operating activities are negative.
b. Research and development projects are postponed
c. Numerous significant related party transactions are present
d. Bonus issues replace annual cash dividends

Answer 104

A

Question 105

An auditor selected items for test counts while observing a client’s physical inventory count. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of?

a. Presentation & disclosure.
b. Completeness
c. Existence
d. Valuation

Answer 105

B

Question 106

Which of the following audit objectives relates primarily to the financial report assertion of presentation and disclosure - classification and understandability?

A) inventories are included in the statement of financial position as current assets
B) inventories exclude items billed to customers or owned by others
C) inventories are included in the statement of financial position at the lower of cost and NRV
D) inventory quantities include all products, materials and supplies owned by the company that are in transit

Answer 106

A

Question 107

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 accounts.
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.

Answer 107

C) slow-moving, excess, defective and obsolete items included in inventories are properly identified

Question 108

Who is most likely to perpetrate fraudulent financial reporting?

A) Members of the board of directors
B) Production employees
C) Management of the company
D) The internal auditors

Answer 108

C) Management of the company

Question 109

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.

A) overstated assets
B) understated liabilities
C) improper revenue recognition
D) overstated expenses

Answer 109

C) improper revenue recognition

Question 110

When the auditor suspects that fraud may be present, auditing standards require the auditor to:

A) terminate the engagement with sufficient notice given to the client.
B) issue an adverse opinion or a disclaimer of opinion.
C) obtain additional evidence to determine whether material fraud has occurred.
D) re-issue the engagement letter.

Answer 110

C) obtain additional evidence to determine whether material fraud has occurred.

Question 111

A system walkthrough is primarily used to:

A) test balances.
B) test details of transactions.
C) gain an understanding of internal controls.
D) determine acceptance of the client.

Answer 111

C) gain an understanding of internal controls.

Question 112

Which of the following matters most likely would be included in a management representation letter?

Answer 112

A confirmation that the entity has complied with contractual agreements.

Question 113

The primary responsibility for detecting fraudulent activity rests with:

A) the external auditor
B) company management.
C)the company lawyer.
D)company management and the board of directors.

Answer 113

B) company management.

Question 114

A self-interest threat arises when:

A) An assurance team member has recently been a director of the client.
B) The auditor encourages others to buy shares in the client.
C) The auditor owns shares in the client.
D) The client threatens to use a different auditor next year.

Answer 114

C) The auditor owns shares in the client.

Question 115

The relationship between risk and materiality:

A) Is positive.
B) It depends on the size of the client.
C) Is irrelevant
D) Is inverse.

Answer 115

D) Is inverse.

Question 116

The relationship between risk and materiality:

A) Is positive.
B) It depends on the size of the client.
C) Is irrelevant
D) Is inverse.

Answer 116

D) Is inverse.

Question 117

If an auditor is performing procedures related to the information that is contained in the client’s pension footnote, he/she is most likely to obtain evidence concerning management’s assertion about:

A) rights and obligations.
B) existence.
C) valuation.
D) presentation and disclosure.

Answer 117

D) presentation and disclosure.

Question 118

Which of the following is the essential purpose of the audit function?

A) Detection of fraud.
B) Examination of individual transactions to certify as to their validity.
C) Determination of whether the client’s financial statement assertions are fairly stated.
D) Assurance of the consistent application of correct accounting procedures.

Answer 118

C) Determination of whether the client’s financial statement assertions are fairly stated.

Question 119

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Classification.

Answer 119

D) Classification.

Question 120

The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB balance assertions?

A) Existence.
B) Rights and obligations.
C) Completeness.
D) Valuation.

Answer 120

C) Completeness.

Question 121

A major assertion for the cash account:

A) existence.
B) completeness.
C) classification.
D) all of the above.

Answer 121

D) all of the above.

Question 122

Professional independence for auditors:

A) detracts from the ability of users to rely on the financial report to make their decisions.
B) is the ability to act with integrity, objectivity and with professional scepticism.
C) is important when the auditor acts independently, and it does not matter what people believe about the auditor’s independence.
D) is only relevant to audits for new clients, not continue

Answer 122

B) is the ability to act with integrity, objectivity and with professional scepticism.

Question 123

The planning stage of an audit does not include:

a) Gaining an understanding of the client.
b) Identification of factors that may affect the risk of a material misstatement in the financial report.
c) Development of an audit strategy and a risk and materiality assessment.
d) Audit execution and reporting.

Answer 123

D) Audit execution and reporting.

Question 124

An auditor is interested in the client’s inventory turnover ratio because it helps the auditor understand:

A) if the industry is the same as another industry.
B) if the client is as competitive and has as high a turnover as the industry average.
C) if the client’s debtors are paying their accounts on time.
D) if the client is in the right industry.

Answer 124

B) if the client is as competitive and has as high a turnover as the industry average.

Question 125

The auditor decides which controls to test by considering:

A) the type of control.
B) the frequency of the control being performed.
C) the level of assurance the auditor wishes to gain.
D) all of the above.

Answer 125

D) all of the above.

Question 126

Valuation and allocation is a significant assertion for cash:

A) always.
B) never.
C) when the client has cash balances which are held in a foreign currency.
D)none of the above.

Answer 126

B) never

Question 127

After the auditor has prepared a flowchart of the process surrounding sales and evaluated the design of the internal controls, the auditor would perform tests of controls on all internal control procedures.

A) Documented in the xfflowchart.
B)Considered to be weaknesses that might allow errors to enter the accounting system.
C) Considered to be strengths that the auditor plans to rely on.
D)That would aid in preventing irregularities.

Answer 127

C) Considered to be strengths that the auditor plans to rely on.

Question 128

Regardless of the assessed level of control risk, an auditor would perform some:

A) Tests of controls to determine the effectiveness of internal control policies.
B) Analytical procedures to verify the design of internal control.
C) Substantive tests to restrict detection risk for significant transaction classes.
D) Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Answer 128

C) Substantive tests to restrict detection risk for significant transaction classes.

Question 129

An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of

A) Valuation.
B) Completeness.
C) Existence or occurrence.
D) Accuracy.

Answer 129

C) Existence or occurrence.

Question 130

Inspecting documents, such as an invoice for the purchase of fixed assets, provides the auditor with evidence relevant to the:

A) Rights and obligations assertion, because the document will show the client’s name as the purchaser.
B) Occurrence assertion, because the document will show that the transaction took place on the specified date.
C) Accuracy assertion, because the document will show the purchase amounts.
D) All of the above.

Answer 130

D) All of the above.

Question 131

Analytical procedures:

A) Cannot be performed on interim data.
B) Are not affected by different accounting methods between the client and other members of the industry.
C) Must take into account seasonal variation in the client’s business.
D) Are only useful if the client’s variation from budget is low.

Answer 131

C) Must take into account seasonal variation in the client’s business.

Question 132

In testing plant and equipment balances, an auditor examines new additions listed in the fixed asset register. This procedure most likely obtains evidence concerning management’s assertion of:

a. Completeness.
b. Existence or occurrence.
c. Presentation and disclosure.
d. Valuation.

Answer 132

b. Existence or occurrence.

Question 133

An auditor concluded that no excessive costs for idle plant were charged to manufactured inventory. This conclusion most likely related to the auditor’s objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and:

a. Valuation.
b. Completeness.
c. Existence or occurrence.
d. Rights and obligations.

Answer 133

a. Valuation.

Question 134

The working papers for a client contain both a permanent and a current file. The difference between the two files is that:

a) The permanent file is kept by the audit partner in charge and cannot be altered after the first audit engagement is completed, but the current file can be updated.
b) The permanent file must be sent to NZICA and the current file is not.
c) The permanent file includes documents that relate to the client and are relevant for more than one audit, and the current file includes the details of work completed and evidence gathered that relate to the current audit.
d) All of the above

Answer 134

c) The permanent file includes documents that relate to the client and are relevant for more than one audit, and the current file includes the details of work completed and evidence gathered that relate to the current audit.

Question 135

Which of the following would normally be retained on the permanent file maintained for a company audit client?

a) Completed checklist of financial reporting disclosure checklist
b) Extracts of minutes of meetings of the directors
c) Copy of the company’s constitution
d) Written representations from management

Answer 135

c) Copy of the company’s constitution

Question 136

Documenting Internal controls:

a. is always handled through the use of checklists and pre-formatted questionnaires.
b. is done after internal controls are tested so that the results can be included in the documentation.
c. can be handled with a combination of narratives and flowcharts or questionnaires.
d. is not done for smaller clients because of the risk of management override.

Answer 136

c. can be handled with a combination of narratives and flowcharts or questionnaires.

Question 137

A debtor’s positive confirmation:

a. provides evidence about the classification assertion.
b. provides evidence about the existence of the debt.
c. provides evidence that the debt will definitely be collected.
d. is not as useful as a negative confirmation.

Answer 137

b. provides evidence about the existence of the debt.

Question 138

Which of the following is the best example of a substantive test:

a. Examining a sample of cash disbursements to test whether expenses have been properly approved.
b. Confirmation of balances of accounts receivable.
c. Comparison of signatures on cheques to a list of authorised signers.
d. Flowcharting of the client’s cash receipts system.

Answer 138

b. Confirmation of balances of accounts receivable.

Question 139

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

a. physical assets.
b. procedures.
c. processes.
d. inventory taking.

Answer 139

a. physical assets.

Question 140

If the auditor decides to seek a further reduction in control risk, this will require the auditor to:

a. expand the scope of substantive testing during interim work.
b. rely exclusively on analytical procedures.
c. perform additional tests of control.
d. increase, proportionately, assessed inherent risk.

Answer 140

c. perform additional tests of control.

Question 141

Segregation of Incompatible duties:

a. is a guarantee that fraud cannot occur.
b. is the same as performance review by a supervisor.
c. means that different people are assigned responsibilities for authorising transactions, recording transactions and maintaining custody of assets.
d. all of the above.

Answer 141

c. means that different people are assigned responsibilities for authorising transactions, recording transactions and maintaining custody of assets.

Question 142

A management letter:

a) Contains recommendations for improving internal control and discusses other issues discovered during the course of the audit.
b) Is written by management to the auditor at the start of the audit.
c) Lists only the material weaknesses discovered during the audit.
d) All of the above.

Answer 142

a) Contains recommendations for improving internal control and discusses other issues discovered during the course of the audit.

Question 143

Which of the following conditions make absolute data comparisons between years relatively less useful:

a. Multiple years of financial data available
b. Single location clients
c. Changes in production methods
d. Budgets that are carefully prepared

Answer 143

c. Changes in production methods

Question 144

The going concern assumption means:

a. the entity is facing difficulties continuing as a going concern.
b. the entity is viewed as continuing in business for the foreseeable future with no need for liquidation.
c. assets and liabilities are stated at liquidation values.
d. the auditor is concerned whether the entity is going to change locations.

Answer 144

b. the entity is viewed as continuing in business for the foreseeable future with no need for liquidation.

Question 145

Those charged with governance have a responsibility to ensure that the information in the financial report is:

a) Relevant and reliable.
b) Comparable and understandable.
c) True and fair.
d) All of the above.

Answer 145

d) All of the above.

Question 146

When the client conducts periodic or cycle counts of selected inventory items at various times during the year rather than a single inventory count at year-end, which of the following is necessary if the auditor plans to test the accuracy of the clients inventory balances at interim dates:

a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

Answer 146

b. Perpetual inventory records are maintained.

Question 147

The auditor must consider whether it is appropriate to assume that the client will remain as a going concern:

a) Because this means that assets are valued on the basis that they will continue to be used for the purposes of conducting a business.
b) Only if the client is facing bankruptcy and long-term debt is likely to be withdrawn.
c) Only if the client is listed on a stock exchange.
d) Because mitigating circumstances are not important.

Answer 147

a) Because this means that assets are valued on the basis that they will continue to be used for the purposes of conducting a business.

Question 148

Can an auditor hire a systems analyst who specialises in developing systems to assist on a client audit?

Answer 148

a) Yes, provided the systems analyst is qualified to perform each of the specialised tasks

Question 149

The reliability of data used for analytical procedures:

a) Affects the persuasiveness of the evidence from analytical procedures.
b) Is more useful on a consolidated basis than an individual business segment basis.
c) If unaffected by inflation.
d) Is not ever affected by the strength of controls over the client’s budgetary processes.

Answer 149

a) Affects the persuasiveness of the evidence from analytical procedures.