MIDTERM TEST Flashcards
Which three of the following controls best prevent misappropriation of customers’ remittances?
A. Segregation of duties between cash handling and recording
B. Post opening by two people
C. Investigation of differences between till records and cash collected
D. Regular banking
A. Segregation of duties between cash handling and recording
B. Post opening by two people
D. Regular banking
The internal auditor at Windsor Ltd has identified the following deficiencies within that organisation’s sales system.
For each deficiency, select the most likely consequence which might arise as a result of that deficiency.
Invoices are matched to orders but not warehouse records.
A Customers may not pay promptly
B Invoices may be raised in error
C Orders may be accepted from customers who are unable to pay
Receivables statements are not sent to customers.
D Customers may not pay promptly
E Invoices may be raised in error
F Orders may be accepted from customers who are unable to pay
B Invoices may be raised in error
D Customers may not pay
The external auditor at Reading Ltd has identified the following deficiencies within that organisation’s sales system.
For each deficiency, select the most likely consequence which might arise as a result of that deficiency.
Overdue accounts are not followed up.
A Invoiced sales might not be properly recorded
B Credit notes might not be properly recorded
C Debts might be included on the receivables ledger that are not collectable
Invoices are not in numerical sequence.
D Invoiced sales might not be properly recorded
E Credit notes might not be properly recorded
F Debts might be included on the receivables ledger that are not collectable
C Debts might be included on the receivables ledger that are not collectable
D Invoiced sales might not be properly recorded
Bourne Ltd operates a number of control procedures in its sales system. Assuming that all controls are operating effectively, which one of the following control procedures is most likely to ensure that customers are invoiced for goods received?
A Use of pre-printed sequentially numbered sales order documentation
B Matching of sales orders with despatch records
C Matching of despatch records with sales invoices
D Requiring customers to sign for goods received
C Matching of despatch records with sales invoices
The following describes aspects of the sales system in operation at Barrow plc.
For each process, select whether it represents a strength or a deficiency of the system.
Sales invoices are matched to despatch records and sales orders. The calculations on the invoices are checked by the accounts clerk.
A Strength
B Deficiency
The receivables ledger clerk posts the sales invoices and cash received to the receivablesledger. The receivables ledger clerk also reconciles the receivables ledger to the control account on a monthly basis.
C Strength
D Deficiency
The condition of goods returned is checked and a goods returned record is produced. A copy of this is sent to the accounts department and a credit note is raised by the chief accountant.
E Strength
F Deficiency
A Strength
D Deficiency
E Strength
The following describes processes which make up the sales system at Raffles Ltd. For each process, select whether it represents a strength or a deficiency of the system.
Orders are placed by telephone. On receipt of a call, following credit checks, the order is immediately entered onto the system.
A Strength
B Deficiency
The order generates a despatch record which is sent to the warehouse, and an invoice which is sent to accounts receivable. Goods in inventory are despatched immediately and the despatch record is amended manually for unavailable goods.
C Strength
D Deficiency
A copy of any despatch records with incomplete orders is placed in an ‘unfulfilled orders’ file. This file is reviewed daily and the order filled as soon as inventory is available.
E Strength
F Deficiency
A Strength
D Deficiency
E Strength
Which one of the following controls would provide the most positive assurance regarding the completeness of the sales figure recorded in the financial statements of a manufacturing company?
A Segregation of duties between the preparation of goods despatched records and the preparation of the sales invoices
B The issue of pre-numbered sales invoices for every sales transaction and internal checking for completion of processing
C The use of a pre-numbered goods despatched record for every sales transaction and internal checking for completeness of processing
D Authorisation of all sales invoices by the sales manager before processing
C The use of a pre-numbered goods despatched record for every sales transaction and internal checking for completeness of processing
Which one of the following controls would provide the most assurance regarding the completeness of the revenue figure in the financial statements of a manufacturing company?
A Segregation of duties between the preparation of goods despatched notes and the preparation of the sales invoices
B The issue of pre-numbered sales invoices for every sales transaction and internal checking for completion of processing
C The use of a pre-numbered goods despatched note for every sales transaction and internal checking for completeness of processing
D Authorisation of all sales invoices by the sales manager prior to processing
C The use of a pre-numbered goods despatched note for every sales transaction and internal checking for completeness of processing
In each of the following three cases, select whether control risk is higher or lower than normal.
The company has an established and well-resourced internal audit function.
A Control risk is higher than normal
B Control risk is lower than normal
The company has a history of reviewing financial performance on a regular basis at board level.
C Control risk is higher than normal
D Control risk is lower than normal
Purchase invoices are not authorised before payment.
E Control risk is higher than normal
F Control risk is lower than normal
B Control risk is lower than normal
D Control risk is lower than normal
E Control risk is higher than normal
Which three of the following statements about audit committees are correct?
A At least 50% of the members of an audit committee must be non-executive directors
B Listed companies are required to have an audit committee
C Audit committees are considered to be good practice for all large companies
D If a company has an internal audit function, the chief internal auditor should sit on the audit committee
E Audit committees are an important aspect of a company’s control environment
B Listed companies are required to have an audit committee
C Audit committees are considered to be good practice for all large companies
E Audit committees are an important aspect of a company’s control environment
Which one of the following is not part of an entity’s risk assessment process?
A Identify relevant business risks
B Estimate the impact of risks
C Assess the likelihood of occurrence
D Decide upon actions to manage the risks
E Report the process to the auditors
E Report the process to the auditors
The following are examples of internal controls which operate at Badweather plc.
For each example, select the type of control activity which it illustrates.
The financial controller counts petty cash on a monthly basis.
A Authorisation
B Information processing
C Physical control
There are two keys to the locked finance department safe: one held by the finance director and the other by the managing director.
D Authorisation
E Information processing
F Physical control
C Physical control
F Physical control
The following are examples of internal controls which operate at Castle Ltd.
For each example, select the type of control activity which it illustrates.
The financial controller reconciles the receivables ledger to the receivables ledger control account monthly.
A Performance review
B Information processing
C Segregation of duties
The receivables ledger clerk posts invoices to the receivables ledger. The cash book clerk posts cash receipts to the receivables ledger.
D Performance review
E Information processing
F Segregation of duties
B Information processing
F Segregation of duties
Which one of the following would be the simplest way of recording a straightforward system not subject to a great deal of change annually?
A Flowchart
B Narrative notes
C Questionnaire
D Family tree
B Narrative notes
Most entities make use of IT systems for financial reporting and operational purposes.
Controls operating in an IT environment can be split into general controls and application controls.
Which one of the following is an application control?
A Training staff in new IT procedures B Taking back-up copies of programs
C Maintenance agreements over IT equipment
D Cyclical reviews of all master files
D Cyclical reviews of all master files
Which two of the following are authorisation control activities?
A A bank reconciliation signed by the finance director
B A cheque payment run approved by the finance director
C An appraisal of the sales ledger clerk by the finance director
D A trial balance compiled by the finance director
A A bank reconciliation signed by the finance director
B A cheque payment run approved by the finance director
One of the five elements of internal control is monitoring of controls.
Which two of the following are activities which would be used to monitor controls?
A Management’s review of whether bank reconciliations are being prepared on a timely basis
B Internal auditors’ evaluation of whether the sales team are following company policy regarding customer discounts
C Authorisation of purchase invoices before they are paid
D Authorisation of purchase orders by the department manager
A Management’s review of whether bank reconciliations are being prepared on a timely basis
B Internal auditors’ evaluation of whether the sales team are following company policy regarding customer discounts
Peach plc is a large organisation with a complex accounting and information system. Critical to an understanding of the system are the reporting lines and relationships between different departments.
In this situation which one of the following methods is most likely to be used by the auditor to record the system of document flow?
A Narrative notes
B Flowcharts
C Questionnaires
D Organisational charts
B Flowcharts
Which two of the following are valid comments about the quality of assurance evidence?
A Evidence from external sources is more reliable than evidence obtained from the entity’s records B Evidence from internal sources is more reliable when related internal controls operate effectively.
C Evidence from internal sources is more reliable than evidence created by the assurance provider.
D Photocopies are more reliable than facsimiles.
A Evidence from external sources is more reliable than evidence obtained from the entity’s records
B Evidence from internal sources is more reliable when related internal controls operate effectively.
Which three of the following are assertions used by the auditor about account balances at the period end?
A Existence
B Accuracy, valuation and allocation
C Cut-off
D Completeness
A Existence
B Accuracy, valuation and allocation
D Completeness
Two types of procedures used in gathering evidence are tests of controls and substantive procedures.
For each of the following examples, select the type of procedure illustrated.
Observation of opening the post
A Test of control
B Substantive procedure
Calculation of the gross profit margin and comparison with that of the previous accounting period
C Test of control
D Substantive procedure
Reviewing invoices paid for evidence of authorisation
E Test of control
F Substantive procedure
A Test of control
D Substantive procedure
E Test of control
Which three of the following are assertions used by the auditor about account balances at the period end?
A Existence
B Accuracy, valuation and allocation
C Cut-off
D Completeness
A Existence
D Completeness
Which two of the following would be included in an assurance report?
A Statement of directors’ responsibilities
B Identification of the criteria
C Auditor’s opinion
D Title
B Identification of the criteria
D Title
With respect to ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment, which three of the following procedures shall be used in understanding the entity and its environment?
A Inquiries of management and others within the entity
B Inquiries of third parties
C Analytical procedures
D Observation and inspection
A Inquiries of management and others within the entity
C Analytical procedures
D Observation and inspection
In each of the following cases, select whether inherent risk is higher or lower than normal.
The company operates a profit-related pay scheme.
A Inherent risk higher than normal
B Inherent risk lower than normal
The business of the company is cash-based.
C Inherent risk higher than normal
D Inherent risk lower than normal
Financial statements contain balances with straightforward financial accounting requirements.
E Inherent risk higher than normal
F Inherent risk lower than normal
A Inherent risk higher than normal
C Inherent risk higher than normal
F Inherent risk lower than normal
Adam has been given the following draft figures for Imperious Ltd for the year ended
30 June 20X7 to analyse. Materiality has been set at £35,000 and the finance director has
told Adam in a planning meeting that there have been few changes in the year. Budgets
were set at 20X6 levels and there have been no major movements in non-current assets.
20X7 20X6
£ £
Revenue 3,497,284 3,487,286
Cost of sales 1,867,294 2,008,967
Salaries 467,900 420,975
Repairs and renewals 3,645 3,800
Depreciation 4,598 4,365
Advertising 37,945 37,283
For each item identified below, state whether it warrants further testing to analytical
procedures or not.
Cost of sales
A Warrants further testing
B No further testing required
Repairs and renewals
C Warrants further testing
D No further testing required
Advertising
E Warrants further testing
F No further testing required
A Warrants further testing
D No further testing required
Advertising
E Warrants further testing
Which three of the following would increase inherent risk?
A Sample sizes have been calculated incorrectly by the auditor and are too small
B A significant number of balances are based on estimates
C The financial statements include complex transactions
D Audit staff are inexperienced
E The company is seeking to raise finance
B A significant number of balances are based on estimates
C The financial statements include complex transactions
E The company is seeking to raise finance
Which one of the following best describes professional scepticism?
The assurance provider should:
A not believe anything that management tells him
B not believe anything that management tells him, without obtaining supporting evidence
C apply a questioning mind to the information and evidence he obtains
D always assume the worst outcome in cases of uncertainty
C apply a questioning mind to the information and evidence he obtains
Which three of the following are benefits of an engagement letter in respect of assurance services?
A Clearly defines the extent of the assurance provider’s responsibilities
B Provides written confirmation of the acceptance of the engagement
C Confirms the scope of the engagement
D Certifies the assurance provider’s opinion
A Clearly defines the extent of the assurance provider’s responsibilities
B Provides written confirmation of the acceptance of the engagement
C Confirms the scope of the engagement
Which one of the following best describes the concept of assurance?
Assurance refers to:
A an assurance firm’s high level of satisfaction as to the reliability of an assertion being made by one party for the use of another party
B an assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party
C a users satisfaction as to the reliability of an assertion being made by another party
D an assurance firm’s limited level of satisfaction as to the reliability of an assertion being made by one party for the use of another party
B an assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party
Which one of the following statements best describes the evidence obtained and the opinion given in a reasonable assurance engagement?
A Sufficient appropriate evidence and a negatively worded opinion
B Sufficient appropriate evidence and a positively worded opinion
C A lower level of evidence and a negatively worded opinion
D A lower level of evidence and a positively worded opinion
B Sufficient appropriate evidence and a positively worded opinion
Which one of the following qualifications is required for individuals working on audits in the UK?
A University degree
B Professional qualification
C Membership of a recognised supervisory body
D Employment by a firm controlled by qualified persons
D Employment by a firm controlled by qualified persons
Which three of the following are stated fundamental principles of the IESBA Code?
A Integrity
B Objectivity
C Independence
D Confidentiality
E Courtesy
A Integrity
B Objectivity
D Confidentiality
Which one of the following statements best describes ethical guidance in the UK?
A Ethical guidance provides a set of rules which must be followed in all circumstances.
B Ethical guidance is a framework containing a combination of rules and principles the application of which is dependent on the professional judgement of the assurance provider based on the specific circumstances.
C Ethical guidance provides a set of principles which can be applied at the discretion of the assurance provider.
D Ethical guidance is a series of legal requirements.
B Ethical guidance is a framework containing a combination of rules and principles the application of which is dependent on the professional judgement of the assurance provider based on the specific circumstances.
Which three of the following threats to independence might arise on the current audit when an audit team member is involved in employment negotiations with an audit client during the course of the audit?
A Self-interest
B Self-review
C Intimidation
D Familiarity
A Self-interest
C Intimidation
D Familiarity
There are various general threats to independence recognised by ethical codes.
For the following two examples, select the type of threat which might arise in that situation.
The audit senior assigned to the audit of Loesdon Ltd has recently become engaged to the finance director’s daughter.
A Self-interest
B Management
C Advocacy
A Self-interest
Talland LLP is the external auditor of Huntley Ltd, a retailer. The managing partner has been called to a meeting with the board of directors of Huntley Ltd. At that meeting the firm has been asked if it can provide the following non-audit services.
Huntley Ltd would like to implement a new sales system. They have asked Talland LLP to take on a consultancy project whereby the firm will evaluate several possible systems, advise on which system should be selected, and oversee the installation of the new system.
Which one of the following sets of threats would arise from the above scenario, if the project was accepted by Talland LLP?
A Advocacy and management
B Management and familiarity
C Management and self-review
D Advocacy and familiarity
C Management and self-review
In which one of the following instances would the client’s permission be required before disclosure is made to a third party?
A The client is involved in tax evasion
B The receivables ledger clerk at a client has committed a theft by teeming and lading
C An employee of a client is involved in terrorist activities
D There has been an industrial accident at one of the client’s factories which has not been reported to the relevant licensing authorities
D There has been an industrial accident at one of the client’s factories which has not been reported to the relevant licensing authorities
