Mock exam 1 48%

Question 1

As part of his analytical procedures on the financial statements of Nails Ltd, Peter has identified that the current ratio has decreased from 1.7 to 1.3. All purchases of inventory are currently made for cash and all sales are credit sales.
Which TWO of the following could be a valid explanation for this decrease?
1.The company has increased its credit policy to customers from 30 to 50 days.

2. The company has shifted its reliance from long-term debit to short-term debit.
3. The company has decided to adopt a just in time inventory system (whereby the supplier will deliver direct to its stores, eliminating the need for a distribution centre).
4. The company has recently offered special discounts to customers to attract more sales.

Answer 1

For the current ratio (the ratio of current assets to current liabilities) to decease either current assets must have decreased or current liabilities must have increased. Therefore, the answers are:

2. The company has shifted its reliance from long-term debit to short-term debit.
3. The company has decided to adopt a just in time inventory system (whereby the supplier will deliver direct to its stores, eliminating the need for a distribution centre).

Question 2

Where both control and inherent risks are low, what are the implications for the audit strategy?

Rely on controls, limited substantive procedures necessary

Rely on controls, no substantive procedures necessary

Rely on controls, extensive substantive procedures necessary

No reliance on controls, extensive substantive procedures necessary

Answer 2

Rely on controls, limited substantive procedures necessary.

(Even where control and inherent risks are low, some substantive procedures should still be carried out and cannot be avoided altogether.)

Question 3

Which TWO of the following are risks associated with remote auditing?

1. Potential limitations in audit scope e.g. inability to attend inventory counts and access client documentation
2. IT security is crucial to the functioning of remote working so steps much be taken to keep data secure
3. Control risk is likely to be assessed as lower than previously due an increase in the number of client staff working remotely
4. Lower risk of fraud

Answer 3

1. Potential limitations in audit scope e.g. inability to attend inventory counts and access client documentation
2. IT security is crucial to the functioning of remote working so steps much be taken to keep data secure

Question 4

For each of the following statements, decide which are true in respect of business risk.

1. Inherent and control risks are components of audit risk.
2. Auditors should provide suggestions for companies to overcome business risks.
3. Identifying business risks is part of the company’s risk assessment process

Answer 4

1. Inherent and control risks are components of audit risk.
2. Identifying business risks is part of the company’s risk assessment process.

Question 5

Which one of the following controls is LEAST LIKELY to address the risk that money received is not banked?

Matching cash receipts with invoices

Monthly bank reconciliations

Prompt bank payments

Investigation of shortages and surpluses of cash in the business

Answer 5

Investigation of shortages and surpluses of cash in the business

(It is least likely to ensure that monies rec on a day to day basis are banked)

Question 6

The following describes processes which form part of the purchases system in operation at Green Ltd.

For each process, decide whether it represents a strength or a weakness in the system.

1. All orders are placed directly with suppliers by the production department.
2. All supplier invoices are matched against purchase orders and goods received notes prior to being entered into the accounting system.

Answer 6

1. All orders are placed directly with suppliers by the production department.
   Weakness
2. All supplier invoices are matched against purchase orders and goods received notes prior to being entered into the accounting system.
   Strength

(For 1. the production dept might make inappropriate orders which will go unchecked as orders aren’t authorised first)

Question 7

The following system of time recording operates at Green Ltd.

Staff clock in and out of work using a swipe card. There is no supervision of this practice but there is a control in place ensuring that only current employees have a swipecard in their possession.

Which of the following might be a consequence of the above?

Employees are paid at an inappropriate rate

Employee deductions are inappropriate

Employees are paid for more than the hours worked

Fictional employees may be set up

Answer 7

Employees are paid for more than the hours worked

(Not fictious employees as question states there is a control in place ensuring only current employees have a swipecard)

Question 8

The following statements describe possible limitations of the provision of assurance.

For each statement, decide whether it is a limitation or is not a limitation.

1. Sampling is part of the audit process.
2. The provision of assurance in itself can be a subjective process.
3. The auditors may be auditing that particular client for the first time.

Answer 8

1. Sampling is part of the audit process - Limitation
2. The provision of assurance in itself can be a subjective process -
   Limitation
3. The auditors may be auditing that particular client for the first time - NOT A limitation

Question 9

The following statements relate to the differences between internal and external auditors.

For each statement decide whether it is true or false.

1. Internal auditors should not co-operate with external auditors.
2. Statutory audits are carried out by external auditors only.
3. The internal audit department forms part of the overall internal control system.

Answer 9

1. Internal auditors should not co-operate with external auditors -
   FALSE
2. Statutory audits are carried out by external auditors only.
   TRUE
3. The internal audit department forms part of the overall internal control system.
   TRUE

Question 10

For each of the following statements concerning analytical procedures, decide whether they are true or false.

1. Analytical procedures can be used in tests of controls
2. Analytical procedures are only helpful where the integrity of the underlying data is high
3. Analytical procedures must be carried out by senior audit personnel only

Answer 10

1. Analytical procedures can be used in tests of controls - FALSE
2. Analytical procedures are only helpful where the integrity of the underlying data is high - TRUE
3. Analytical procedures must be carried out by senior audit personnel only - FALSE

Question 11

Which TWO of the following situations would be referred to in the management representation letter?

(Select true or false for each option).

1. Management has refused the auditor permission to contact a major customer.
2. Management has confirmed its belief that the ongoing litigation with a former employee will not result in the company having to pay compensation.
3. Management has confirmed that it believes that a defaulting customer will pay its debts in due course.
4. Management believes that no fraud has been committed by senior management in the period.

Answer 11

1. Management has refused the auditor permission to contact a major customer - FALSE
2. Management has confirmed its belief that the ongoing litigation with a former employee will not result in the company having to pay compensation - TRUE
3. Management has confirmed that it believes that a defaulting customer will pay its debts in due course - TRUE
4. Management believes that no fraud has been committed by senior management in the period - FALSE

Question 11

Which THREE of the following are purposes of a management representation letter?

(Select true or false for each option).

1. Confirmation that the financial statements are free of material misstatements
2. Confirmation that the management acknowledges its responsibility for the preparation of the FS
3. Confirmation that management acknowledges the terms of the engagement
4. Confirmation that management acknowledges its responsibility for the design and implementation of internal control

Answer 11

1. Confirmation that the financial statements are free of material misstatements - True
2. Confirmation that the management acknowledges its responsibility for the preparation of the FS - TRUE
3. Confirmation that management acknowledges the terms of the engagement - FALSE
4. Confirmation that management acknowledges its responsibility for the design and implementation of internal control - TRUE

(Acknowledge of terms of engagement is sought in the engagement letter)

Question 12

In which TWO circumstances might it be permissible to use the negative method of receivables confirmation?

(Select true or false for each option).

1. The assessed risk of material misstatement is high.
2. A small number of large balances is involved.
3. A substantial number of errors is not expected.
4. The auditor has no reason to believe that customers will disregard the request.

Answer 12

1. The assessed risk of material misstatement is high - FALSE
2. A small number of large balances is involved - FALSE
3. A substantial number of errors is not expected - TRUE
4. The auditor has no reason to believe that customers will disregard the request - TRUE

(when the assessed risk of misstatement is high or there are a small number of large balances involved, then the positive meth should be used)

(negative meth is essentially when there is no reason or no expectations)

Question 13

During the course of the audit of Ham Ltd, Mary receives 24 replies out of the 27 direct customer confirmation letters. Mary has already communicated with the three outstanding respondees on at least four occasions.

What action should Mary now take?

No action is necessary as 24 out of 27 responses is sufficient.

Mary should pass on the details of the outstanding responses to an independent company official for chasing.

Mary should continue her efforts to contact the customers.

Mary should deem that they are fictitious customers.

Answer 13

Mary should pass on the details of the outstanding responses to an independent company official for chasing.

Question 14

Which THREE of the following items will be included in a bank letter from a specific bank?

(Select true or false for each option).

1. Details of all standing orders with the bank
2. The bank balance on each account with the specific bank
3. Any guarantees made by the client
4. Any titles or other assets held for safe custody by the bank

Answer 14

1. Details of all standing orders with the bank - FALSE
2. The bank balance on each account with the specific bank - TRUE
3. Any guarantees made by the client - TRUE
4. Any titles or other assets held for safe custody by the bank - TRUE

Question 15

Jude & Co is about to commence the audit of its client, Merry Ltd. However, Merry Ltd still owes fees to Jude & Co for last years audit.

Which of the following should be Jude & Co’s course of action?

Continue to act with safeguards

Threaten to issue a qualified audit opinion if Merry Ltd do not pay

Consider whether it is necessary to resign

Accept shares in Merry Ltd to the value of the audit fee

Answer 15

Consider whether it is necessary to resign

(A threat to independence is automatically created with overdue fees)

Question 16

Which THREE of the following constitute possible subject matter which may be evaluated for the purposes of an assurance engagement?

(Select correct or incorrect for each option).

1. Data
2. Systems of processes
3. Corporate governance
4. UK GAAP

Answer 16

1. Data - CORRECT
2. Systems of processes - CORRECT
3. Corporate governance - CORRECT
4. UK GAAP - INCORRECT

Question 17

The following are types of test that might be carried out by an assurance provider.

For each example, select the FS assertion that is being tested.

1. A sample of purchases taken from throughout the year are checked against supplier invoices
2. Insurance expenses are compared year on year

Answer 17

1. A sample of purchases taken from throughout the year are checked against supplier invoices - OCCURENCE
2. Insurance expenses are compared year on year - ACCURACY

(Purchase invoices would be reviewed for occurrence to see items were acc bought. Expenses would be compared year on year to check amounts are accurate)

Question 18

Select whether the following statements are true or false.

On a reasonable assurance engagement, absolute assurance is expressed positively

A statutory audit leads to a certification of the correctness of the FS

An assurance engagement is an independent examination

Answer 18

On a reasonable assurance engagement, absolute assurance is expressed positively - FALSE

A statutory audit leads to a certification of the correctness of the financial statements - FALSE

An assurance engagement is an independent examination - TRUE

Question 19

The following statements describe ways in which the assurance provider might be able to “close” the expectations gap.

For each statement select whether it is true or false.

1. By issuing an engagement letter setting out the work to be carried out and its limitations
2. By reducing the audit fee
3. By including a caveat in the assurance report

Answer 19

1. By issuing an engagement letter setting out the work to be carried out and its limitations - TRUE
2. By reducing the audit fee - FALSE
3. By including a caveat in the assurance report - TRUE

Question 20

Which of the following methods of recording internal controls and document flow is generally regarded as the most effective?

Flowcharts

Family trees

Narrative notes

Questionnaires

Answer 20

Flowcharts

(regarded as the most effective way of recording internal controls)

Question 21

For each of the following statements concerning documentation, select whether they are true or false in accordance with ISA 230 Audit Documentation.

1. The preparation of documentation is a legal requirement.
2. Documentation assists team members to direct and supervise work done.
3. Documentation may be in paper or electronic form.

Answer 21

1. The preparation of documentation is a legal requirement - FALSE
2. Documentation assists team members to direct and supervise work done - TRUE
3. Documentation may be in paper or electronic form - TRUE

(Documentation prep in the form required by ISA 230 is a professional, not a legal, requirement)

Question 22

External confirmation requests may be used by the auditor to gather evidence.

For each of the following statements select whether it is true or false.

1. A positive confirmation request always asks respondents to reply whether or not they agree with the information given.
2. A positive confirmation usually provides more reliable audit evidence than a negative confirmation request.
3. Selecting a sample of confirmation requests drawn from a client’s list of receivables is less reliable than for payables balances.

Answer 22

1. A positive confirmation request always asks respondents to reply whether or not they agree with the information given - FALSE
2. A positive confirmation usually provides more reliable audit evidence than a negative confirmation request - TRUE
3. Selecting a sample of confirmation requests drawn from a client’s list of receivables is less reliable than for payables balances - FALSE

(Rec balances are more likely to be complete in the client’s records than payables balances)

Question 23

The results of substantive tests on trade payables at Waltham Ltd are set out below. The materiality threshold set for these tests was £12,000.

For each of the following results, select the action which should be taken by the audit senior (Refer to senior colleague/draw a conclusion)

1. Of the 15 supplier confirmations sent, only 10 were returned.
2. In the sample of 30 supplier invoices out of approximately 300, representing 5% of the payables balances, errors were found on the payables ledger concerning the recording of liabilities from 8 invoices totalling £200.

Answer 23

1. Of the 15 supplier confirmations sent, only 10 were returned - REFER TO SENIOR COLLEAGUE
2. In the sample of 30 supplier invoices out of approximately 300, representing 5% of the payables balances, errors were found on the payables ledger concerning the recording of liabilities from 8 invoices totalling £200 - DRAW CONCLUSION

Question 24

In order to address the familiarity threat that arises from the long association of a quality management review partner involved in the audit with a client which is a listed company, what action, if any, is required?

A quality management review partner involved in the audit should serve for no longer than five continuous years before being rotated off the client.

A quality management review partner involved in the audit should serve for no longer than six continuous years before being rotated off the client.

A quality management review partner involved in the audit should serve for no longer than seven continuous years before being rotated off the client.

There are no restrictions as to the number of years a quality management review partner involved in the audit can serve at an audit client.

Answer 24

A quality management review partner involved in the audit should serve for no longer than SEVEN continuous years before being rotated off the client

(Remember PARTNER related question is SEVEN years)

Question 25

Within an assurance firm, a number of security measures should be put into place to ensure that accidental disclosure of confidential client information is prevented:

1. Not discussing client matters in public places
2. Not discussing client matters at the assurance firm’s premises
3. Not discussing client matters with any party outside the assurance firm
4. Not leaving working papers unattended at the client’s premises
5. Not taking working papers off the assurance firm’s premises

Which of the above statements are correct?

1, 2 and 3

1, 3 and 4

2, 3 and 4

All of the statements are correct

Answer 25

1, 3 and 4

(Not discussing client matters at the assurance firm’s premises and not being allowed to take working papers off the premises would be unreasonable)