Mock exam 1 Attempt 2 80%

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?

Select CORRECT or INCORRECT for each option).

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

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)

CURRENT RATIO = CURRENT ASSETS:CURRENT LIABILITIES
thus for it to decrease current assets must’ve DECREASED or current liabilities INCREASED

By shifting its reliance from long-term to short-term debt, the current ratio is decreased as current liabilities increase.

By adopting a just-intime inventory policy inventory levels will fall, causing a decrease in current assets and hence a decease in the current ratio.

Question 2

The following statements relate to small companies and their systems of internal control.

For each statement decide whether it is true or false

1. Small companies have no need for systems of internal control.
2. Small companies can use unsophisticated methods of control to compensate for the lack of formal controls
3. Small companies has difficulty with implementing segregation of duties controls.

Answer 2

1. Small companies have no need for systems of internal control - FALSE
2. Small companies can use unsophisticated methods of control to compensate for the lack of formal controls - TRUE
3. Small companies has difficulty with implementing segregation of duties controls - TRUE

GOT THE 3RD WRONG - Given the limited number of employees, the extent to which segregation of duties controls can practically be implemented is limited.

Question 3

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 3

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

GOT THE 2ND WRONG - Statutory audits are carried out by EXTERNAL AUDITORS ONLY

Question 4

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 4

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

GOT THE 2ND AND 3RD WRONG - Analytical procedures are only helpful where the integrity of the underlying data is high (THATS A GIVEN REALLY) + Analytical procedures do not need necessarily to be carried out by senior audit personnel. However as with all audit work carried out, it should be supervised and reviewed by a more senior member.

Question 5

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 financial statements
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 5

READ THE QUESTION - IT SAID CHOOSE 3 NOT 2

Confirmation that the financial statements are free of material misstatements

Confirmation that the management acknowledges its responsibility for the preparation of the financial statements

Confirmation that management acknowledges its responsibility for the design and implementation of internal control

Question 6

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 6

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

1 is incorrect as this would constitute a limitation of scope and would be referred to in the audit report

4 is incorrect as a more general statement is made by management with regards to fraud and irregularities (not one that covers management frauds only).

Question 7

Which THREE of the following are MOST LIKELY to indicate that the net realisable value of inventory is lower than its cost?

(Select TRUE or FALSE for each option).

1. There is a physical deterioration of the inventory.
2. There has been an increase in selling price.
3. Newer models are now available.
4. There has been a marketing decision to offer small discounts during a sale period.
5. There has been a significant unforeseen increase in production costs which cannot be passed on the customer.

Answer 7

1. There is a physical deterioration of the inventory - TRUE
2. There has been an increase in selling price - FALSE
3. Newer models are now available - TRUE
4. There has been a marketing decision to offer small discounts during a sale period - FALSE
5. There has been a significant unforeseen increase in production costs which cannot be passed on the customer - TRUE

Increasing selling price or offering small discounts during a sale period DO NOT indicate that NRV is lower than cost

3 YOU GOT WRONG - With newer models available, existing inventory is likely to be obsolete thus NRV is lower than cost

5 YOU GOT WRONG - The significant unforeseen increase in production costs which cannot be passed on to the customer is likely to push the product cost over the NRV.

Question 8

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 8

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

Had the right idea, but where the assessed risk of material misstatement is high + a small number of large balances is involves, then the POSITIVE method should be used

Question 9

In a system where wages are paid in cash, which THREE of the following duties should be segregated?

1. Preparing the payroll summary
2. Requesting each employee to sign for his pay packet
3. Filling pay packets with the cash
4. Distribution of wages
5. Requesting verification of employees’ identity

2, 3 and 4
3, 4 and 5
1, 4 and 5
1, 3 and 4
1, 2 and 3

Answer 9

1, 3 and 4

The acts of requesting each employee to sign the wage packets (2) and requesting verification of employee’s identity (5) are not critical duties that require segregation in the process of cash wages being paid.

Question 10

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 10

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

YOU GOT THE 1ST WRONG - Positive confirmations can ask respondents to fill in the amount they owe rather than just agree/disagree with a given balance

Question 11

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 11

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