Mock exam 2 50%

Question 1

Which one of the following is a reason that organisations have effective systems of internal control?

To reduce audit risk

To reduce time required for the statutory audit

To maximise cash-flow

To maximise operating efficiency

To maximise profits

Answer 1

To maximise operating efficiency

(by maximising operating efficiency this would also improve cash-flow, and profitability)

Question 2

Under which of the following circumstances MUST a firm decline an appointment as auditor to a company?

The prospective client…

refuses to grant the firm permission to contact the previous auditor.

refuses to grant permission to the previous auditor to communicate with the firm.

still owes audit fees to the previous auditor.

is one for which your firm is ethically barred from acting.

Answer 2

is one for which your firm is ethically barred from acting

Question 3

Posh Ltd has recently discovered that they have been purchasing their materials from a supplier who is more expensive than competitors and is often unreliable.

Which of the following controls would help to prevent this from happening again?

1. Use of central procurement department to make purchases
2. Use of approved supplier list
3. Obtaining references from other customers of supplier
4. Matching the order form to goods received note
5. Use of sequentially numbered order forms

All of the above
1, 2, 3
1, 2, 4
2, 3, 4
1, 2, 3, 5

Answer 3

1, 2, 3

Question 4

For each of the following controls, identify whether they are general IT controls or information processing IT controls.

1. Segregation of duties
2. Virus checks
3. One to one checking
4. Batch totals
5. Training

Answer 4

1. Segregation of duties = GENERAL IT CONTROLS
2. Virus checks = GENERAL IT CONTROLS
3. One to one checking = INFO PROCESSING IT CONTROLS
4. Batch totals = INFO PROCESSING IT CONTROLS
5. Training = GENERAL IT CONTROLS

(general it controls apply to the whole system as opposed to one particular program)

Question 5

Which of the following best describes the term ‘detection risk’?

The risk that the auditors give an inappropriate opinion on the financial statements.

The susceptibility of an account balance or class of transactions to misstatement that could be material individually or when aggregated with misstatements in other balances or classes, assuming there were no related controls.

The risk that a material misstatement would not be prevented, detected or corrected by the accounting and internal control systems.

The risk that the auditor’s procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes.

Answer 5

The risk that the auditor’s procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes.

Question 6

Within the audit report there are implied opinions.

Which of the following are implied opinions?

1. Proper accounting records have been maintained
2. The accounts are in agreement with the accounting records and returns
3. All information and explanations have been received as the auditors think necessary and they have had access at all times to the company’s books, accounts and vouchers.
4. The accounts are true and fair
5. The accounts are properly prepared in accordance with the Companies Act 2006

All of the above
1, 2, 3
1, 2, 4
2, 3, 4
1, 2, 3, 5

Answer 6

1, 2 and 3

(4 and 5 are EXPLICIT opinions not IMPLICIT opinions)

Question 7

For each of the following statements select whether they are TRUE or FALSE.

1. Reviewing supplier statement reconciliations selected on the basis of purchases turnover in the year helps to confirm the completeness of the accounts payable balance.
2. Recalculating the depreciation charge helps in verifying the rights and obligations assertion for non-current assets.
3. Reviewing post balance sheet inventory movements helps verify the valuation of inventory.

Answer 7

1. Reviewing supplier statement reconciliations selected on the basis of purchases turnover in the year helps to confirm the completeness of the accounts payable balance - TRUE
2. Recalculating the depreciation charge helps in verifying the rights and obligations assertion for non-current assets - FALSE
3. Reviewing post balance sheet inventory movements helps verify the valuation of inventory - TRUE

(Post YE BS inv movements will help provide evidence as to valuation of the inv at BS date)

Question 8

Which one of the following is not a control which safeguards cash and bank accounts?

Limited cheque signatories

Banking cash on a daily basis

Surprise cash counts

Reconciliation of receivables ledger control account

Bank reconciliations

Answer 8

Reconciliation of receivables ledger control account

(It is a control over the recording of sales and recs rather than a specific control over cash collection)

Question 9

Which of the following would be included in the management representation letter?

1. directors opinion on the likely outcome of future court case (where no other evidence exists)
2. acknowledgment of the directors’ responsibility to prepare the Financial Statements
3. acknowledgement of the directors’ responsibility for the design and implementation of internal control
4. director’s belief that company is a going concern
5. representations that the non current assets are appropriately recorded in the Financial Statements.

1, 2 and 3
1 and 2 only
All of the above
1, 2, 3, and 4

Answer 9

1, 2, 3, and 4

Question 10

For each of the following statements select whether they are true or false.

1. The FRC Ethical Standard applies to UK audit work.
2. A framework of ethical guidance prevents accountants interpreting legalistic requirements narrowly in order to circumvent ethical requirements.

Answer 10

1. The FRC Ethical Standard applies to UK audit work - TRUE
2. A framework of ethical guidance prevents accountants interpreting legalistic requirements narrowly in order to circumvent ethical requirements. - true

Question 11

Ross Limited has just discovered that an ex-employee Rachel has been paid for 4 weeks following the date she left the company.

Which of the following control procedures would be least likely to reduce the risk of employees who have left being made up a pay packet, which is collected by leaver or accomplice?

The warehouse manger supervises the payout of wages (she knows all the employees personally)

Comparison of payroll records with pay packets to ensure that they match

Weekly check of pay packets against list of leavers and joiners

Weekly authorisation of payroll by payroll and human resource manager

Answer 11

Comparison of payroll records with pay packets to ensure that they match

READ THE QUESTION! Its LEAST likely not most.

(Option two is the correct answer because comparing payroll records with pay packets would only confirm the employee received the correct amount of pay)

Question 12

For each of the following statements concerning the use of test data and audit software select whether they are true or false.

1. Test data involves the use of the assurance provider’s own software.
2. Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation.
3. Audit software can be installed on a client’s system to reperform calculations relating to year-end balances.

Answer 12

1. Test data involves the use of the assurance provider’s own software - FALSE
2. Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation - TRUE
3. Audit software can be installed on a client’s system to reperform calculations relating to year-end balances - TRUE

Question 13

Which of the following services would it be least appropriate for a firm to carry out for an audit client?

Provision of corporate finance services

Preparation of the tax computation

Preparation of the financial statements for a listed company

Provision of tax advice

Answer 13

Preparation of the financial statements for a listed company

(the preparation of FS for a listed company poses a significant self-review threat and as a result is rarely acceptable)

Question 14

Which of the following procedures which could be undertaken to confirm the valuation of a client’s bank balance is most reliable?

Inspection of the bank reconciliation

Inspection of the bank confirmation letter

Review of cash paid after date

Review of sales invoice

Answer 14

Inspection of the bank confirmation letter

Question 15

For the list below, select whether the following should be included on a permanent audit file or a current audit file.

1. Engagement Letter
2. Draft financial statements for the year
3. Accounting System Notes

Answer 15

1. Engagement Letter - PERMANENT FILE
2. Draft financial statements for the year - CURRENT FILE
3. Accounting System Notes - PERMANENT FILE

Question 16

Smarter Supermarkets operates a chain of fifteen supermarkets across London. At head office, there is an internal audit department which carries out audits and investigations on the individual supermarkets in the chain.

Which TWO of the following could the internal audit department carry out and still operate effectively?

(Select TRUE or FALSE for each option).

1. Tests of the controls at the Westminster supermarket as part of a routine internal audit cycle
2. Temporarily filling the role of the Lewisham supermarket manager while she is on sick leave
3. Identification of risks at the proposed Waterloo supermarket, which is due to open next year
4. Investigation into the physical controls at all the supermarkets

Answer 16

Tests of the controls at the Westminster supermarket as part of a routine internal audit cycle - TRUE

Temporarily filling the role of the Lewisham supermarket manager while she is on sick leave - FALSE

Identification of risks at the proposed Waterloo supermarket, which is due to open next year - FALSE

Investigation into the physical controls at all the supermarkets - TRUE

(Option 2 unacceptable as it involves the internal auditor in operational matters. Option 3 appears to be a special assignment)

Question 17

The possibility that the auditor’s conclusion, based on a sample of a certain size may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure is referred to as…

non sampling risk.

sampling risk.

tolerable error.

expected error.

Answer 17

sampling risk

(Non-sampling risk is the risk that auditors concludes incorrectly as inappropriate audit procedures have been used or auditor might have misinterp’d evidence and failed to recognise an error)

(Tolerable error is the max error in the population that the auditor is willing to accept)

(Expected error is the error that the auditor expects to be in the population)

Question 18

Which of the following statements is an accurate description of a management representation letter?

It confirms the scope of the engagement.

It sets out material weaknesses in internal controls.

It confirms matters management have said to audit staff as evidence towards the audit opinion.

It sets out matters arising during the engagement which are of interest to management.

Answer 18

It confirms matters management have said to audit staff as evidence towards the audit opinion

(1 refers to the engagement letter, 2 refers to mgmt latter and 4 is somewhat covered in the mgmt letter)

Question 19

When ascertaining the value of inventory, net realisable value could be less than cost when there has been:

physical deterioration of the products

obsolescence of products

Business decision to sell the products at a loss

fall in selling price of the products

All the above
1, 2 and 3
1 and 2
1, 2 and 4

Answer 19

All the above

(All the above are correct because all the factors would reduce the NRV of the products)

Question 20

For the list below, select whether the test is deigned to provide evidence about Completeness or Valuation.

1. As part of testing property, plant and equipment, a review of the repairs account in the nominal ledger.
2. As part of testing property, plant and equipment, additions are agreed back to invoices.
3. As part of testing inventory, cut off testing on year end deliveries is performed.

Answer 20

1. As part of testing property, plant and equipment, a review of the repairs account in the nominal ledger - COMPLETENESS
2. As part of testing property, plant and equipment, additions are agreed back to invoices - VALUATION
3. As part of testing inventory, cut off testing on year end deliveries is performed - COMPLETENESS

Question 21

There are five general sources of threat identified by the IESBA Code.

Which of the following situations would not give rise to a self interest threat?

Outstanding fees due from client

Acting in support of a client who is in dispute with a third party

Loan with client

Fees from client constitute 20% of total fee income

Answer 21

Acting in support of a client who is in dispute with a third party

AGAIN, READ THE QUESTION, It is would NOT give rise

(the answer exhibits the advocacy threat not self interest)

Question 22

Attending a period-end inventory count provides assurance primarily on which financial statement assertion?

Existence

Valuation

Rights and obligations

Classification

Answer 22

Existence

(Anything to do with attending and inventory counts is always Existence)

Question 23

Which TWO of the following are reasons why segregation of duties is important in a system of internal control?

(Select CORRECT or INCORRECT for each option).

1. It improves efficiency.
2. It helps to prevent fraud.
3. It improves the rate of detection of errors.
4. It is a way of assigning roles within a large organisation.

Answer 23

1. It improves efficiency - INCORRECT
2. It helps to prevent fraud - CORRECT
3. It improves the rate of detection of errors - CORRECT
4. It is a way of assigning roles within a large organisation - INCORRECT

Question 24

In a ‘reasonable assurance engagement’ how are the assurance provided and the conclusion given best described?

Absolute and negative

High and negative

High and positive

Low and positive

Answer 24

High and positive

(For reasonable assurance, the assurance provided is HIGH –> never ABSOLUTE or LOW)

Question 25

The gross margin at West Ltd has increased from the previous year.

Assuming there are no errors in the financial statements, which of the following explains this increase?

1. Sales volume has increased
2. Administrative costs have increased
3. The cost of raw materials has increased without an effect on the sales price
4. The company now employs more efficient production techniques

Answer 25

The company now employs more efficient production techniques

(company is more efficient, reducing its production cost and therefore increasing its gross margin)

(1 is not correct as an increase in sales volume will see cost of sales rise proportionately, 2 does not apply admin costs are not part of cost of sales, 3 would cause gross margin to fall)

Question 26

In carrying out tests of control, which THREE of the following types of procedures can be used?

1. Inquiry
2. Analytical procedures
3. Computation
4. Inspection
5. Reperformance

Answer 26

1, 4 and 5

(Analytical procedures and computation are used in carrying out substantive procedures)

Question 27

Sending external confirmations to receivables is not helpful for ascertaining which of the following?

The collectability of the receivables balance

The existence of the receivables balance

Whether the receivables balance belongs to the client entity

The accuracy of the receivables balance

Answer 27

The collectability of the receivables balance

(Sending confirmations to rec will not provide evidence as to the COLLECTABILITY of the receivables balance as customers will confirm whether or not they owe the amounts, not whether they will/are ABLE to pay them)