Mock exam 3 44%

Question 1

Which TWO of the following are classed as subject matter?

UK Corporate Governance Code

12 month cash flow forecasts

Systems of internal control

Accounting standards

Answer 1

12 month cash flow forecasts

Systems of internal control

(UK Corp Gov Code and Acc standards are classed suitable criteria)

Question 2

Which TWO of the following roles could internal audit function perform to help the board in its management of the company and still operate effectively?

Valuation of land and buildings

Monitor of internal controls

Conducting fraud investigations

Providing direct assistance to external auditors with testing

Answer 2

Monitor of internal controls

Conducting fraud investigations

(Main role of internal audit is evaluating the EFFECTIVENESS of internal controls)

(Internal audit should not perform valuations to retain objectivity and direct assistance to external auditors is PROHIBITED!!!)

Question 3

For each of the following statements, select whether they are TRUE or FALSE in respect of audit reports.

An explicit opinion is given on whether the financial statements give a true and fair view of the state of the company’s affairs at the end of the financial year

The Key Audit Matters section of the audit report describes all of the material misstatements found

Explicit opinion is given on whether all information and explanations have been received

Answer 3

An explicit opinion is given on whether the financial statements give a true and fair view of the state of the company’s affairs at the end of the financial year - TRUE

The Key Audit Matters section of the audit report describes all of the material misstatements found - FALSE

Explicit opinion is given on whether all information and explanations have been received - FALSE

(The KAM section highlights matters in the pro judgement of the auditor that were most significant in the audit)

Question 4

When determining sample sizes for test of details there are a number of factors that the auditor should take into account.

For each of the following factors, select whether it could cause the sample size to INCREASE or to DECREASE.

A decrease in the tolerable misstatement

A decrease in the auditors assessment of the risk of material misstatement

A decrease in the use of analytical procedures to test the same assertion

Answer 4

A decrease in the tolerable misstatement - INCREASE

A decrease in the auditors assessment of the risk of material misstatement - DECREASE

A decrease in the use of analytical procedures to test the same assertion - INCREASE

(1 - Reduction in tolerable misstatement means more samples are required.)

(2 - A decrease in the risk of misstatement results in a fall in the sample size)

Question 5

For each of the following statements concerning perpetual inventory counts, select whether they are TRUE or FALSE.

All inventory lines must be counted at least once a quarter

The auditor must attend at least one count and ensure adequate controls are in place

A follow up surprise inventory count must be done by the auditor

Answer 5

All inventory lines must be counted at least once a quarter - FALSE

The auditor must attend at least one count and ensure adequate controls are in place - TRUE

A follow up surprise inventory count must be done by the auditor - FALSE

(1 - All inventory lines must be counted at least once a year, NOT PER QUARTER)

(3 - Surprise counts are NOT required)

Question 6

Walton LLP has just signed an environmental audit on a retailer, an engagement looking at the impact of the organisation’s impact on the natural environment. It used the words “nothing has come to our attention”.

Which ONE of the following is correct about the level of assurance, the evidence sought and the conclusion made?

Reasonable assurance, sufficient and appropriate evidence, positively expressed opinion

Limited assurance, sufficient and appropriate evidence, positively expressed conclusion

Limited assurance, sufficient and appropriate evidence, negatively expressed conclusion

Absolute assurance, sufficient and appropriate evidence, negatively expressed conclusion

Answer 6

Limited assurance, sufficient and appropriate evidence, negatively expressed conclusion

(An environmental audit is a limited assurance engagement, where conclusions are expressed negatively)

Question 7

Jolmes Ltd is a car parts manufacturer, located at a single factory. The following describes processes that make up the payroll system.

For each process, select whether it represents a STRENGTH or a DEFICIENCY of the system.

The payroll manager updates standing data on the payroll system and also processes the monthly payments

The standing data file of employees is regularly printed out, given to department managers to sign and confirm all staff

The payroll department receives verbal confirmation of new employees in weekly meetings

Answer 7

The payroll manager updates standing data on the payroll system and also processes the monthly payments - DEFICIENCY

The standing data file of employees is regularly printed out, given to department managers to sign and confirm all staff - STRENGTH

The payroll department receives verbal confirmation of new employees in weekly meetings - DEFICIENCY

(1 - Payroll needs segmentation of duties as the payroll manager could update standing data and make payments)

Question 8

Which ONE of the following is a control objective relating to the sales system?

Goods are checked for quality before despatch

To ensure discounts received are accounted for completely and accurately

To test numerical sequences of invoices and investigate missing numbers

To ensure all goods despatched are correctly invoiced

Answer 8

To ensure all goods despatched are correctly invoiced

Question 9

Whinston LLP audits X Ltd, a chain of restaurants. They have also been approached by Y Ltd, a main competitor of X Ltd.

Assuming Whinston LLP wins the tender for Y Ltd, which TWO of the following are appropriate safeguards to manage the conflict of interest that might arise?

Require every employee to Whinston LLP to sign a confidentiality agreement

Use separate engagement teams and engagement partners for each client

Inform the ICAEW of all safeguards being applied

Regular monitoring of safeguards by an engagement quality control reviewer

Answer 9

Use separate engagement teams and engagement partners for each client

Regular monitoring of safeguards by an engagement quality control reviewer

(Not every employee will have to sign a confidentiality agreement, only those actually on the engagement)

Question 10

State which TWO of the following are limitations of assurance engagements

Financial cost

Fraud detection

Sampling used

Reliance on responsible party to provide information

Answer 10

Sampling used

Reliance on responsible party to provide information

(Sampling gives risk to sampling risk)

(Reliance on responsible parties for information might be needed, as there may be no other means of verifying items.)

Question 11

Which TWO of the following are limitations of internal controls?

Human mistakes

Cost of implementation

Unusual transactions

Segmentation of data

Answer 11

Human mistakes

Unusual transaction

(Unusual transactions go outside of what normally happens and controls may become ineffective)

Question 12

The auditor of Wilks Ltd performs a sampling method that uses a constant internal between selections, with the first interval having a random start.

Which ONE type of sampling method is this describing?

Systematic selection

Random selection

Haphazard selection

Monetary Unit Sampling

Answer 12

Systematic selection

(Haphazard and random are both the worst methods, simple)

(MUS always includes a currency)

Question 13

Which TWO of the following describe tests of controls that could be performed on the purchases system of Clifton Ltd?

Check whether petty cash payments have been approved

Verify that supplier statement reconciliations have been performed on a regular basis

Obtain two signatories on payments of cheques

Matching of goods received with invoices and the creation of an accrual for those goods received not matched to a corresponding invoice

Answer 13

Check whether petty cash payments have been approved

Verify that supplier statement reconciliations have been performed on a regular basis

(Test of controls are to see if the control has been performed, such as approval of payments, or reconciliations performed and evidenced as performed)

Question 14

For each of the following statements, select whether they are TRUE or FALSE in respect of audit testing.

The auditor must always carry out some substantive procedures, due to limitations in systems of internal control.

Substantive procedures are made up of tests of detail only

Less evidence is obtained in limited assurance engagements

Answer 14

The auditor must always carry out some substantive procedures, due to limitations in systems of internal control - TRUE

Substantive procedures are made up of tests of detail only - FALSE

Less evidence is obtained in limited assurance engagements - TRUE

Question 15

Which TWO of the following are examples of where audit data analytics could be helpful?

Comparing entity data to externally obtained data

Physical inspection of plant and machinery

Three way matching of purchase orders, good received notes and invoices

Selecting materiality thresholds

Answer 15

Comparing entity data to externally obtained data

Three way matching of purchase orders, good received notes and invoices

(Data analytics analyses patterns and extracts useful info for planning and performing an audit)

(This can use other data sources for comparison and more complex matching of transactions e.g 3 way matching)

Question 16

Mulgrew Ltd has just obtained a five year bank loan, to help expand the business. The auditor is performing tests to ensure there are no material misstatements surrounding the balance.

For each of the following statements concerning substantive procedures of non-current liabilities, select whether they are TRUE or FALSE.

Recalculate any interest accrual to verify accuracy

Inspect the financial disclosure of the loan is adequate

Inspect the loan agreement for terms and conditions such as restrictive covenants

Answer 16

ALL TRUE!!!

All procedures would be performed

Question 17

Which TWO of the following are areas in which a self-interest threat may arise?

Where the audit firm is leasing office space from the assurance client

Where the auditor represents the firm in a tax dispute

Where the audit engagement partner has acted on the client for 8 years

Where the audit firm is combining services with the clients services and markets it together

Answer 17

Where the audit firm is leasing office space from the assurance client

Where the audit firm is combining services with the clients services and markets it together

(Leasing office space and combining/marketing services together is a close business relationship under self-interest threat. Representing the client in tax disputes is an ADVOCACY threat. Engagement partner for 8 years could be a FAMILIARITY threat)

Question 18

Which ONE of the following would warrant further investigation after analytical procedures?

New customers given generous credit terms and receivables days increasing

A large 5 year bank loan was obtained and current ratio increased

50% cuts to advertising budgets yet sales increased

Gross profit staying static despite large bonuses paid to staff in the year

Answer 18

50% cuts to advertising budgets yet sales increased

(Advertising budgets reduced massively may hinder sales. Longer credit terms would increase RECEIVABLES days. A long-term loan would give cash injection but not be included in the CURRENT ratio as a LIABILITY. Wage rises would hit operating profit usually)

Question 19

The following describes processes which make up the sales system at Todd Ltd. For each process, describe whether it represents a strength or a deficiency of the system

Order forms should be sequentially pre-numbered and a regular sequence check performed

For orders placed over the phone, a check is made whether they are an existing customer, then the order is processed

Customer queries are dealt with by ordering, warehouse and sales ledger staff

Answer 19

Order forms should be sequentially pre-numbered and a regular sequence check performed - STRENGTH

For orders placed over the phone, a check is made whether they are an existing customer, then the order is processed - DEFICIENCY

Customer queries are dealt with by ordering, warehouse and sales ledger staff - STRENGTH

Question 20

Which TWO of the following describe control procedures that could be performed on the payroll system of Harkness Ltd?

Employees are only paid for work that has been performed

The payroll masterfile can be accessed by all staff if required

Managing Director reviews the full payroll listing before payroll funds are released

All timesheets and overtime are approved by managers before sent to payroll

Answer 20

Managing Director reviews the full payroll listing before payroll funds are released

All timesheets and overtime are approved by managers before sent to payroll

(MD review of payroll is to identify any possible outliers from standard payroll)

(Review of timesheets and appropriate authorisation ensures people get paid for work performed)

Question 21

Many auditors use two types of audit file: a current audit file and a permanent audit file.

For each of the following documents, select whether it will be included in the CURRENT audit file or PERMANENT audit file.

Detailed history of the client’s business

Audit planning memorandum

Written representations from management

Answer 21

Detailed history of the client’s business - PERMANENT

Audit planning memorandum - CURRENT

Written representations from management - CURRENT

Question 22

For each of the following statements concerning ethical codes and independence, select whether they are TRUE or FALSE.

Accountants need an ethical code as they have access to sensitive information

Management threat is contained in FRC Ethical Standard only

Auditors must identify any ethical threats of compliance to fundamental principles, and decline or discontinue the engagement if there are any present

Answer 22

Accountants need an ethical code as they have access to sensitive information - TRUE

Management threat is contained in FRC Ethical Standard only - TRUE

Auditors must identify any ethical threats of compliance to fundamental principles, and decline or discontinue the engagement if there are any present - FALSE

(3 - they must address with appropriate safeguards before any decline or discontinuation)

Question 23

In which TWO of the following engagements is there a significant threat to independence?

Being the audit engagement partner at X plc, a listed company for 8 years

Being the audit engagement partner at Y Ltd, a non-listed company for 7 years

Being the Engagement Quality control reviewer for Z Plc, a listed entity for 8 years

Being the audit engagement partner at P Ltd, a recently turned listed company, for four years and then agreeing to stay on for a further two years

Answer 23

Being the audit engagement partner at X plc, a listed company for 8 years

Being the Engagement Quality control reviewer for Z Plc, a listed entity for 8 years

Question 24

Which ONE of the following is correct in relation to the presumption of dependence for a listed client?

There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 15% of gross practice income

There is a presumption of dependence when annual assurance fee income from all services to the client will regularly exceed 10% of gross practice income

There is a presumption of dependence when total fees from non-audit services exceed 60% of the average audit fee over the last three years

There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 10% of gross practice income

Answer 24

There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 10% of gross practice income

(Exceeding 15% of gross practice income is for NON-LISTED clients. It must be for all services, not just assurance services. Non-audit service should not exceed 70% of the average audit fee for the last three years)

Question 25

For each of the following statements, select whether they are TRUE or FALSE in respect of audit procedures.

Physical inspection of tangible assets in use and agreeing it back to the non-current asset register tests completeness

Checking mathematical accuracy of records, such as adding up ledgers, is a Reperformance procedure

Observation of a procedure is weak as it only confirms the procedure is being performed when the assurance provider is present

Answer 25

Physical inspection of tangible assets in use and agreeing it back to the non-current asset register tests completeness - TRUE

Checking mathematical accuracy of records, such as adding up ledgers, is a Reperformance procedure - FALSE

Observation of a procedure is weak as it only confirms the procedure is being performed when the assurance provider is present - TRUE

(2 - Checking math accuracy is recalculation not reperformance)

(3 - Observation may not cover the procedure being performed throughout the year)

Question 25

Which THREE of the following statements about audit committees are correct?

At least 75% of the members must be non-executive directors

Audit committees make recommendations to the board in relation to the external auditor

Listed companies are required to have an audit committee

Audit committees verify the accuracy of the financial statements in an explicit opinion in the annual report

The head of Internal audit should report to the audit committee

Answer 25

Audit committees make recommendations to the board in relation to the external auditor

Listed companies are required to have an audit committee

The head of Internal audit should report to the audit committee

Question 26

Which TWO of the following are valid circumstances in which written representations may be required?

In the absence of valid invoices to support purchases

To avoid overruns on the audit fee

To support management’s judgement in relation to a specific assertion

To support inspection of board minutes indicating the intention to sell large amounts of land and buildings.

Answer 26

To support management’s judgement in relation to a specific assertion

To support inspection of board minutes indicating the intention to sell large amounts of land and buildings

(Written reps should not replace info that would normally be expected to see, such as invoices)

(Cost and time are not valid instances where written reps are accepted to replace audit evidence)

Question 27

Winkleman Ltd sells industrial ovens to restaurants, with a 60-day credit period on all sales.

Which TWO of the following substantive procedures will provide evidence over the existence of Winkleman’s trade receivables?

Discussion with the board over old debts not written off

Inspection of post year end bank statements for cash received

A positive receivables confirmation

Recalculation of the receivables collection period and compare to credit terms

Answer 27

Inspection of post year end bank statements for cash received

A positive receivables confirmation

(Discussions over bad debts not written off is VALUATION)

(Recalculation of the receivables collection period is VALUATION)

Question 28

For each of the following statements concerning ethical codes and independence, select whether they are true or false.

The audit team and the firm should be independent during the period of the engagement

The audit team and the firm should be independent until 2 years have elapsed after the termination of the engagement

The ICAEW uses a framework of principles

Answer 28

The audit team and the firm should be independent during the period of the engagement - TRUE

The audit team and the firm should be independent until 2 years have elapsed after the termination of the engagement - FALSE

The ICAEW uses a framework of principles - TRUE

READ THE MF QUESTION (framework of PRINCIPLES BLUD)