Mock Questions Flashcards
Poppy LLP performed an audit on Anna Ltd. During the work Poppy LLP decided not to circularise banks and ran out of time to audit Trade Receivables. Subsequent to the year end Anna Ltd went into liquidation and their bank sued Poppy LLP for negligence.
Did they have grounds to do this?
It depends if Poppy LLP knew that the bank would rely on financial statements and the bank suffered a financial loss.
Duty of care needs to be established with the bank for it to be successful. Usually only special relationships.
An audit firm has a client which has fees of £50,000 out of the total £250,000 income for the firm. What is the threat and what should be done?
Threat of self interest
Decline the work.
What is the threshold for the % ones clients fee can be?
15% max
What is the principle of control when a stock count is performed by 2 members of staff from the internal audit department?
Segregation of duties
Control or lack of control?
At the monthly board meetings a copy of the account are handed out to all directors.
Lack of control.
Control would be that they are checked by all directors.
Reperform a bank reconciliation and agree reconciling items to supporting documents.
What is the assertion?
Valuation
Is it a inherent, control or detection risk that a company sells high end fashion clothes?
Inherent because it is to do with the nature of the business.
Flowers Ltd loaned Bulb Limited £1000, John Smith is a Director of both businesses.
If there revenue is £1,000,000, is this material?
Yes because it is material by nature because it is an intercompany transactions.
Jethro is the audit manager for new client Tull Plc. He has made enquiries of the financial controllers regarding a customer account balance of £32,000 that has been unpaid for 12 months.
“I doubt we will receive a penny from this customer, the last I heard they had filed for bankruptcy. We have not entered a provision as the directors want to show a high profit this year”
What is the best course of action?
Raise the issue at the closing meeting with the directors
Identify whether test data or audit software would be the CAAT used for the procedure below.
Sort sales ledger balances to identify the 20 highest year end balances to test at the year end.
Test data
Identify whether test data or audit software would be the CAAT used for the procedures below.
Entering hours worked by employees to ensure the payroll software is correctly calculating gross pay.
Audit software
Is an engagement for a qualified accountant to prepare financial statements on behalf of a company a example of an assurance engagement?
No as it is preparing financial statements not auditing them
True or false
The external auditor can rely on internal controls of a company, once they have been fully documented.
False they need to be documented and tested
Audit software is usually used to assist in what?
Substantive procedures of the audit
Two components of the internal control system in an organisation are the control environment and the risk assessment _______?
Process
An event organiser provides a discount to customers purchasing tickets two months in advance. Is this a strength or a weakness?
Strength
Cash from on the day ticket sales is collected twice every day at 12 noon and when the event closes by a security guard. Is this a strength or control weakness?
Weakness
Employees scan their ID card when arriving and leaving to record hours worked. Is this a sufficient control?
No because someone could scan someone else’s card.
All audit procedure sould be designed to ensure the auditor obtains appropriate and ______ evidence.
Sufficient
The year- end inventory check is undertaken by internal audit at some locations, is a control risk.
True or false
False it is an audit risk as relying on internal audit.
The company purchases new vehicles for its management team at the year end of its financial year if cash balances are good.
Is this a control or audit risk?
Control risk due to large purchases at the year end leading to errors.
During the final review of the audit at Relax Ltd, a chain of coffee shops, you discover that an
inventory count was not undertaken at a branch that was opened earlier than planned This branch
was not in the original audit plan but was not identified as a problem by the auditor in charge as it
was not material.
Identify the audit opinion that should be given.
Modified because Although the item is identified as not material, the fact that it is a new branch should be brought
to the attention of the shareholders as there is always risk in new operations. A modified report
should be issued with an emphasis of matter paragraph.
The external auditors responsibility is to express an opinion on whether the financial statements are prepared in accordance with an applicable financial reporting framework
True or false
True
The sampling approach whereby population is divided into two or more subsets which have familiar characteristics is what type of sampling
Stratified
Tracing till records the corresponding entries in the cashbook is a test for understatement overstatement or both
Understatement only
The Susceptibility of an assertion Two and a statement that could be material either individually or when aggregated with other misstatements before consideration of any related controls is known as inheritance risk true or false
True
Management of the audited entity routinely reviews exception report of unusual high-value transactions does this make control risk higher or lower
Control risk is lowered because they are routinely checked
Performance materiality is used at the planning stage of external audit to determine which items to test true or false
True
The external auditor is required to form an opinion on whether the audited entity has kept adequate accounting records. True or false
True
One of the objective of the IAASB is to set auditing and assurance standards which must be adopted worldwide
True or false
False
A disclaimer of liability is implemented via …
The audit report
The external auditor needs to produce the information to defend himself in legal proceedings.
Does this require the clients permission?
No
When a raw materials purchase invoice is received the account clerk checks it against the purchase order and then passes the invoice for payment
Is this enough to rely on controls
No
The director of Ennis Ltd have refused to make an allowance against a material amount due from Glam Ltd. They have fully explained their reasoning for this in a note to the financial statements. Your firm is of the opinion that none of the amount due is recoverable.
What type of audit opinion do you give?
Qualified opinion
