MyK Knowledge Checks

Question 1

Which THREE of the following statements form part of the generally accepted definition of “fair”, in the context of “a true and fair view”?

The information is free from discrimination and bias.

The accounts have been correctly extracted from the company’s books and records.

The information complies with generally accepted accounting practice.

The accounts reflect the commercial substance of the company’s underlying transactions.

Answer 1

The information is free from discrimination and bias

The information complies with generally accepted accounting practice

The accounts reflect the commercial substance of the company’s underlying transactions

Question 2

You have been approached by a prospective client to undertake their annual statutory external audit.

Put the following actions in their correct order according to the ICAEW Code of ethics.

Write to existing auditor to seek information that could influence your decision to accept the appointment.

Obtain written authority from prospective client to contact existing auditor.

Inform client of decision having considered other factors influencing your decision.

Write to existing auditor for a second time if they fail to respond, stating intention to accept engagement.

Review response from existing auditor.

Answer 2

Obtain written authority from prospective client to contact existing auditor - STEP 1

Write to existing auditor to seek information that could influence your decision to accept the appointment - STEP 2

Write to existing auditor for a second time if they fail to respond, stating intention to accept engagement - STEP 3

Review response from existing auditor - STEP 4

Inform client of decision having considered other factors influencing your decision - STEP 5

Question 3

Which of the following describes the meaning of ‘financial statement assertions’?

The assertions made by management that are embodied in the financial statements.

The assertions made by the auditor on the financial statements that are embodied in the audit report.

The assertions made by the auditor that are embodied in the financial statements.

The assertions made by management in the management representation letter.

Answer 3

The assertions made by management that are embodied in the financial statements

Question 4

Which of the following best describes random selection in audit testing?

Testing 100% of a population.

Testing all items in a population with a particular characteristic.

Testing items in a population that appear unusual or suspicious.

Testing less than 100% of a population where each item in the population has an equal chance of selection.

Answer 4

Testing less than 100% of a population where each item in the population has an equal chance of selection.

Question 5

Missing Co, a financial training college, has discovered that it has been charged for textbooks that it has never received.

Which of the following controls would have prevented this from happening?

Inspecting the condition of deliveries before unpacking

Matching purchase invoices with purchase orders

Matching purchase invoices with GRNs

Performing regular inventory counts

Answer 5

Matching purchase invoices with GRNs

Question 6

Hammers Ltd operates a number of control procedures in its sales system.

Assuming all controls operate effectively, which one of the following procedures will help to ensure that invoices are correctly and accurately prepared?

Sales orders are matched with despatch notes.

Invoices are matched with despatch notes.

Invoices are matched with sales orders.

Payment receipts are matched with invoices.

Answer 6

Invoices are matched with despatch notes

Question 7

Hill Ltd operates a number of controls over its payroll.

For the following three controls, select whether they are PREVENTATIVE or DETECTIVE controls.

All staff records are maintained by the human resources manager. Any changes in these records are promptly communicated to the payroll department.

Payroll costs are compared to budget on a monthly basis.

All employees who are paid weekly by cash, must show evidence of their identification prior to receiving their wages.

Answer 7

All staff records are maintained by the human resources manager. Any changes in these records are promptly communicated to the payroll department - PREVENTATIVE

Payroll costs are compared to budget on a monthly basis - DETECTIVE

All employees who are paid weekly by cash, must show evidence of their identification prior to receiving their wages - PREVENTATIVE

Question 8

The following are descriptions of internal controls in operation at Josh Ltd.

For each description select the type of control activity which it illustrates.

1. Payroll information is agreed to personnel files prior to processing.
2. Budgeted salaries are compared to actual salaries on a monthly basis.

Answer 8

1. Payroll information is agreed to personnel files prior to processing - RECONCILIATION
2. Budgeted salaries are compared to actual salaries on a monthly basis - VERIFICATION

Question 9

Maryland Ltd employs 150 employees and has very high annual staff turnover.

Which of the following controls would BEST ENSURE that only existing employees are paid and that leavers do not continue to be paid?

Staff records are maintained for each member of staff.

Staff complete work schedules, which they submit direct to the payroll department.

Monthly comparisons are made between staff records held by the human resources manager and the payroll office.

Staff are paid by direct transfers to their bank accounts.

Answer 9

Monthly comparisons are made between staff records held by the human resources manager and the payroll office.

Question 10

For each of the following forms of evidence select from 1 to 3 in order to rank them in terms of their reliability (where 1 is the most reliable and 3 is the least reliable).

Schedule of aged receivables obtained from the client.

Bank statement obtained from the client.

Bank statement obtained directly from the bank.

Answer 10

1 = Bank statement obtained directly from the bank.

2 = Bank statement obtained from the client.

3 = Schedule of aged receivables obtained from the client.

Question 11

With regards to tolerable error and sampling risk, select whether the following statements are true or false.

Tolerable error is the minimum error that the auditor would be willing to accept.

Tolerable error is used by management as a guide to the extent of errors they can make.

Sampling risk is the risk that the actual errors found in a sample will exceed the expected errors.

Answer 11

ALL FALSE

Tolerable error is the MAXIMUM acceptable error that an auditor (NOT MGMT) can accept and still conclude that the FS show a T&F view

Sampling risk is the risk that the sample chosen doesnt rep the population

Question 12

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

Test data involves the use of the assurance provider’s own software.

Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation.

Audit software helps auditors automate the process of examining financial information, ultimately improving efficiency of audit procedures.

Answer 12

Test data involves the use of the assurance provider’s own software - FALSE

Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation - TRUE
Audit software helps auditors automate the process of examining financial information, ultimately improving efficiency of audit procedures - TRUE

Question 13

Which TWO of the following documents assist in testing sales cut-off?

1. Sales orders
2. Despatch notes
3. Sales invoices
4. Remittance advices

Answer 13

2. Despatch notes
3. Sales invoices

Question 14

Which TWO of the following matters are management required to confirm in writing in a letter of representation?

1. That management are responsible for the preparation of the financial statements.
2. That management are responsible for protecting the interests of the shareholders.
3. That management are responsible for the design and implementation of internal control.
4. That the audit fee will be paid in full within three months of the signing of the audit report.
   Incorrect

Answer 14

1. That management are responsible for the preparation of the financial statements.
2. That management are responsible for the design and implementation of internal control.

Question 15

For each of the following statements in respect of management representations select whether they are true or false.

1. Management representation letters act as a substitute for other audit evidence.
2. Management representation letters contain confirmation that the effects of uncorrected misstatements are immaterial.
3. Management representation letters contain the statement that management has disclosed all relevant subsequent events to the auditors.

Answer 15

1. Management representation letters act as a substitute for other audit evidence - FALSE
2. Management representation letters contain confirmation that the effects of uncorrected misstatements are immaterial - TRUE
3. Management representation letters contain the statement that management has disclosed all relevant subsequent events to the auditors - TRUE

Question 16

Which of the following issues would be likely to be included in a management representation letter?

Completeness of liabilities

Completeness of trade accounts receivable

Existence of non-current assets

Accuracy of prepayments

Answer 16

Completeness of liabilities

(Knowledge of completeness of liabs is an area that rests with mgmt and other evidence may not be available)

Question 17

Who normally drafts and signs the management representation letter?

Auditor drafts and signs

Auditor drafts, senior management sign

Senior management draft and sign

Senior management draft, auditor signs

Answer 17

Auditor drafts, senior management sign

Question 18

For each of the following situations involving an auditor and his clients select the action the auditor should take: Accept with no safeguards / Accept with safeguards / Reject.

A client has offered the auditor an audit fee based on a percentage of reported profits.

An audit client has requested that the audit partner serve on the board of directors.

Answer 18

A client has offered the auditor an audit fee based on a percentage of reported profits - REJECT

An audit client has requested that the audit partner serve on the board of directors - REJECT ALSO

(The auditor must reject a proposition of contingent fees and also reject the offer to serve on the board of directors. Both are NOT ALLOWED)

Question 19

With regards to auditors’ working papers, select whether the following statements are true or false.

Working papers belong to the auditor.

Auditor prepare working papers on a voluntary basis.

There are no circumstances under which auditors’ working papers should be given to a third party without the permission of the client.

Answer 19

Working papers belong to the auditor - TRUE

Auditor prepare working papers on a voluntary basis - FALSE

There are no circumstances under which auditors’ working papers should be given to a third party without the permission of the client - FALSE

(Working papers belong to the auditor! They are not prepared on a voluntary basis, they are REQUIRED)

Question 20

Assurance providers need to take particular care in the steps taken where conflicts of interest arise.

For each of the following cases select whether they constitute a conflict of interest or not.

1. The assurance provider has been approached to provide audit services to a key competitor of an existing client.
2. The assurance provider has been asked to advise a company wishing to acquire a client company.
3. The assurance provider has been approached to carry out a review assignment on the interim financial statements of an existing client.

Answer 20

1. The assurance provider has been approached to provide audit services to a key competitor of an existing client - CONFLICT OF INTEREST
2. The assurance provider has been asked to advise a company wishing to acquire a client company - CONFLICT OF INTEREST
3. The assurance provider has been approached to carry out a review assignment on the interim financial statements of an existing client - NOT A CONFLICT OF INTEREST