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Auditing > Week 1 > Flashcards

Week 1 Flashcards

1
Q

What are the 5 elements to assurance engagement?

A 
Three party relationship
Underlying subject matter 
Suitable criteria 
Sufficient appropriate evidence 
Written assurance report
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2
Q

An audit establishes the conformity of assertions with specified criteria. In an audit of a financial report, the criteria by which financial report assertions are judged are?

A

The applicable accounting standards.

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3
Q

Who is the responsible party for the adequacy of the disclosure in the financial report and accompanying footnotes?

A

The entity’s Board of Directors.

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4
Q

At what levels can assurance be provided under the assurance services framework?

A

Reasonable assurance and limited assurance.

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5
Q

Independent auditors are referred to as ‘independent’ because?

A

They are not employees of the entity being audited.

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6
Q

The highest level of assurance is provided by?

A

An audit

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7
Q

Which of the following can be the underlying subject matter of the audit?

A

The financial report of a company.

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8
Q

To which assurance engagements does the Framework for Assurance Engagements apply?

A

Audits of historical financial information.
Reviews of historical financial information.
Assurance engagements other than audits or reviews of historical financial information.

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9
Q

The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations and cash flows is applied within the framework of?

A

The agreed reporting framework.

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10
Q

To which type of assurance engagement does the umbrella standard ASAE 3000 (ISAE 3000) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ not apply?

A

A review of a half-yearly financial report.

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11
Q

Independent auditors perform audits on the financial reports of public companies. This type of auditing can best be described as?

A

A discipline that assures financial information presented by management.

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12
Q

An audit of the financial report of Campbell Ltd, an Australian listed company, is being conducted by an external auditor. The external auditor is expected to?

A

Express an opinion as to whether the financial report is prepared in accordance with an applicable financial reporting framework.

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13
Q

The essence of a financial report audit is to?

A

Determine whether the client’s financial reports are fairly stated.

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14
Q

The independent auditor adds credibility to the client’s financial report by?

A

Attaching an auditor’s opinion to the client’s financial report.

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15
Q

Financial report auditing can best be described as:

A

A discipline that attests to the results of accounting and other functional operations and data.

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16
Q

Which of the following is not one of the fundamental principles underlying the objective of an audit?

A

Client satisfaction.

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17
Q

Which of the following statements is not true concerning assurance services?

A

Unlike audit engagements, an engagement to perform assurance services does not require the auditor to consider information reliability.

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18
Q

Which is not an attribute of an external auditor?

A

Client advocacy.

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19
Q

Which of the following is not one of the fundamental principles of professional ethics underlying an audit?

A

Scepticism

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20
Q

What are the 5 fundamental principles of professional ethics for auditors?

A 
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
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21
Q

What are the fundamental principles underlying the objective of an audit?

A 
Knowledge
Responsibility
Quality control
Rigour and scepticism
professional judgement
evidence
documentation
communication
association
reporting
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22
Q

What is not one of the fundamental principles of professional ethics underlying an audit?

A

Knowledge

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23
Q

The primary responsibility for the adequacy of disclosures in the financial report of a publicly held company rests with?

A

Those charged with the governance of the company.

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24
Q

The accuracy of information included in notes that accompany the audited financial report of a company whose shares are traded on a stock exchange is the primary responsibility of?

A

those charged with the governance of the company

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25
Q

The value of an assurance service lies in its ability to?

A

improve information’s relevance and faithful representation.

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26
Q

In the context of agency theory, information asymmetry refers to the idea that?

A

management has more information about the entity’s true financial position than do the absentee owners.

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27
Q

The public has turned to auditors to provide assurance services primarily because?

A

the integrity and objectivity of auditors increases the public’s trust that the underlying information is not materially misstated.

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28
Q

Which of the following best describes why an independent auditor is asked to express an opinion on the true and fair presentation of a financial report?

A

The opinion of an independent party is needed because a company may not be objective with respect to its own financial report.

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29
Q

Which of the following is considered to be an enhancing characteristic of financial information that has been audited?

A

Comparability.

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30
Q

Which of the following best describes the reason why an independent auditor reports on financial statements?

A

Different interests may exist between the company preparing the statements and the parties using the statements.

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31
Q

Below are a number of potential additional benefits arising from an assurance service:

I. recommendations to improve the efficiency of operations.
II. a positive influence on the behaviour of people whose activities are being assured.
III. recommendations to improve the effectiveness of operations.

Which combination of these is identified in the book as additional benefits?

A

All three

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32
Q

When an auditor expresses an opinion on the financial report, the auditor’s responsibilities extend to:

A

whether the entity’s results are fairly presented in the financial report in accordance with approved accounting standards.

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33
Q

It is very hard for auditors to remain independent of their clients, given that they are paid by their clients. Below are a number of possible mechanisms:

I. ethical rules.
II. approved auditing standards.
III. audit committees.

Which of these mechanisms can help the auditor maintain their independence?

A

All three

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34
Q

What has been the major recent proposal by the IAASB to reduce the expectations gap?

A

Amendments to the Auditor’s Report.

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35
Q

In which area is there a gap between society’s expectations of auditors and the perceived performance of auditors?

A

The detection and reporting of earnings management and fraud.

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36
Q

Below are a number of potential areas where a gap between society’s expectations of auditors and the perceived performance of auditors has been identified:

I. compliance with laws and regulations.
II. the detection and reporting of earnings management and fraud.
III. ability to communicate different levels of assurance in the auditor’s report.

Which combination of these has been identified as an expectations gap?

A

II and III only

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37
Q

The performance gap part of the expectations gap, as defined by Porter, is a combination of which two components?

A

Deficient standards and deficient performance.

38
Q

Who establishes Australian auditing standards?

A

Australian Auditing and Assurance Standards Board.

39
Q

Who is responsible for developing and approving international auditing and assurance standards?

A

The International Auditing and Assurance Standards Board.

40
Q

Assurance services would include which of the following?

A

Providing an opinion concerning the accuracy of statements made on a client’s web site.

41
Q

Under the Corporations Act 2001, if a company’s financial report, when prepared in accordance with accounting standards, would not otherwise give a true and fair view?

A

the directors are required to add such information and explanations in the financial report so as to give a true and fair view.

42
Q

Approved auditing standards prescribe?

A

The basic principles and essential procedures of the audit together with related general guidance with guidance on procedural matters or on entity- or industry-specific issues contained in Guidance statements.

43
Q

What is the general character of the work conducted in performing a forensic audit?

A

Detecting or deterring fraudulent activity.

44
Q

Forensic audits include all of the following except?

A

Manufacturers’ claims about product quality.

45
Q

Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of economy, efficiency and:

A

effectiveness.

46
Q

Below are different types of audits:

I. compliance audit.
II. financial report audit.
III. internal audit.
IV. performance audit.

Which combination of these types of audits can be collectively integrated and described as a comprehensive audit?

A

I, II and IV only.

47
Q

Which of the following statements best explains why the auditing profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?

A

A requirement for a profession is to establish ethical standards that stress a responsibility to the public, clients and colleagues.

48
Q

Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly?

A

Companies Auditors and Liquidators Disciplinary Board.

49
Q

Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board?

A

Financial Reporting Council.

50
Q

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) are intended to be applied to?

A

all audits of companies incorporated under the Corporations Act 2001.

51
Q

Which of the following bodies monitors the operation of the Australian Accounting Standards Board?

A

Financial Reporting Council.

52
Q

To become a registered company auditor, a person must be?

A

A fit and proper person.
A member of one of the accounting bodies.
Ordinarily resident in Australia.

53
Q

The types of actions by members of accounting bodies that may result in disciplinary action being taken by the member’s accounting body include:

A

If the member is found guilty of a fraud.
If the member practises while bankrupt or insolvent.
If the member continues practising despite being declared of unsound mind.

54
Q

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) contain?

A

The effective date of the standard.

55
Q

An auditor of a company finds that there are rare and exceptional circumstances where they are unable to comply with a relevant requirement in an auditing standard. They are, however, able to perform appropriate alternative audit procedures. To whom do they have to report or document these circumstances?

A

The auditor is required to document the circumstances in the audit working papers.

56
Q

Who is responsible for assessing whether company auditors meet the required competency standards for registration?

A

Australian Securities and Investments Commission.

57
Q

T or F
The Australian Securities and Investments Commission is a member of the International Forum of Independent Audit Regulators.

A

True

58
Q

Which of the following is not a standard-setting board or committee of the International Federation of Accountants (IFAC)?

A

International Accounting Standards Board (IASB).

59
Q

Membership of the International Auditing and Assurance Standards Board (IAASB) consists of?

A

International audit firms.
International Federation of Accountants (IFAC) member bodies.
Non-auditor representatives.

60
Q

Which of the following types of companies can only be used by an audit firm with the consent of the National Council of Chartered Accountants Australia and New Zealand?

A

Practice company

61
Q

Which accounting body in Australia was established under Royal Charter?

A

Chartered Accountants Australia and New Zealand.

62
Q

The largest accounting organisation in Australia is?

A

CPA Australia.

63
Q

Which of the following are elements of an audit firm’s quality control that should be considered in establishing its quality control policies and procedures?
Personnel management
Monitoring
Engagement performance

A

All three

64
Q

The objective of quality control dictates that an audit firm should establish policies and procedures for professional development that provide reasonable assurance that all entry-level personnel:

A

have the knowledge required to enable them to fulfil the responsibilities assigned.

65
Q

A firm of independent auditors must establish and follow explicit quality control policies and procedures because these standards?

A

give reasonable assurance that the firm as a whole will conform to the auditing standards.

66
Q

In pursuing its quality control objectives with respect to acceptance of a client, an audit firm is not likely to:

A

review the personnel practices of the proposed client.

67
Q

The mandatory continuing professional education (CPE) requirement for members of Chartered Accountants Australia and New Zealand is:

A

120 CPE hours every three years.

68
Q

Within the context of quality control, the primary purpose of continuing professional development and training activities is to enable an audit firm to provide personnel with:

A

knowledge required to fulfil assigned responsibilities.

69
Q

An auditor who is approached by their accounting body to undergo a quality control audit must:

A

obtain the client’s permission to disclose information to the investigators prior to giving them any information.

70
Q

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

A

minimise the likelihood of association with clients whose management lacks integrity.

71
Q

In pursuing the audit firm’s quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm’s clients. Which quality control objective would this be most likely to satisfy?

A

Independence

72
Q

A basic objective of an audit firm is to provide professional services in conformance with professional standards. Reasonable assurance of achieving this basic objective is provided through?

A

A system of quality control.

73
Q

A basic objective of an audit firm is to provide professional services in conformance with professional standards. Reasonable assurance of achieving this basic objective is provided through?

A

a system of quality control.

74
Q

An auditor’s duty of care to a client would most likely be breached if the auditor failed to?

A

comply with all relevant auditing standards.

75
Q

Due professional care does not require?

A

appointment of the auditor by the shareholders.

76
Q

Common law requires that the auditor?

A

Performs their work with due care.

77
Q

When performing an audit, an auditor would most likely be considered negligent if they failed to?

A

Warn the client of any known internal control weaknesses.

78
Q

Big Ltd wished to acquire the ordinary shares of Small Pty Ltd and engaged Albert & Associates to audit the financial report of Small Pty Ltd. Albert & Associates failed to discover a significant liability when performing the audit. In a common law action against Albert & Associates, Big Ltd, at a minimum, must prove?

A

Negligence on the part of Albert & Associates.

79
Q

The court found that Roberts & Associates had performed a negligent audit of Pinnacle Ltd, but the plaintiff did not receive damages because the court found insufficient proof of causation. Causation means that?

A

The auditor’s failure to perform a proper audit caused the damages.

80
Q

The Pacific Acceptance case established that:

A

auditors have a duty to closely supervise and review the work of inexperienced audit staff.

81
Q

To which of the following parties does the auditor owe a duty of care under contract?

A

The company itself.

82
Q

The AWA case established that?

A

auditors are only liable for the proportion of damages attributable to their actions.

83
Q

Contributory negligence?

A

will result in an apportionment of damages arising from the plaintiff’s loss between the defendant and the plaintiff.

84
Q

Cases that have allowed the auditor to use the defence of contributory negligence include:

A

AWA

85
Q

ABC Ltd (ABC) engaged the accounting firm of Ace & King to perform its annual audit. Ace amp; King performed the audit in a competent, non-negligent manner and billed ABC for $30 000, the agreed fee. Shortly after delivery of the audited financial report, Sam Lloyd, the assistant controller, disappeared, taking with him $40 000 of ABC’s funds. It was then discovered that Sam had been engaged in a highly sophisticated, novel defalcation scheme during the past year. He had previously embezzled $50 000 of ABC’s funds. ABC has refused to pay the auditor’s fee and is seeking to recover the $90 000 that was stolen by Sam. Which of the following is correct?

A

The auditor is entitled to collect the audit fee and is not liable for $90 000.

86
Q

In the Caparo case, the court held that the auditor owes a duty of care to?

A

the shareholders as a body, but not individual shareholders or third parties.

87
Q

An auditor can be sued for damages under which of the following Acts?

A

ASIC Act 2001.

88
Q

Privity letters are issued by auditors to:

A

establish proximity and foreseeability.

89
Q

Simpson & Associates issued an unmodified auditor’s opinion on the financial report of Ridge Ltd (Ridge). Simpson & Associates did not detect material misstatements in the financial report as a result of negligence in the performance of the audit. Based upon the financial report, Clark purchased shares in Ridge. Shortly afterwards, Ridge became insolvent, causing the price of the shares to decline drastically. Clark has commenced legal action against Simpson amp; Associates for damages. Simpson & Associates’ best defence to such an action would be that:

A

there is no proof of proximity.

90
Q

A claim for a breach of duty of care might arise against an auditor if?

A

a bank made a loss due to a loan made to the company based on figures in an audited financial report commissioned by the bank.

91
Q

Harry & Joseph rendered an unmodified auditor’s opinion on the financial report of a company that sold shares in a public offering. Based on a false statement in the financial report, Harry & Joseph is being sued by an investor who purchased shares in this public offering. Which of the following represents a viable defence?

A

The investor did not actually rely upon the false statement.

92
Q

The CLERP 9 reforms now provide for limitation of auditor’s liability through:

A

A statutory cap
Proportionate liability.
Incorporation.

Auditing (11 decks)

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