Week 2

Question 1

For a Corporations Act 2001 audit, the auditor has reporting obligations to?

Answer 1

management and the board of directors.

Question 2

The Corporations Act 2001 requires the auditor to report on certain matters only on an exception basis. This means that the auditor need only report particulars of any deficiency, failure or shortcoming in respect of these matters. Which of the following matters should not be reported on an exception basis?

Answer 2

Whether the financial report provides a true and fair view.

Question 3

How are the governing body’s and auditor’s responsibilities stated in the current auditor’s report for Governing body’s responsibility and Auditor’s responsibility?

Answer 3

Both explicitly

Question 4

When an auditor expresses an adverse opinion, the opinion paragraph should include?

Answer 4

a direct reference to a separate paragraph in the auditor’s report disclosing the basis for the opinion.

Question 5

The basic elements of the auditor’s standard report for a Corporations Act 2001 audit include all of the following except?

Answer 5

a statement that accounting estimates are reasonable, but that there will normally be differences between estimated and actual results.

Question 6

The information gap is:

Answer 6

the difference between what users believe is needed to make informed investment decisions and what is currently available to them.

Question 7

The auditor’s report now requires a description of key audit matters, which are?

Answer 7

the significant differences between what is disclosed in a financial report prepared in accordance with the financial reporting framework and what is necessary to provide a true and fair view.

Question 8

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to?

Answer 8

a separate qualification paragraph that discusses the basis for the opinion rendered.

Question 9

Which combination of the following three possibilities for improving the communication effectiveness has been adopted in the recently enhanced standard form auditor’s report?

I: Giving the auditor’s opinion on the financial report greater emphasis by placing it at the beginning of the auditor’s report.
II: Allowing for changing the presentation and positioning of generically-worded paragraphs explaining the respective responsibilities of management (or those charged with governance) and of the auditor to make them more useful.
III: The auditor providing additional information about key audit matters.

Answer 9

All of I, II and III.

Question 10

For the purposes of the approved auditing standards, what are the differences, if any, between the phrases ‘true and fair view’ and ‘presents fairly, in all material respects’?

Answer 10

The two phrases are equivalent.

Question 11

Your client has followed approved accounting standards but a note to the financial report indicates the early application of an accounting standard that has a pervasive effect on the financial report in advance of its effective date. The note details the reasons for this view. You, as the auditor, concur that this additional note disclosure is necessary to give a true and fair value. What type of opinion should you issue?

Answer 11

An unmodified opinion with an Emphasis of Matter.

Question 12

Which of the following statements is true for fair presentation frameworks? A fair presentation framework:

Answer 12

allows for circumstances where additional note disclosures beyond the reporting framework may be necessary and allows for circumstances where it may be necessary to depart from a requirement of a reporting framework to achieve fair presentation.

Question 13

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial report, the auditor would issue a(n)?

Answer 13

unmodified opinion.

Question 14

When a financial report is presented that is not in conformity with accounting standards, an auditor may issue

Answer 14

A qualified opinion but not a Disclaimer of opinion

Question 15

A solicitor limits a response concerning a litigation claim because the solicitor is unable to determine the likelihood of a favourable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of potential loss is material in relation to the client’s financial report considered as a whole?

Answer 15

Unmodified with an Emphasis of Matter paragraph.

Question 16

Muir Ltd is required to but does not wish to prepare and issue a statement of cash flows as part of its financial report. In these circumstances, the auditor’s report should include:

Answer 16

an adverse opinion stating that the financial report, taken as whole, is not fairly presented because of the omission of the required statement.

Question 17

When restrictions are imposed by the client that significantly limit the auditor’s ability to audit fixed assets (a material part of the balance sheet), the auditor generally should issue which of the following opinions?

Answer 17

Qualified.

Question 18

Your client, Sharpe Ltd, is being sued by one of its competitors for $40 million for an alleged patent infringement. Your client has assets of $80 million and a reported profit of $20 million. The client has disclosed the lawsuit in a note to the accounts along with a statement indicating that they intend to vigorously defend the suit and are confident of winning the suit. Your independent legal advice supports this view and you are satisfied with the details provided by the client in the notes to the accounts. What type of opinion should you express on the financial report of Sharpe Ltd?

Answer 18

An unmodified opinion with an Emphasis of Matter.

Question 19

An auditor was unable to obtain an audited financial report or other evidence supporting an entity’s investment in a foreign subsidiary considered material to the financial report. Between which of the following opinions should the entity’s auditor choose?

Answer 19

Qualified and disclaimer.

Question 20

Your client has followed approved accounting standards but a note to the financial report indicates that the application of certain standards results in the financial report being materially misstated. The note details the reasons for this view. You do not concur with this view. What type of opinion should you issue?

Answer 20

A qualified opinion or adverse opinion.

Question 21

Swift Ltd has disclosed the fact that they are being sued for $3 million. Swift Ltd reported a profit for the year of $300 million and has total assets of $75 million. You conclude that disclosure of the litigation is adequate. What type of opinion should you express on the financial report of Swift Ltd?

Answer 21

Unmodified opinion with an Emphasis of Matter.

Question 22

An auditor has been unable to obtain the audited financial report for the entity’s major foreign subsidiary due to civil unrest in that country. The appropriate auditor’s report is:

Answer 22

a qualified opinion or a disclaimer of opinion.

Question 23

Your audit client has not written inventory down to net realisable value in accordance with approved accounting standards. The write-down would reduce current assets by 8 per cent and net profit before income tax by 12 per cent. What type of auditor’s report should you issue?

Answer 23

A qualified opinion.

Question 24

An entity is facing significant litigation as a result of dumping oil in the ocean. This is adequately disclosed in the notes to the financial report. The appropriate auditor’s report is:

Answer 24

an unmodified opinion with an Emphasis of Matter paragraph.

Question 25

When a client will not make essential corporate minutes available to the auditor, the auditor’s report will probably contain a(n):

Answer 25

qualified opinion.

Question 26

Cassidy Ltd, a listed company, refuses to separately disclose directors’ fees of $2.5 million on the basis that they believe they are quantitatively immaterial. Profit for the last year was $980 million. The auditor should issue a(n):

Answer 26

qualified opinion.

Question 27

Richards Ltd has reported losses two years in a row and has a debt to total assets ratio of 0.90. In addition, a $5 million debenture is maturing next year and the company has not set aside any funds to repay the debt. The parent entity of Richards Ltd has decided to repay the debenture when it matures and provide sufficient funding to cover any additional losses that Richards Ltd might incur. Richards Ltd has not disclosed these arrangements in its financial report and the auditor is adamant that it should be brought to the shareholders’ attention. What type of opinion should the auditor express on the financial report of Richards Ltd?

Answer 27

Qualified opinion or adverse opinion.

Question 28

Coggin Ltd changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial report but is reasonably certain to have a substantial effect in later years. If the change is adequately disclosed in the notes to the financial report the auditor should issue a report with a(n):

Answer 28

unmodified opinion.

Question 29

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s disclosures concerning this matter are adequate, the auditor’s report may include:

Answer 29

neither a disclaimer of opinion or qualified opinion

Question 30

On 2 July 20X0 Fluro Paint Ltd received a notice from its primary suppliers that all wholesale prices would be increased by 10 per cent, to be effective immediately. On the basis of the notice Fluro Paint Ltd revalued its 30 June 20X0 inventory to reflect the higher costs. The details of the adjustment were disclosed in the notes to the financial report. The inventory adjustment was material. The auditor of the 30 June 20X0 financial report would issue:

Answer 30

a qualified opinion.

Question 31

Due to time and staff restrictions the auditor was unable to attend the inventory stocktake at a remote branch location for Outback Ltd. The inventory at this site accounted for 30 per cent of total assets. Alternative procedures were applied satisfactorily. The auditor should issue:

Answer 31

an unmodified opinion.

Question 32

The financial report of Charger Ltd indicates that there are going concern problems. After considering additional audit evidence, the auditor concludes that the client will not continue as a going concern during the next year. What type of audit opinion should the auditor express?

Answer 32

Adverse opinion.

Question 33

The auditor of Kennedy Ltd has serious doubts that the entity will continue as a going concern. There is adequate disclosure of this significant uncertainty in the notes to the financial report. The uncertainty is the result of a single factor affecting the client. What type of audit opinion should the auditor express?

Answer 33

Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 34

Juan Donald, an independent auditor, was engaged to perform an audit of the financial report of Pinnacle Ltd one month after its financial year had ended. Although the inventory count was not observed by Donald and accounts receivable were not confirmed by direct communication with debtors, Donald was able to gain satisfaction by applying alternative auditing procedures. Donald’s auditor’s report will probably contain:

Answer 34

an unmodified opinion.

Question 35

The financial report of Fast Dollar Ltd indicates that there may be some going concern problems. However, the auditor concludes, based on mitigating factors, that the client will most likely continue as a going concern during the next year. The mitigating factors are adequately disclosed in the accounts. What type of audit opinion should the auditor express?

Answer 35

Unmodified opinion.

Question 36

The directors of a listed company refuse to disclose directors’ remuneration of $400 000 on the basis that it is not material. Net profit after tax is $25 million and net assets are $100 million. The appropriate auditor’s report is:

Answer 36

a qualified opinion.

Question 37

Costello, as principal auditor for the consolidated financial report, finds that the audit of a major subsidiary is qualified by another auditor. Costello does not consider the qualification to be material relative to the consolidated financial report. What recognition, if any, must Costello make in his auditor’s report to the qualified report of the auditor of the subsidiary?

Answer 37

He need make no reference.

Question 38

At the end of the audit the auditor has two issues outstanding. The first is a disagreement with those charged with governance concerning the use of an inappropriate valuation method for inventory (LIFO). The second issue is significant uncertainty as to whether the entity will continue as a going concern, which is adequately disclosed in the notes to the accounts. What type of audit opinion should the auditor express?

Answer 38

Qualified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 39

Higgins Insurance Ltd is trading profitably at 30 June 20X0 as reflected in its financial report. On 24 July 20X0 there is a hailstorm in Sydney that creates unprecedented damage. Although Higgins had undertaken all the normal reinsurance processes, it is unlikely that they will be able to pay all claims and there is a high probability that the company will have to be wound up. The auditor believes that the financial report as at 30 June 20X0 is true and fair and that this natural disaster is adequately disclosed. The auditor should issue:

Answer 39

an adverse opinion.

Question 40

An entity operates in a highly regulated industry with special, legislated reporting requirements, with which it has complied. However, this has resulted in it not complying with the requirements of some Australian Accounting Standards. Note 1 to the accounts states that the accounts are prepared in conformity with both the special legislated reporting requirements and the Australian Accounting Standards. What type of audit opinion should be issued?

Answer 40

An unmodified opinion with regards the special legislation and a qualified opinion with regards to the departure from Australian Accounting Standards.

Question 41

If an entity’s external auditor expresses an unmodified opinion as a result of the audit of the entity’s financial report, readers of the auditor’s report can assume that:

Answer 41

all material disagreements between the entity and the external auditor about the application of accounting principles were resolved to the satisfaction of the auditor.

Question 42

Certain circumstances, while not affecting the auditor’s opinion on the financial report, may require the auditor to add an Emphasis of Matter paragraph to the report. These circumstances include all of the following except where:

Answer 42

there is a matter involving a significant uncertainty that is not adequately disclosed.

Question 43

An auditor would issue an adverse opinion if:

Answer 43

the financial report taken as a whole does not fairly present the financial condition and results of operations of the entity.

Question 44

When a client declines to include a statement of cash flows in its financial report, the auditor’s report will usually:

Answer 44

contain either a qualified or adverse opinion because of inadequate disclosure.

Question 45

In which of the following circumstances would an adverse opinion be appropriate?

Answer 45

The financial report is prepared on the going concern basis when it is not appropriate.

Question 46

When a contingency is resolved immediately subsequent to the issuance of a report that was modified with respect to the contingency, the auditor should:

Answer 46

take no action regarding the event.

Question 47

Under which of the following sets of circumstances might an auditor disclaim an opinion?

Answer 47

There are significant uncertainties affecting the financial report.

Question 48

Which of the following situations will not result in modification of the auditor’s report because of a scope limitation?

Answer 48

Reliance placed on the report of another auditor.

Question 49

When an audited financial report is presented in a client’s annual report containing other information, the auditor should:

Answer 49

read the other information to determine whether it is consistent with the audited financial report.

Question 50

When the audited financial report of the prior year is presented together with those of the current year, the continuing auditor’s report covers:

Answer 50

both years.

Question 51

When an audited financial report is presented in a document containing other information, the auditor:

Answer 51

should read the other information to consider whether it is inconsistent with the audited financial report.

Question 52

The auditor’s best course of action with respect to ‘other financial information’ included in an annual report containing the auditor’s report is to:

Answer 52

read and consider the manner of presentation of the ‘other financial information’.

Question 53

An auditor’s report on comparative financial reports should be dated as of the date of the:

Answer 53

issuance of the report.

Question 54

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing an audited financial report. If the auditor concludes that the financial report does not require revision (it is the other information which is inconsistent with the auditor’s knowledge) but the client refuses to revise or eliminate the material inconsistency, the auditor may:

Answer 54

revise the auditor’s report to include an Other Matter paragraph describing the material inconsistency.

Question 55

Information in the chairman’s address, accompanying the financial report in an entity’s annual report, is inconsistent with information contained in the audited financial report. The entity refuses to alter the chairman’s address. The appropriate auditor’s report is:

Answer 55

an unmodified opinion with an Other Matter paragraph.

Question 56

All of the following are true with respect to the auditor’s consideration of information other than the audited financial report that are included in a client’s annual report except:

Answer 56

the auditor must perform audit procedures on this other information.

Question 57

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing an audited financial report. If the auditor concludes that the financial report does require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may:

Answer 57

revise the auditor’s report to include an Emphasis of Matter paragraph describing the material inconsistency.

Question 58

Prince, an auditor, was engaged to audit the financial report of Randwick Company after its financial year had ended. Prince neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied concerning both after applying alternative procedures. ’Prince’s auditor’s report most likely contained a(n):

Answer 58

unmodified opinion.

Question 59

With respect to the auditor’s duty to determine that certain matters related to the conduct of the audit are communicated to the audit committee, the communication:

Answer 59

may be oral or written and may be made before or after issuing the auditor’s report.

Question 60

Which of the following statements is not true with regards to the auditor’s responsibility where a client entity decides to publish its audited financial report on its website.

Answer 60

The auditor should structure the engagement to audit the financial report published on the website as a separate audit engagement, have the client sign a separate engagement letter and undertake appropriate additional audit procedures.