Week 5

Question 1

Which of the following audit procedures is most likely to identify doubts about the appropriateness of the going concern assumption?

Answer 1

Reviewing compliance with the terms of loan agreements.

Question 2

Why is the auditor concerned about the appropriateness of the going concern assumption?

Answer 2

It may motivate management to misstate the financial report.
The auditor needs to audit the solvency statement in the directors’ declaration
It may affect the appropriateness of the financial report.

Question 3

Which of the following conditions or events would most likely cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

Answer 3

Cash flows from operating activities are negative.

Question 4

The auditor’s report covers the solvency statement in the:

Answer 4

directors’ declaration.

Question 5

The relevant period that the auditor needs to consider when assessing the appropriateness of the going concern assumption is:

Answer 5

up to the expected date of the date of the auditor’s report on the following financial year.

Question 6

Which of the following conditions or events would be considered a mitigating factor in a going concern assessment?

Answer 6

Disposal of land held for redevelopment that was no longer required.
Obtaining a loan from a new financial institution.
Reducing the current year’s dividend from the previous year’s amount.

Question 7

An independent auditor finds that Baron Pty Ltd occupies office space, at no charge, in an office building owned by a shareholder of Baron Pty Ltd. This finding indicates the existence of:

Answer 7

related-party transactions.

Question 8

For a reporting entity that has participated in related-party transactions that are material, disclosure in the financial report should include:

Answer 8

the nature of the relationship and the terms and manner of settlement.

Question 9

An example of a transaction that may be indicative of the existence of related parties is:

Answer 9

exchanging property for similar property in a non-monetary transaction.

Question 10

Which of the audit procedures listed below would be least likely to disclose the existence of related-party transactions of a client during the period under audit?

Answer 10

Confirming large purchases and sales transactions with the major suppliers and/or customers involved.

Question 11

Which of the following is not a characteristic of whistleblowing?

Answer 11

The disclosure is made to earn a reward.

Question 12

The auditor should assess the risk that errors and fraud may cause the financial report to be materially misstated and, based on that assessment:

Answer 12

design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial report.

Question 13

An auditor finds evidence that warehouse staff are fraudulently claiming overtime. The auditor should:

Answer 13

report the matter to management immediately.

Question 14

If an illegal act is discovered during the audit of a publicly-held company, the auditor should

Answer 14

report the act to high-level personnel within the client’s organisation.

Question 15

Earnings management includes:

Answer 15

Intentional violations of accounting standards that are individually immaterial, but have the effect of increasing profit materially in aggregate.
Inappropriate revenue recognition.
‘big bath’ charges that make poor results look even worse.

Question 16

Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud?

Answer 16

The auditor must plan the audit so as to have a reasonable expectation of discovering material fraud.

Question 17

ASA 240 (ISA 240) provides that the primary day-to-day responsibility for prevention of fraud rests with:

Answer 17

management.

Question 18

Which of the following situations would be defined as fraud under the auditing standards?

Answer 18

Misappropriation of assets.

Question 19

If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, the auditor should:

Answer 19

consult with legal counsel as to what other action, if any, should be taken.

Question 20

If, as a result of auditing procedures, an auditor believes that a client may have committed illegal acts, which of the following actions should be taken immediately by the auditor?

Answer 20

Inquire of the client’s management and consult with the client’s legal counsel and/or other specialists, as necessary, to obtain an understanding of the nature of the acts and their possible effects on the financial report.

Question 21

Which of the following factors would most likely increase an auditor’s concern about the risk of fraudulent financial reporting?

Answer 21

Inability to generate cash flows from operations while reporting substantial earnings growth.

Question 22

In general, material frauds perpetrated by which of the following people are most difficult to detect?

Answer 22

Financial controller.

Question 23

The auditor is most likely to presume that a high risk of a fraud exists if:

Answer 23

inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.

Question 24

When the auditor concludes, based on information obtained and, if necessary, consultation with legal advisers, that an illegal act has or is likely to have occurred, the auditor should:

Answer 24

consider the effect on the financial report as well as the implications for other aspects of the audit.

Question 25

With respect to illegal acts, the auditor’s responsibility is to:

Answer 25

design the audit to provide reasonable assurance of detecting illegal acts that are material to the financial report.

Question 26

The primary factor that distinguishes error from fraud is:

Answer 26

whether the underlying cause of a misstatement is intentional or unintentional.

Question 27

An auditor discovers a likely fraud during an audit, but concludes that the effect of the fraud is not sufficiently material to affect the auditor’s opinion. The auditor should:

Answer 27

disclose the fraud to the appropriate level of the client’s management.

Question 28

The auditor can respond to an increased risk of fraud by taking all of the following actions except:

Answer 28

increasing acceptable audit risk.

Question 29

Which of the following situations does not represent an opportunity to commit fraud?

Answer 29

The auditor’s relationship with management is strained.

Question 30

Which of the following approaches should be part of an auditor’s planning of the audit engagement?

Answer 30

Plan to search for fraud or errors that would have a material effect on the financial report.

Question 31

Your audit client, Red Roses Ltd, has a new management incentive scheme in place, with bonuses calculated on the basis of the increase in net profit over the previous year. The basis of the bonus will remain the same for the next three years. Your client has had a very poor year and there is no way this year that it will be able to meet its budget or last year’s net profit. Which of the following represents a high inherent risk for this year?

Answer 31

Next year’s expenses taken up this year.

Question 32

Which of the following statements is true?

Answer 32

Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.

Question 33

Some account balances, such as those for foreign currency transactions, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as:

Answer 33

inherent risk.

Question 34

Which of the following inventory items is likely to have high inherent risk?

Answer 34

Internet computer software.

Question 35

Which of the following actions cannot be taken by auditors to reduce audit risk?

Answer 35

Reduce the level of inherent risk.