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School of Accounting

ACCT3708 Auditing and Assurance Services
ACCT3718 Auditing and Assurance Services


Session 1 - 2010

1. Time allowed: 2 hours

2. Number of questions: The exam is divided into two parts.
PART A is worth 40 marks and consists of two written
answer questions. (Note that the questions are NOT of
equal value)
PART B consists of 16 multiple choice questions worth 1
mark each, in total 16 marks.

3. Total exam: 56 Marks (represents 56% of final assessment)

All questions are compulsory.
Each written question is to be answered in a separate examination book (ie. 2
examination books per student).


Question 1 (total 24 marks)

You are the auditor of Red Pages Ltd, a large listed company, for the year ended
31 December 2010. You expect to sign the Audit Report by 31 March 2011.
The companys main products are widely used and respected printed and online
telephone directories. The printed directory is distributed to all businesses and
households in Australia on an annual basis, for free. Access to the online
directory is also free of charge.

Red Pages Ltd derives its revenue from the sale of advertising space to
businesses which are named in its printed and online directories. Advertising
space in the online directory is sold for weekly, monthly and annual periods. The
following is an extract from the principle accounting policies note to the financial

Red Pages printed directory revenues are recognised on
delivery of the published printed directories to customers
premises. Revenue from online directories is recognised
over the life of the advertising agreements, on a straight
line basis. Unearned revenue is credited to the balance

Due to the popularity of the internet, fewer businesses and households rely on
the printed directory and revenue has been declining for the last 5 years.
Recently the rate of decline has accelerated and profitability is marginal.
Revenue for the online directory has also declined, although this is mostly
attributable to the recent Global Financial Crisis. Boggle Ltd, an internet search
engine and competitor of Red Pages Ltd has recently developed a new
accessory for mobile phones which will provide free telephone directory
information to mobile phone users.

You have been the auditor of Red Pages Ltd for several years and past audit
reports have all been unqualified. Nevertheless, in prior years there have been
difficulties in determining the delivery dates for printed directories and in 2010 a
contract was awarded to a new delivery service provider, in an attempt to
improve the process.

Key financial data follows:

$m $m
Sales 12.9 17.8
COGS 6.1 6.0

Current Assets
Inventories (note 1) 6.2 6.1
Trade and other receivables 2.6 1.8

Non-current assets
Property, plant and equipment 3.6 3.9

Current Liabilities
Payables and Borrowings 3.7 3.7
Unearned revenue 5.3 9.8

Non-Current Liabilities
Employee entitlements (note 2) 0.5 0.8

Note 1: Inventories consist of printed 2011 directories awaiting delivery and are
recorded at cost.
Note 2: Employee entitlements include provisions for annual and long service

Other information that has been obtained includes:
During the audit it was brought to your attention that software problems
resulted in a significant number of printing errors in the 2010 directory. A
number of customers have complained and several are taking legal action.
Legal advice suggests that the claims may be valid.
On 1 J anuary 2011 environmental legislation was enacted which will
require the company to collect and recycle disused and previous years
printed directories. This is likely to increase operating costs significantly.
On 20 J anuary 2011 Red Pages Ltd announced a business partnership
with Blue Pages Ltd, its largest online directory competitor. This
partnership is likely to significantly reduce future operating costs.

All of the above are deemed to be material.


1. From the available information describe four (4) significant audit risks. For
each risk you should also indicate the key account, assertion at risk, and
provide a specific appropriate test of detail to address each of the identified
[16 marks]

NOTE: You may wish to present your answer to this question in the
following format:

Explanation of risk
(1 mark each)

Account at risk
(1 mark each)

(1 mark each)

Audit Procedure
(1 mark each)

2. Outline the impact each of the two (2) subsequent events will likely have on
the financial statements and the audit report.
[4 marks]

3. Briefly outline two (2) factors that indicate that Red Pages Ltd may have a
going concern problem. J ustify you selection of factors.
[4 marks]

Question 2 (total 16 marks)


PART ONE (8 marks)

For each of the four independent situations described below, indicate the audit report
the auditor should issue and provide justification for your answer.

a. In the period after year end, and prior to issue of your audit opinion, your
client, a major retailer, has been successfully prosecuted for uncompetitive
behaviour which occurred during the accounting period. The matter is
highly damaging and costly to your client, and is estimated to cost $100m.
A subsequent events note has been included in the financial statements
and directors report.
[2 marks]

b. Your client has determined that the cash basis of accounting provides a
more faithful representation of its financial position than accrual accounting,
as it is a cash rich business. Based on your audit work you have
determined that the difference between cash and accrual accounting, if
adjusted, would significantly change the net assets and profit.
[2 marks]

c. A number of ratios shown in the 5 year statistical summary within your
clients annual report have been prepared on a basis which is inconsistent
with other information in the financial statements. You are happy with the
financial statements and Annual Report disclosures in all other respects.
[2 marks]

d. Your client has excluded a number of disclosures from its financial
statements as they are relatively minor. You agree with your client that they
relate to only minor matters and are unlikely to be of interest to the
shareholders, although some of them relate to directors remuneration.
[2 marks]

PART TWO (8 marks)

Items (i) through (iv) are examples of internal controls that you have documented for the
interest bearing liabilities and interest expense segment of your clients system.

i. Before interest expense is calculated, for an interest bearing liability, the
accountant confirms the interest rate with the financial institution that lent
the money, to ensure that the correct rate is used.
ii. After the interest expense has been calculated, the accountant reconciles
the interest expense account to the interest bearing liabilities sub-ledger, to
check that all interest bearing liabilities have an entry in the interest
expense account.
iii. Before the preparation of the year end trial balance, the accountant checks
that foreign currency loans are translated into Australian dollars at the
correct exchange rate.
iv. All ledger entries, for interest bearing liabilities, include the name of the
lender and the identity number from the loan contract.

For each item state:

a) The assertion that the control addresses
b) A test of control that would provide evidence that the control is effective
(note that inquiry of client personnel or investigation of policy and
procedures manuals is not a sufficient answer.)

You should present your answer in the format below.

Control Assertion
(1 mark)
Test of Control
(1 mark)



This question contains sixteen (16) multiple choice questions each worth one (1) mark.
A separate answer sheet is provided.
Carefully read the instructions as provided.
Indicate the most correct response in the spaces provided.
Please ensure you fil l in your Student Number and Student Name correctl y
on your answer sheet.
No marks are deducted for an incorrect response.

Question 1

When considering whether an auditor is independent, the relevant test in law is?
a. Whether an auditor is independent in mind.
b. Whether an auditor is perceived to be independent.
c. Would a reasonable person consider the auditor was independent in mind
and appearance.
d. The ruling in the Pacific Acceptance case.

Question 2

Which of the following characteristics should both an accountant and auditor possess?
a. Professional competence.
b. Integrity.
c. Confidentiality.
d. All of the above.

Question 3

a. Issues Australian Auditing Standards.
b. Is a government agency authorised by ASIC.
c. Is comprised only of the big 4 accountancy firms.
d. both a. and b.

Question 4

When considering whether to rely on the work performed by the internal audit
department of your client, as external auditor you need to consider the organisation
structure because:
a. The taxation structure of the business will impact your understanding of
your client.
b. The reporting line of internal audit is critical to the credibility assigned to that
work by the directors.
c. The competency of the internal audit staff is directly correlated with
organisation structure.
d. Internal audit can never be truly independent.

Question 5

The auditors negligence in the AWA case:
a. Was very significant as it lead to the development of a number of
comprehensive and specific audit standards in Australia.
b. Was attributable to a lack of auditor independence.
c. Was not the only negligent behaviour considered by the judge presiding
over the case.
d. Established the legal principle that it is difficult for third parties to sue

Question 6

When an auditor issues a modified audit opinion:
a. The opinion must be qualified.
b. The opinion must either be a qualified opinion, an adverse opinion or a
disclaimer of opinion.
c. The opinion may be either qualified or unqualified with an emphasis of
matter or other matter paragraphs.
d. It is a result of a change in the scope of the audit.

Question 7

Which of the following statements is true?
a. Where the auditor has relied on the work of another auditor this fact must
be mentioned in the audit opinion.
b. An auditor may rely on the work of others when considering the sufficiency
and appropriateness of audit evidence gathered.
c. The prime function performed by internal audit is to issue an opinion on the
truth and fairness of the clients internal controls.
d. When using the work of an expert, the competence of the expert is more
important than their independence.
Question 8

Which of the following statements are false?
a. Substantive tests must always be performed, unless testing of controls is
100% effective.
b. Tests of controls are ultimately for the benefit of the directors of the audit
client, as weaknesses discovered by the auditor are reported to them in the
management letter.
c. A combination of substantive and controls testing may be used in an audit
of inventory.
d. both a. and b.

Question 9

Which of the following assertions best reflects the risk of error in respect of debtors and
a. Valuation and allocation.
b. Completeness.
c. Cut-off.
d. Occurrence.

Question 10

Which of the following statements relating to the audit opinion are correct?:
a. Must be dated and signed by the auditor, even when it has been re-issued.
b. Must be addressed to the members of the company.
c. Must also refer to any matters, regardless of their nature, which the auditor
believes should be brought to the attention of the shareholders of the
d. All of the above.

Question 11

When a client processes a non-standard type of transaction in its IT system, the auditor
a. Reduce reliance on the effectiveness of controls.
b. Concentrate audit focus on this type of transaction.
c. Ensure generalised audit software (GAS) is used for sample selection.
d. Not seek to rely on application controls.

Question 12

In Australia, public sector audits have a broader scope than those conducted in the
private sector. Which of the following best explains the reason for this difference in
a. The public sector is non-profit making hence there is less emphasis on
auditors generating profits from audit engagements and more emphasis on
substantive audit testing.
b. Parliament is concerned with the economy, efficiency and effectiveness of
government departments, both state and federal.
c. The Auditor-General conducts performance and compliance audits only.
d. It is not possible to rely on internal controls in the public sector.

Question 13

Which of the following statements is true?
a. Business risk is a subset of audit risk.
b. True and fair means only compliance with the Auditing Standards.
c. It is never possible for an auditor to trust the audit client.
d. Auditor independence is compromised where an individual senior staff
member on the audit team spends longer than 5 years on a specific

Question 14

Which of the following internal control procedures will most likely detect the
understatement of inventory?
a. Physical access restrictions to the goods warehouse.
b. The condition of inventory is assessed regularly by the inventory controller.
c. Inventory write-offs must be approved by the inventory controller.
d. Stocktake procedures, whereby a sample of ledger records are matched to
the physical goods.

Question 15

Going concern is best described as:
a. A matter for both internal and external auditors.
b. A matter relating to the ability of a company to meet its total liabilities at
the current date.
c. An emphasis of matter.
d. A matter which both the auditor and client must consider, relating to a
companys future prospects.

Question 16

Audit committees:
a. Are an aspect of a companys corporate governance.
b. Focus on the financial statements only.
c. Are comprised exclusively of executive directors.
d. Assist the external auditor in respect of audit risk selection.