T8 – Multiple choice questions

1. With regard to which of the following financial statement assertions may an auditor encounter particular difficulties in
obtaining sufficient evidence where internal controls are weak?

A. Ownership
B. Existence
C. Valuation
D. Completeness

2. The auditors of Three Co recently completed their interim audit for the year ending 31 July 2009. They confined their
work only to tests of control on accounting records to 31 March 2009 and concluded that controls were totally
unreliable.

What will be the nature of the work carried out when conducting the final audit of the company’s financial statements for
the year ending 31 July 2009?

A. Tests of control on the system and substantive procedures on transactions for the period from 1 April 2009 to
31 July 2009, plus a review of the financial statements.
B. Tests of control on the system for the period from 1 April 2009 to 31 July 2009, substantive procedures on the
statement of financial position as at 31 July 2009, plus a review of the financial statements.
C. Substantive procedures on transactions for the whole accounting period and on the statement of financial position
as at 31 July 2009, plus a review of the financial statements.
D. Substantive procedures on the statement of financial position as at 31 July 2009, plus a review of the financial
statements.

3. Which of the following would normally be retained on the current file maintained for a limited liability company audit
client?

A. Narrative notes describing the company’s accounting systems.

B. A copy of the company’s constitution.
C. A management representation letter.
D. A description of the company’s business and its operations.

4. Which of the following describes the auditor’s role when attending a client’s inventory count?

A. To count all of the inventory.

B. To observe the conduct of the inventory count.
C. To identify damaged and obsolete inventory.
D. To supervise the inventory counting teams.

5. The auditor of Four Co, a manufacturing company, has noted an increase in total sales value but a decrease in the
company’s gross profit percentage for 2009 as compared to the previous year.

Which of the following is consistent with, and adequately explains, the decrease?

A. Sales commission payable to the company’s sales force increased in relation to sales values as compared to 2008.
B. Sales volumes have decreased as compared to 2008.
C. During 2009, due to a scarcity of supply the company had to pay higher prices when purchasing components.
D. During 2009 a major component supplier withdrew the settlement discounts previously granted.

6. Which of the following should be included in an auditors’ report, when there has been a limitation on the auditors’
work in connection with a matter they consider material but not pervasive to the financial statements of a company?

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A. An ‘except for’ opinion.
B. A ‘disclaimer’ of opinion.
C. An adverse opinion.
D. None of the above.

7. Which of the following would provide the most persuasive evidence of a company’s ownership of a freehold office
building?

A. Inspection of the purchase documentation.

B. Inspection of recent expense invoices for extensive repairs to the building, paid for by the company.
C. Inspection of the title deeds to the building.
D. Inspection of a directors’ board minute confirming ownership of the building.

8. ‘Audit risk’ is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially
misstated.

Which of the following categories of risk can be controlled by the auditor?

Category of risk:

(1) Inherent risk

(2) Control risk
(3) Detection risk
(4) Sampling risk

A. 1 and 2 only
B. 1, 3 and 4
C. 2, 3 and 4
D. 3 and 4 only

9. Which audit working paper should provide satisfactory evidence that audit resources have been directed towards high
risk areas of an audit?

A. Systems narrative notes.

B. Systems flowcharts.
C. Audit attention points brought forward from the previous period.
D. The overall audit strategy documentation.

10. Which of the following should be facilitated by the standardization of substantive procedure working papers?

(1) Meeting of specified audit objectives.

(2) Communicating with the staff of the audit client.
(3) Delegation of audit work.
(4) Review of audit work.

A. 1 and 4 only
B. 1, 3 and 4
C. 2 and 3 only
D. 1, 2, 3 and 4

11. Which of the following strategies should give an auditor the STRONGEST assurance as to the existence of trade
receivables year-end balances in a company with weak internal controls over the sales and trade receivables function?

A. Carrying out a positive circularisation of receivable balances in respect of the year-end balances.
B. Carrying out a negative circularisation of receivables balances in respect of year-end balances.
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C. Confirming receivables balances by agreeing to sales invoices, authorized delivery notes and valid order.
D. Confirming receivables balances by verifying subsequent payments after the year end.

12. Which of the following financial indicators ratios on its own, provides the WEAKEST evidence of possible working
capital problems in a limited liability company?

A. Trade receivables collection period.

B. Quick (acid test) ratio.
C. Gross profit margin.
D. Trade payables payment period.

13. The auditor’s responsibility paragraph in an auditor’s report should describe an audit as including which of the
following:

(1) Reporting on whether the financial statements give a true and fair view.
(2) Reading other information contained in the annual report and considering whether it is consistent with the audited
financial statements.
(3) Evaluating the overall presentation of the financial statements.
(4) Evaluating the reasonableness of accounting estimates made by management.

A. 1, 2 and 3
B. 1 and 3 only
C. 2, 3 and 4
D. 3 and 4 only

14. Which of the following statements is TRUE with regard to an emphasis of matter paragraph included in a modified
auditor’s report?

A. The paragraph should be included before the Opinion paragraph.

B. The paragraph may refer to a matter other than those presented or disclosed in the financial statements that, in
the auditor’s opinion is relevant to users’ understanding of the audit.
C. The paragraph should ordinarily refer to the fact that the auditor’s opinion is modified in respect of the subject
matter.
D. The inclusion of the paragraph should not affect the auditor’s opinion on the financial statements.

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