Audit Test Bank

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Chapter 01 Key
1. Which of the following is not an element of an assurance engagement?

A. Three-party relationship.
B. Approved assurance standards.
C. Suitable criteria.
D. A written assurance report.
Chapter - Chapter 01 #1
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 1.1 Understand the framework for assurance engagements and the structure of assurance standards and pronouncements.
Section: The framework for assurance engagements and the structure of assurance standards and pronouncements
2. 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 ethical rules of conduct.
B. Australian Auditing Standards.
C. listing rules of the Australian Securities and Investments Commission.
D. applicable accounting standards.
Difficulty: Easy
Est Time: < 1 min
3. Who is the responsible party for the adequacy of the disclosure in the financial report and accompanying
footnotes?
A. Auditor in charge of fieldwork.
B. Management of the entity.
C. Auditor who signs the auditor's report.
D. Audit clerk who assists in preparing the report and footnotes.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 13.1 Understand the nature and significance of the auditor’s reporting obligations.
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4. At what levels can assurance be provided under the assurance services framework?
A. Reasonable assurance and limited assurance.
B. High assurance and reasonable assurance.
C. Assurance can be provided on a continuum from 0% to 100%.
D. Assurance can be provided on a continuum from absolute to limited.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 16.1 Appreciate the framework of standards under which assurance services are currently offered, and how specific standards relate to different
types of assurance services.
5. Independent auditors are referred to as 'independent' because:

A. their offices are not at the entity's place of business.
B. they are not employees of the entity being audited.
C. they are paid by parties outside of the audited entity.
D. they report to users outside of the audited entity.
Difficulty: Easy
Est Time: < 1 min
6. The highest level of assurance is provided by:

A. compiling financial reports.
B. agreed-upon procedures.
C. review.
D. audit.
Difficulty: Easy
Est Time: < 1 min

7. Which of the following is a necessary precondition for a practitioner to undertake an assurance engagement
to
examine and report on an entity's internal control over financial reporting?
A. Management presents its written assertion about the effectiveness of internal control.
B. The practitioner anticipates relying on the entity's internal control in a financial report audit.
C. Management agrees not to present the practitioner's report in a general-use document to shareholders.
D. The practitioner is a continuing auditor who previously has audited the entity's financial report.
Difficulty: Medium
Est Time: 1–3 mins
Learning Objective: 16.6 Understand the characteristics of engagements involving the assurance of reports on internal controls, and appreciate the assurance
provider’s responsibilities in such engagements.
8. To which assurance engagements does the Framework for Assurance Engagements apply?
A. Audits of historical financial information.
B. Reviews of historical financial information.
C. Assurance engagements other than audits or reviews of historical financial information.
D. All of the given answers are correct.
Difficulty: Medium
9. 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. Australian Auditing Standards that include the concept of materiality.
B. quality control.
C. the agreed reporting framework.
D. the auditor's assessment of the audited entity's level of control risk.
Difficulty: Medium

10. 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 performance audit on a government department.
B. A review of a half-yearly financial report.
C. A limited assurance report on the effectiveness of internal control.
D. A limited assurance engagement on prospective financial information.

Difficulty: Medium
11. Which of the following can be the subject matter of the audit?
A. The financial report of a company.
B. The Australian accounting standards.
C. The Australian auditing standards.
D. The auditor's report.

Difficulty: Easy
Est Time: < 1 min
Learning Objective: 1.2 Define auditing and appreciate the fundamental principles underlying an audit.
Section: Auditing—definition and fundamental principles
12. 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.
B. an activity whose purpose is to search for irregularities.
C. a regulatory function that prevents the issuance of improper financial information.
D. a professional activity that measures and communicates financial and business data.

Difficulty: Easy
Est Time: < 1 min

13. 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 the attractiveness of Campbell for investment purposes.
B. express an opinion as to whether the financial report is prepared in accordance with an applicable
financial reporting framework.
C. make a 100% examination of Campbell's records.
D. certify the correctness of Campbell's financial report.

Difficulty: Easy
14. The essence of a financial report audit is to:

A. examine individual transactions so that the auditor may certify as to their validity.
B. detect fraud.
C. assure the consistent application of correct accounting procedures.
D. determine whether the client's financial reports are fairly stated.

Difficulty: Easy
Est Time: < 1 min
15. The independent auditor adds credibility to the client's financial report by:
A. testifying under oath about client financial information.
B. attaching an auditor's opinion to the client's financial report.
C. maintaining a clear-cut distinction between management's representations and the auditor's representations.
D. stating in the auditor's communication of internal-control-related matters that the audit was made in
accordance with Australian auditing standards.

Difficulty: Easy

16. Financial report auditing can best be described as:

A. a regulatory function that prevents the issuance of improper financial information.
B. a professional activity that measures and communicates financial and business data.
C. a discipline that attests to the results of accounting and other functional operations and data.
D. a branch of accounting.

Difficulty: Easy
17. Which of the following statements is not true concerning assurance services?
A. Assurance services focus on improving the quality of information, or its context, for decision makers.
B. The growth in assurance services has been driven in part by users' demands for more relevant and
reliable information.
C. Auditing services can be viewed as a subset of assurance services.
D. Unlike audit engagements, an engagement to perform assurance services does not require the auditor to
consider information reliability.

Difficulty: Medium
18. Which of the following is not an attribute of an external auditor?

A. Client advocacy.
B. Integrity.
C. Competence with regards to subject matter.
D. Objectivity.

Difficulty: Medium
Est Time: < 1 min

19. Which of the following is not one of the fundamental principles of professional ethics underlying an audit?
A. Confidentiality.
B. Scepticism.
C. Integrity.
D. Objectivity.

Difficulty: Medium
20. Which of the following is not one of the fundamental principles of professional ethics underlying an audit?
A. Objectivity.
B. Integrity.
C. Knowledge.
D. Confidentiality.

Difficulty: Medium
21. Which of the following is not one of the fundamental principles underlying the objective of an audit?
A. Knowledge.
B. Communication.
C. Evidence.
D. Client satisfaction.

Difficulty: Medium
22. Which of the following is not one of the fundamental principles underlying the objective of an audit?
A. Knowledge.
B. Client satisfaction.
C. Evidence.
D. Documentation.

Difficulty: Medium

23. The primary responsibility for the adequacy of disclosures in the financial report of a publicly held company
rests with the:
A. management of the company.
B. partner assigned to the audit engagement.
C. Securities and Exchange Commission.
D. auditor in charge of the fieldwork.

Difficulty: Easy
Est Time: < 1 min
Learning Objective: 1.3 Appreciate the attributes of accounting information.
Section: Attributes of accounting information
24. 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. the independent auditor.
B. the stock exchange officials.
C. the Securities and Exchange Commission.
D. the company's management.

Difficulty: Easy
Est Time: < 1 min
25. Which of the following is not considered to be a value added to financial information that has been audited?
A. Comparability.
B. Relevance.
C. Reliability.
D. Periodicity.

Difficulty: Medium

26. The value of an assurance service lies in its ability to:

A. improve information relevance and reliability.
B. report on the assurance process.
C. improve the consistency of information.
D. provide a professional service that is valued by the responsible party.

Difficulty: Easy
Learning Objective: 1.4 Understand the reasons giving rise to demand for assurance and appreciate the relationships between the auditor, the client and the public.
Section: Demand for assurance and the auditor–client–public relationship
27. In the context of agency theory, information asymmetry refers to the idea that:
A. information can vary in its reliability.
B. information can vary in its relevance.
C. management has more information about the entity's true financial position than do the absentee owners.
D. management will not act in the best interests of the absentee owners.

Difficulty: Easy
28. The public has turned to auditors to provide assurance services primarily because:
A. there is a need to develop new revenue streams for accounting firms.
B. the integrity and objectivity of auditors increases the public's trust that the underlying information
is not materially misstated.
C. auditors have been proactive in identifying new types of assurance services to market to customers.
D. audits do not provide reliable information for decision makers.

Difficulty: Easy

29. 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. It is management's responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial report.
B. It is difficult to prepare a financial report that fairly presents a company's financial position and
changes in cash flows without the expertise of an independent auditor.
C. It is a customary courtesy that all shareholders of a company receive an independent report on
management's stewardship in managing the affairs of the business.
D. The opinion of an independent party is needed because a company may not be objective with respect
to its own financial report.

Difficulty: Easy
30. Which of the following would not be included in a recommendation by the assurance provider in regards to
the
efficiency and effectiveness of operations?
A. An explanation of the problem.
B. Suggested possible improvements in performance.
C. A statement that the assurance provider has reasonable assurance that they have identified all material
matters with regards to efficiency and effectiveness that are of interest to management.
D. Recommendation of investigating specific areas of the entity's business processes.

Difficulty: Medium
31. Which of the following best describes the reason why an independent auditor reports on financial
statements?
A. A management fraud may exist and it is more likely to be detected by independent auditors.
B. Different interests may exist between the company preparing the statements and the parties
using the statements.
C. A misstatement of account balances may exist and is generally corrected as the result of the
independent auditor's work.
D. A poorly designed internal control system may be in place.

Difficulty: Medium

32. 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. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Difficulty: Medium
33. When an auditor expresses an opinion on the financial report, the auditor's responsibilities extend to:
A. an ongoing responsibility for the entity's solvency in accordance with the requirements of the
Corporations Act 2001.
B. the underlying wisdom of the management's decisions.
C. active participation in the implementation of advice given.
D. whether the entity's results are fairly presented in the financial report in accordance with approved
accounting standards.

Difficulty: Medium
34. 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. auditing and other professional standards.
III. audit committees.
Which of these mechanisms can help the auditor maintain their independence?
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Difficulty: Medium

35. What best describes the concept of risk assessment that currently underpins the auditing standards?
A. The risk that the financial report is misstated as a result of weaknesses in internal control.
B. The risk that the financial report is misstated because of fraud.
C. Developing client acceptance and continuance practices that minimise the likelihood of lawsuits against the
auditor.
D. Whether management has systems in place to evaluate and effectively manage the entity's business risks.

Difficulty: Easy
Learning Objective: 1.5 Appreciate the evolution of the audit function.
Section: The evolution of the audit function
36. Which of the following was first in the evolution of auditing approaches?
A. Business risk approach.
B. Transactions cycle approach.
C. Statement of financial position approach.
D. Financial risk approach.

Difficulty: Easy
Est Time: < 1 min
Learning Objective: 1.5 Appreciate the evolution of the audit function.
Section: The evolution of the audit function
37. In which area is there a gap between society's expectations of auditors and the perceived performance of
auditors?
A. Compliance with laws and regulations.
B. The detection and reporting of earnings management and fraud.
C. Fair presentation of the financial report.
D. All of the given answers are correct .

Difficulty: Easy
Learning Objective: 1.6 Explain the concept of the expectation gap, especially in the areas of auditor’s report messages, corporate failures, fraud and communicating
different levels of assurance.
Section: The expectation gap

38. 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. the messages contained in the auditor's report.
Which combination of these has been identified as an expectations gap?

A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Difficulty: Medium
Learning Objective: 1.6 Explain the concept of the expectation gap, especially in the areas of auditor’s report messages, corporate failures, fraud and communicating
different levels of assurance.
Section: The expectation gap
39. Who establishes Australian auditing standards?

A. Australian Auditing and Assurance Standards Board.
B. Australian Accounting Standards Board.
C. Australian Securities and Investments Commission.
D. The professional bodies together (CPA Australia, The Institute of Chartered Accountants in Australia
and the National Institute of Accountants).

Difficulty: Easy
Est Time: < 1 min
Learning Objective: 1.7 Appreciate the role of auditing standards and audit requirements contained in the Corporations Act 2001.
Section: The role of auditing standards and audit requirements contained in the Corporations Act 2001
40. Assurance services would include which of the following?

A. Working with a client to develop a more efficient method of processing financial transactions.
B. Preparing a report representing a client's position during a tax audit.
C. Assisting a client in identifying potential sources of capital for acquisitions.
D. Providing an opinion concerning the accuracy of statements made on a client's web site.

Difficulty: Easy

41. 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 auditors are required to add such information and explanations in the financial report so
as to give a true and fair view.
B. the directors are required to add such information and explanations in the financial report so
as to give a true and fair view.
C. the directors should refer to this situation in their director's declaration.
D. no additional information should be added to the financial report.

Difficulty: Medium
42.
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 must report these circumstances to either management or the audit committee and
obtain their agreement that the alternative procedures are appropriate.
B. If the auditor can use appropriate alternative audit procedures, no reporting or documentation required.
C. The auditor is required to document the circumstances in the auditor's report.
D. The auditor is required to document the circumstances in the audit working papers.

Difficulty: Medium
43. Which of the statements is true with regards the basic principles and essential procedures contained in the
auditing standards?
A. The auditor may depart from basic principles in order to achieve a more efficient audit.
B. There should be no departure from basic principles and essential procedures.
C.
There should be no departure from basic principles and essential procedures should be undertaken
in all except the rare circumstances where it is determined that the audit objective can be achieved
more effectively with alternative procedures.
D. There should be no departure from essential procedures and basic principles should be adhered
to in all but the rare circumstances where they hinder audit efficiency.

Difficulty: Medium

44. What is the general character of the work conducted in performing a forensic audit?
A. Detecting or deterring fraudulent activity.
B. Providing assurance that the financial report is not materially misstated.
C. Identifying the causes of an entity's financial difficulties.
D. Offering an opinion on the reliability of the specific assertions made by management.

Difficulty: Easy
Learning Objective: 1.8 Obtain an overview of other applications of the assurance function, including compliance auditing, performance auditing, comprehensive
auditing, internal auditing and forensic auditing, as well as of providing assurance on subject matter other than historical financial information.
Section: Other applications of the assurance function
45. Forensic audits include all of the following except:

A. Manufacturers' claims about product quality.
B. Criminal investigations.
C. Matrimonial disputes.
D. Employee fraud.

Difficulty: Easy
46. 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. evaluation.
B. effectiveness.
C. compliance.
D. accuracy.

Difficulty: Easy

47. 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 III only.
B. I, II and IV only.
C. I, III and IV only.
D. II, III and IV only.

Difficulty: Medium

Chapter 02 Key
1. 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. Ethical standards that emphasise excellence in performance over material rewards establish a
reputation for competence and character.
B. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
C. A distinguishing mark of a profession is its acceptance of responsibility to the public.
D. A requirement for a profession is to establish ethical standards that stress primarily a responsibility
to clients and colleagues.
Difficulty: Easy
Learning Objective: 2.1 Identify the attributes of professional status and describe to what extent they exist in public accounting.
Section: Professional status of the auditor
2. Which of the following bodies is able to impose penalties on auditors who have failed to carry out their
duties properly?
A. Financial Reporting Council.
B. Companies Auditors and Liquidators Disciplinary Board.
C. Auditing and Assurance Standards Board.
D. All of the options listed here are correct.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 2.2 Describe the regulation of auditing and its subject matter.
Section: Regulation of auditing and of the subject matter of audits
3. Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board?
A. Financial Reporting Council.
B. Companies Auditors and Liquidators Disciplinary Board.
C. Australian Securities Exchange.
Difficulty: Easy
Est Time: < 1 min

4. The Australian auditing standards issued by the Australian Auditing and Assurance Standards Board
(AUASB)
are intended to be applied to:
A. all audit, review, assurance and related engagements conducted by external firms.
B. all audits of entities listed on the Australian Securities Exchange.
C. all audits of companies incorporated under the Corporations Act 2001.
D. all audit, review, assurance and related engagements where the entity has more than five shareholders.
Difficulty: Easy
5. Which of the following bodies monitors the operation of the Australian Accounting Standards Board?
A. Australian Securities Exchange.
B. Financial Reporting Council.
C. Australian Securities and Investments Commission.
D. Auditing and Assurance Standards Board.
Difficulty: Easy
Est Time: < 1 min
6. Which of the following statements is correct?

A. ASIC is a member of the International Forum of Independent Audit Regulators.
B. International auditing standards are mandatory for all auditors.
C. The FRC is a member of IFAC.
D. Membership of the International Auditing and Assurance Standards Board is restricted to members
of the Forum of Firms.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 2.3 Explain the impacts of internationalisation on auditing.
Section: Internationalisation of auditing

7. Which of the following types of companies can only be used by an audit firm with the consent of the
National Council
of the Institute of Chartered Accountants in Australia?
A. Nominee company.
B. Service company.
C. Practice company.
Difficulty: Easy
Learning Objective: 2.4 Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal
structure of an audit firm.
Section: Profile of the auditing profession and of audit firms
8. 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 Engagement
Monitoring
management performance
A.
Yes Yes No
B.
Yes Yes Yes
C.
Yes No Yes
D.
No Yes Yes
Difficulty: Medium
Learning Objective: 2.5 Identify the elements of quality control within audit firms, and explain practice monitoring programs.
Section: Quality control

9. The objective of quality control dictates that a public accounting firm should establish policies and
procedures for
professional development which provide reasonable assurance that all entry-level personnel:
A. prepare working papers that are standardised in form and content.
B. have the knowledge required to enable them to fulfil responsibilities assigned.
C. advance within the organisation.
D. develop specialties in specific areas of public accounting.
Difficulty: Easy
10. A firm of independent auditors must establish and follow explicit quality control policies and procedures
because
these standards:
A. are necessary to meet increasing requirements of auditors' liability insurers.
B. give reasonable assurance that the firm as a whole will conform to the auditing standards.
C. include formal filing of records of such policies and procedures.
D. are required by ASIC for auditors of all entities.

Difficulty: Medium
11. In pursuing its quality control objectives with respect to acceptance of a client, an audit firm is not likely to:
A. make inquiries of the proposed client's legal adviser.
B. review financial reports of the proposed client.
C. make inquiries of previous auditors.
D. review the personnel practices of the proposed client.

Difficulty: Easy

12. The mandatory continuing professional education (CPE) requirement for members of The Institute of
Chartered
Accountants in Australia is:
A. 120 CPE hours every year.
B. 120 CPE hours every three years.
C. 60 CPE hours every three years.
D. 60 CPE hours every year.

Difficulty: Easy
13. With respect to the quality control element concerning hiring, which policy will provide reasonable
assurance that
those employed possess the appropriate characteristics to enable them to work competently?
A. Establish qualifications and guidelines for evaluating potential hirees at each professional level.
B. Establish guidelines and requirements for the firm's professional development program and
communicate them to personnel.
C. Establish qualifications deemed necessary for the various levels of responsibility.
D. Assign responsibility for making advancement decisions.

Difficulty: Medium
14. An auditor who is approached by the ICAA, CPA Australia or IPA to undergo a quality control audit must:
A. provide audit files to the investigators without delay.
B. obtain the client's permission to disclose information to the investigators prior to giving them any
information.
C. co-operate in every way without delay.
D. disclose to the investigators any potential quality control problems that the member is aware of.

Difficulty: Easy

15. The primary purpose of establishing quality control policies and procedures for deciding whether to accept
a new client is to:
A. enable the audit firm to attest to the reliability of the client.
B. satisfy the audit firm's duty to the public concerning the acceptance of new clients.
C. minimise the likelihood of association with clients whose management lacks integrity.
D. anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

Difficulty: Easy
16.
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. Professional relationship.
B. Supervision.
C. Independence.
D. Advancement.

Difficulty: Easy
17. A basic objective of an audit firm is to provide professional services to conform with professional
standards.
Reasonable assurance of achieving this basic objective is provided through:
A. continuing professional education.
B. a system of quality control.
C. compliance with ASX listing requirements.
D. a system of peer review.

Difficulty: Easy

18. Which of the following statements concerning auditing in the public sector is correct?
A. The Auditor-General only conducts financial report audits in the public sector.
B. Private sector auditors may conduct audits in the public sector as a delegate of the Auditor-General.
C. The Auditor-General is appointed by the government.
D. None of the options listed here are correct.

Difficulty: Medium
Learning Objective: 2.6 Explain how auditing in the public sector fits into the Australian auditing and assurance environment.
Section: Auditing in the public sector

Chapter 03 Key
1. Which of the following statements is correct?

A. Ethics is concerned primarily with the well being of your client.
B. Ethics is principally an attitude of mind.
C. Ethics is principally concerned with having a set of rules that must be complied with.
D. Ethics is concerned with creating an environment that allows entities to make an equitable profit.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 3.1 Explain the nature and importance of professional ethics, and describe the three main categories of ethical theory.
Section: Professional ethics and ethical theory
2. Ethics require:
A. knowledge of moral principles.
B. skill in applying moral principles.
C. the development of virtues within the individual.
Difficulty: Easy
Est Time: < 1 min
3. Which of the following is an example of deontological ethics?

A. Egoism.
B. Utilitarianism.
C. The principle of beneficence.
D. Virtues.
Difficulty: Medium
Est Time: < 1 min

4. Which of the following is an example of utilitarianism?

A. Greatest benefit for the individual.
B. Do unto others as you would have them do unto you.
C. Greatest benefit for the greatest number.
D. Equal rights for all.
Difficulty: Easy
Est Time: < 1 min
5. With respect to records in an auditor's possession:

A. copies of client records incorporated into audit work papers must be returned to the client upon request.
B. work sheets, in lieu of a general ledger, belong to the auditor and need not be furnished to the client upon
request.
C. an extensive analysis of inventory prepared by the client at the auditor's request are work papers which
belong to the auditor and need not be furnished to the client upon request.
D. the auditor who retains copies of client records must return the original records upon request.
Difficulty: Medium
Learning Objective: 3.2 Outline the essence of the accounting bodies’ code of ethics.
Section: Accounting bodies code of ethics
6. Which of the following is not an ethical attribute of an external auditor?

A. Independence.
B. Client advocacy.
C. Objectivity.
D. Concern for the public interest.
Difficulty: Easy

7. To help ensure adherence to the principles of independence, integrity, objectivity, confidentiality and
professional behaviour,
an audit firm requires written representations from professional personnel. Ordinarily, these would be
required:
A. only on commencement of employment.
B. each year for all professional staff.
C. each time a new client is obtained.
D. only once the staff member has qualified as a member of CPA Australia, the IPA or the ICAA.
Difficulty: Medium
8. Competence as an independent auditor includes all of the following except:

A. having the technical qualifications to perform an engagement.
B. possessing the ability to supervise and evaluate the quality of staff work.
C. guaranteeing the accuracy of the work performed.
D. doing additional research or consulting others.
Difficulty: Easy
9. APES 110:
A. prohibits tendering for an audit currently done by another audit firm.
B. encourages but does not require auditors to refrain from unwanted solicitation.
C. requires auditors to act in the public interest.
D. prohibits offers of employment to employees of another audit firm without notice.
Difficulty: Medium

10. Auditors are required to complete engagements competently. Competency embraces all of the following
except:
A. an unbiased mental attitude.
B. the technical qualifications of the audit staff.
C. the capacity to exercise judgment.
D. the ability to research subject matter and consult with others.

Difficulty: Easy
11.
If the resignation of an auditor of a public company is to take place outside the company's annual general meeting,
the Australian Securities and Investments Commission (ASIC) must provide consent. This consent will only be
given in exceptional circumstances. A circumstance that would not be considered 'exceptional' is when:
A. the company is not audited by the auditor of the parent company.

B. a negligence claim has been filed against the auditor by the company.
C. the auditor loses his/her independence.
D. the auditor's health is failing.

Difficulty: Medium
12.
Sky Ltd has a year-end of 30 June 20X0. The audit work was completed and the auditor's report signed on 30 September 20X0. On 15 October,
the company called for tenders from prospective auditors for the 20X1 year. The tender process indicated that new auditors should be appointed.
The current auditors wrote a resignation letter dated 20 October that was received by the company on 25 October. This letter advised that the
auditor's resignation was effective from 30 September 20X0. The resignation letter was also forwarded to ASIC, requesting its confirmation of the
resignation. ASIC approved the resignation in a letter dated 30 November. There are no other exceptional circumstances.
The effective date of the resignation is:
A. 30 September 20X0.
B. 20 October 20X0.
C. 25 October 20X0.
D. 30 November 20X0.

Difficulty: Medium

13.
East & Co. is a small firm with four partners. The audit partner, being the only registered company auditor in the firm, retired from the firm on 15
August 20X0. On this date the partner wrote a letter to ASIC requesting permission to resign as auditor of all of his clients. ASIC gave its consent
to the resignation effective from 30 November 20X0. The auditor of the audit clients in the period from 15 August to 30 November is:
A. the retiring partner.

B. East & Co. Chartered Accountants.
C. Australian National Audit Office as nominee.
D. the next most senior partner of East & Co.

Difficulty: Hard
14. Which of the following is not an ethical decision-making model?

A. Laura Nash model.
B. American Accounting Association model.
C. Mary Guy model.
D. IFAC model.

Difficulty: Easy
Learning Objective: 3.3 Apply sound ethical decision-making techniques.
Section: Applying ethics
15. Which of the following best describes the role of corporate governance?
A. Management decides which accounting principles are the most appropriate.
B. Shareholders vote to decide who should be members of the board of directors.
C. An independent board of directors holds the management team accountable to shareholders and
other constituents.
D. Management is compensated based on the company's profitability.

Difficulty: Easy
Learning Objective: 3.4 Explain the concept of corporate governance.
Section: Corporate governance

16. The audit committee of a publicly held company should be made up of:
A. representatives of the major shareholders.
B. the audit partner, the chief financial officer, the legal counsel and at least one outsider.
C. representatives from the client's management, investors, suppliers and customers.
D. members of the board of directors who are not employees.

Difficulty: Medium
17. Which of the following statements would be considered a function of an audit committee?
A. Overseeing the application of appropriate accounting policies and procedures to ensure appropriate
disclosure.
B. Appointing the external auditor.
C. Preparing the financial report for audit.
D. Making decisions regarding the purchase of company assets.

Difficulty: Medium
18. Corporate governance procedures generally involve policies concerning which of the following matters?
A. Compensation arrangements for senior management and non-executive directors.
B. Ensuring the board of directors is composed of persons with an appropriate mix of skills and experience.
C. Nomination of and communication with the external auditors.

Difficulty: Easy
19. Which of the following is not one of the key areas covered by the OECD Principles of Corporate
Governance?
A. Protection of shareholder's rights.
B. Responsibilities of the board.
C. Disclosure and transparency.
D. Responsibilities of the auditor.

Difficulty: Medium

20. Which of the following is not a characteristic of whistleblowing?

A. The disclosure is made in good faith.
B. The disclosure is made in the public interest.
C. The disclosure is made to earn a reward.
D. The whistleblower holds a reasonable belief that disclosure will allow stakeholders to determine
that there has been misconduct.

Difficulty: Medium
Learning Objective: 3.5 Explain the auditor’s role as a whistleblower.
Section: Whistleblowing
21. Independence implies that the auditor:

A. be impartial with respect to the client.
B. must adopt the attitude of a detective during the audit.
C. has an obligation solely to third parties.
D. cannot provide any other professional services to an audit client.

Difficulty: Easy
Section: Auditor independence
22. An auditor is independent if they are:

A. intelligent.
B. independent in fact and in appearance.
C. independent in fact and honest.
D. logical and consistent.

Difficulty: Easy
23. Which of the following most completely describes auditor independence?

A. Performing an audit from the viewpoint of the public.
B. Avoiding the appearance of an interest in the affairs of an audit client.
C. Performing the audit with integrity and objectivity.
D. Accepting the responsibility of acting professionally.

Difficulty: Medium

24. Which of the following is a correct statement with respect to a listed company?
A. The Australian Securities and Investments Commission does not have to be given notice of the
removal of an auditor.
B. An auditor of a public company does not have to have the approval of the Australian Securities
and Investments Commission to resign.
C. An auditor of a public company must be appointed within three months of incorporation.
D. Once the auditor is re-appointed at the first annual general meeting, it is not necessary for the
auditor to be re-appointed each following year.

Difficulty: Medium
25. Which of the following statements is not true?

A. The auditor has a right of access to all books and records at all reasonable times.
B. The auditor must report all situations where inadequate records are being kept.
C. The auditor has a right to attend and be heard at all board meetings.
D. The auditor must review other information attached to the financial report to ensure consistency
with the financial report.

Difficulty: Medium
26. To emphasise auditor independence from management, many entities follow the practice of:
A. appointing a partner of the audit firm conducting the audit to the entity's audit committee.
B. having the auditor report to an audit committee of external members of the board of directors.
C. requesting that a representative of the auditor be on hand at the annual general meeting.
D. establishing a policy of discouraging social contact between employees of the entity and the staff of the
auditor.

Difficulty: Medium

27. Tegan Walker is about to begin a recurring annual audit engagement. As the continuing auditor, her
independence
would ordinarily be considered to be impaired if the previous year's audit fee:
A. was only partially paid and the balance is being disputed.
B. has not been paid and will not be paid for at least twelve months.
C. has not been paid and the client has filed voluntary bankruptcy.
D. was settled by litigation.

Difficulty: Medium
28. It would not be appropriate for the auditor to initiate discussion with the audit committee concerning:
A. the extent to which the work of internal auditors will influence the scope of the audit.
B. details of the procedures that the auditor intends to apply.
C. the extent to which change in the company's organisation will influence the scope of the audit.
D. details of potential problems that the auditor believes might cause a modified opinion.

Difficulty: Medium
29.
Phillippa Thompson was offered the engagement to audit Stump Ltd for the year ended 30 June 20X2. She had
served as a director of Stump Ltd until 30 June 20X0 and her spouse currently owns 1000 of the 10 000 outstanding
shares of Stump Ltd. She should:
A. accept the engagement.

B. let her partner accept and conduct the engagement.
C. refuse the engagement because she had served as a director.
D. refuse the engagement because of her spouse's share ownership.

Difficulty: Medium

30. Under APES 110, a member may not:

A. be a member of the same club as any directors.
B. perform bookkeeping services for an audit client.
C. perform advisory services for an audit client.
D. have any joint, closely held investment with a principal shareholder of an audit client during the
period of the audit engagement.

Difficulty: Hard
31. The ethical rules state that independence of the external audit firm is considered to be impaired if:
A. the audit firm provides management advisory services to the client.
B. the audit partner purchases the client's product at normal retail prices.
C. the audit firm has served as the external auditor for many years.
D. a near relative of one of the partners is the beneficial owner of shares forming a material part of
the share capital of the client.

Difficulty: Medium
32. An auditor strives to achieve independence in appearance to:

A. maintain public confidence in the auditor.
B. maintain an unbiased mental attitude.
C. comply with the Corporations Act 2001.
D. become independent in fact.

Difficulty: Easy

33. One of the partners in your audit firm holds one per cent of the shares in an audit client. This is not material
to
the partner's wealth. This is a breach of:
A. APES 110.
B. the Corporations Act 2001.
C. both APES 110 and the Corporations Act 2001.
D. neither APES 110 nor the Corporations Act 2001.

Difficulty: Easy
34. Which of the following circumstances would not be considered by ASIC to be 'exceptional' for them to
allow the
auditor of a public company to resign outside of the company's annual general meeting?
A. The company is not audited by the auditor of the parent company.
B. A negligence claim has been filed against the auditor by the company.
C. The auditor loses his/her independence.
D. The auditor's health is failing.

Difficulty: Medium
35.
Johnson & Associates has audited the financial report of Wood Pty Ltd for several years and had always been paid promptly for services rendered.
Last year's audit invoices have not been paid because Wood Pty Ltd is experiencing cash flow difficulties and the current year's audit is scheduled
to commence in one week. With respect to the past due audit fees, Johnson & Associates should:
A. perform the scheduled audit and allow Wood Pty Ltd to pay when the cash flow difficulties are alleviated.
B. perform the scheduled audit only after arranging a definite payment schedule and securing notes
signed by Wood Pty Ltd.
C. inform Wood Pty Ltd's management that the past due audit fees may be considered an impairment
of auditor independence.
D. inform Wood Pty Ltd's management that the past due audit fees may be considered a loan on which
interest must be imputed for financial report purposes.

Difficulty: Medium

36. In which of the following instances would the independence of the auditor most likely not be considered to
be impaired?
A. He or she has been retained as the auditor of a charitable organisation in which the spouse of the
auditor serves as treasurer.
B. He or she has been retained as the auditor of a company in which the auditor's investment club
owns a 10 per cent interest.
C. He or she has been retained as the auditor of a large manufacturing company to which the
auditor has a $6000 loan.
D. He or she has been retained as the auditor of a company from which the auditor purchased their
latest motor vehicle at normal list price.

Difficulty: Medium
37. APES 110 would be violated if an auditor accepted a fee for services and the fee was:
A. fixed by a public authority.
B. based on a price quotation submitted in competitive bidding.
C. based on time spent at standard charge rates.
D. payable after a specified finding was attained in a review of a financial report.

Difficulty: Easy
Learning Objective: 3.6 Explain the concept and importance of auditor independence.
Section: Fee determination and obtaining clients
38. The profession's ethical standards most likely are violated when an auditor represents that specific
management
consulting services will be performed for a stated fee and it is apparent at the time of the representation that
the:
A. actual fee will be substantially higher.
B. actual fee will be substantially lower than the fees charged by others for comparable services.
C. auditor will not be independent.
D. fee is a competitive bid.

Difficulty: Easy

39. Which of the following forms of advertising is permissible?

A. Advertising that indicates the auditor's educational and professional attainments.
B. Advertising that offers discounted prices.
C. Advertising that explains deficiencies in competitors' services.

Difficulty: Easy
40. An acceptable audit fee arrangement is to:

A. accept the client's corporate bond as part payment of an audit fee.
B. quote a fixed fee for an audit, based on an estimate of the total costs to be incurred.
C. quote a discounted fee on the expectation of performing other services for the client.
D. accept a reduced audit fee because the audit firm already performs a wide variety of other
services for the client.

Difficulty: Easy

Chapter 04 Key
1. An auditor's duty of care to a client would most likely be breached if the auditor failed to:
A. meet their reporting deadline.
B. detect all of a client's fraudulent activities.
C. conduct the audit for the most competitive price.
D. comply with all relevant auditing standards.
Difficulty: Easy
Learning Objective: 4.1 Explain the concepts of reasonable care and skill, and negligence.
Section: Reasonable care and skill and negligence
2. Due professional care does not require:

A. critical review at every level of supervision of work done and judgment exercised.
B. good faith and integrity.
C. appointment of the auditor by the shareholders.
D. compliance with the auditing standards.
Difficulty: Easy
3. Common law requires that the auditor:

A. guarantee their work.
B. perform their work with due care.
C. discover all fraud.
D. check all transactions.
Difficulty: Easy

4. When performing an audit, an auditor would most likely be considered negligent if they failed to:
A. detect all of the client's fraudulent activities.
B. include a negligence disclaimer in the client engagement letter.
C. warn the client of any known internal control weaknesses.
D. warn the client's customers of embezzlement by the client's employees.
Difficulty: Medium
5.
Mars Ltd wished to acquire the ordinary shares of Saturn Ltd and engaged Sarah & Co. to audit the financial report
of Saturn Ltd. Sarah & Co. failed to discover a significant liability when performing the audit. In a common law action
against Sarah & Co., Mars Ltd, at a minimum, must prove:
A. negligence on the part of Sarah & Co.

B. fraud on the part of Sarah & Co.
C. that Sarah & Co. knew that the liability existed.
Difficulty: Easy
6. The court found that Casey, an auditor, had performed a negligent audit of Royal Treatment Ltd, but the
plaintiff
did not receive damages because the court found insufficient proof of causation. Causation means that:
A. the auditor caused the misstatement of the financial report.
B. the auditor's failure to perform a proper audit caused the damages.
C. the auditor was negligent, but the plaintiff suffered no real damages.
D. the plaintiff was an unforeseen third-party user of the financial report.
Difficulty: Medium

7. The Pacific Acceptance case established that:

A. reasonable care and skill means following the auditing standards.
B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.
C. auditors are only liable for the proportion of damages attributable to their actions.
D. auditors have a duty of care only to the shareholders as a group.
Difficulty: Medium
8. The AWA case established that:

A. reasonable care and skill means following the auditing standards.
B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.
C. auditors are only liable for the proportion of damages attributable to their actions.
D. auditors have a duty of care only to the shareholders as a group.
Difficulty: Easy
Learning Objective: 4.3 Explain the concept of contributory negligence.
Section: Contributory negligence
9. In the Caparo case, the court held that the auditor owes a duty of care to:
A. all users of the published financial report.
B. only those parties specified in the engagement letter.
C. the shareholders as a body but not individual shareholders or third parties.
D. all shareholders but not third parties.
Difficulty: Medium
Learning Objective: 4.4 Indicate to what extent a duty of care may be owed to third parties.
Section: Liability to third parties

10.
Smart issued an unmodified auditor's opinion on the 2012 financial report of Max Ltd, which was filed with ASIC.
Smart 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, Bird purchased shares in Max Ltd. Shortly afterwards, Max Ltd
became insolvent, causing the price of the shares to decline drastically. Bird has commenced legal action
against Smart for damages. Smart's best defence to such an action would be that:
A. Bird lacks a contractual relationship as a basis to sue.

B. the engagement letter specifically disclaimed all liability to third parties.
C. there is no proof of proximity.
D. there has been no subsequent sale for which a loss can be calculated.

Difficulty: Medium
11. A claim for a breach of duty of care might arise against an auditor if:
A. an existing shareholder suffered losses because he increased his investment in the company
based on figures in the audited financial report.
B. 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.
C. a new investor suffered losses because she purchased shares in the company based on figures
in the annual audited financial report.
D. a stockbroker made a loss due to a loan made to the company based on figures in an audited
financial report commissioned by the company.

Difficulty: Medium

12.
FMC Electronics Ltd engaged the accounting firm of Crosby, Seals & Anderson to perform its annual audit. The
firm performed the audit in a competent, non-negligent manner and billed FMC for $16 000, the agreed fee. Shortly
after delivery of the audited financial report, Robert Hightower, the assistant controller, disappeared, taking with him
$28000 of FMC's funds. It was then discovered that Hightower had been engaged in a highly sophisticated, novel
defalcation scheme during the past year. He had previously embezzled $35 000 of FMC's funds. FMC has refused
to pay the auditor's fee and is seeking to recover the $63 000 that was stolen by Hightower. Which of the following
is correct?
A. The auditor cannot recover the audit fee and is liable for $63 000.
B. The auditor is entitled to collect the audit fee and is not liable for $63 000.
C. FMC is entitled to recover the $28 000 defalcation and is not liable for the $16 000 fee.
D. FMC is entitled to rescind the audit contract and thus is not liable for the $16 000 fee, but it cannot
recover damages.

Difficulty: Medium
13.
Smith & Jones 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, Smith & Jones is being sued by an investor
who purchased shares in this public offering. Which of the following represents a viable defence?
A. The investor has not met the burden of proving fraud or negligence by Smith & Jones.
B. The false statement is immaterial in the overall context of the financial report.
C. Detection of the false statement by Smith & Jones occurred after the date of the auditor's report.
D. The investor did not actually rely upon the false statement.

Difficulty: Medium
14. If an audit firm is being sued by a third party for common-law fraud based upon a materially false financial
report,
which of the following is the best defence which the auditors could assert?
A. Lack of a contractual relationship.
B. Contributory negligence on the part of the client.
C. Disclaimer contained in the engagement letter.
D. Lack of causation.

Difficulty: Easy

15. The 'Second Report of the Inquiry into the Law of Joint and Several Liability' in January 1995
recommended:
A. proportionate liability in all circumstances.
B. proportionate liability when the plaintiff is partly at fault.
C. proportionate division of insolvent defendant's share.
D. proportionate liability and defendant's degree of fault.

Difficulty: Easy
Learning Objective: 4.5 Describe alternative methods used to limit the auditor’s liability.
Section: Limitation of liability
16. The CLERP 9 reforms now provide for limitation of auditor's liability through:
A. a statutory cap.
B. proportionate liability.
C. incorporation.

Difficulty: Easy
Learning Objective: 4.5 Describe alternative methods used to limit the auditor’s liability.
Section: Limitation of liability
17. ASA 240 (ISA 240) provides that primary responsibility for fraudulent reporting rests with:
A. the board of directors.
B. management.
C. the external auditor.
D. the audit committee.

Difficulty: Easy
Learning Objective: 4.6 Explain the auditor’s duties with regard to the prevention, detection and reporting of fraud.
Section: Responsibility for the prevention and detection of fraud

18. Which of the following statements best describes the auditor's responsibility regarding the detection of
fraud?
A. The auditor must extend auditing procedures to actively search for fraud.
B. The auditor is responsible for the failure to detect fraud only when an unmodified auditor's opinion is
issued.
C. The auditor is responsible for fraud when such failure results from non-performance of procedures
described in the engagement letter.
D. The auditor must plan the audit so as to have a reasonable expectation of discovering material fraud.

Difficulty: Medium
19. An auditor discovers a likely fraud during an audit, but concludes that its effects, if any, could not be
material
enough to affect the auditor's opinion. The auditor should:
A. perform additional audit procedures to determine whether fraud has occurred and, if so, the amount thereof.
B. report the finding to the appropriate level of the client with the recommendation that it be pursued to a
conclusion.
C. notify the proper authorities.
D. note in the working papers that the amount is immaterial and that no further action is required.

Difficulty: Medium
20. The auditor's responsibility for the detection of an illegal act is the same as the auditor's responsibility for
the
detection of an error when the illegal act:
A. creates a material contingent liability that must be disclosed.
B. involves financial matters such as embezzlement or violations of securities laws.
C. has a direct and material effect on the determination of a financial report amount.
D. has consequences material to the presentation and disclosure of financial position or operating results.

Difficulty: Medium

21. If an illegal act is discovered during the audit of a publicly held company, the auditor should:
A. notify the regulatory authorities.
B. determine who was responsible for the illegal act.
C. intensify the audit.
D. report the act to high-level personnel within the client's organisation.

Difficulty: Medium
22. Which of the following statements best describes the auditor's responsibility regarding the detection of
fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure clearly results from
non-performance of audit procedures specifically described in the engagement letter.
B. The auditor must extend auditing procedures to actively search for evidence of fraud in all situations.
C. The auditor should design auditing procedures to provide reasonable assurance that fraud material to
the financial report is detected.
D. The auditor is responsible for the failure to detect fraud only when an unmodified opinion is issued.

Difficulty: Medium
23. An auditor finds evidence that warehouse staff are fraudulently claiming overtime. The auditor should:
A. further investigate the matter and report it to management when concrete evidence has been obtained.
B. report the matter to management in the year-end management letter.
C. report the matter to management immediately if the expected financial effect of the fraud is material.
D. report the matter to management immediately.

Difficulty: Medium

24. The auditor should assess the risk that errors and fraud may cause the financial report to be materially
misstated
and, based on that assessment:
A. design the audit to provide reasonable assurance of detecting errors and fraud that are material
to the financial report.
B. plan the audit to search for errors or fraud that could be material to the financial report.
C. perform the audit with an awareness that errors or fraud could occur and cause a material
misstatement of the financial report.
D. apply substantive tests to detect material misstatements except those perpetrated by
means of forgery or collusion.

Difficulty: Medium

Chapter 05 Key
1. Who is responsible for the preparation of the financial report?

A. Auditor.
B. Management.
C. Both auditor and management.
D. None of the answers given are correct.
Difficulty: Easy
Est Time: < 1 min
Learning Objective: 5.1 Explain the difference between accounting and auditing.
Section: Accounting and auditing contrasted
2. Which audit assertion relates to ensuring that all recorded sales are valid?
A. Existence.
B. Completeness.
C. Occurrence.
D. Valuation and allocation.
Difficulty: Easy
Learning Objective: 5.2 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures.
Section: Financial report assertions and audit objectives and procedures
3. Which of the following audit objectives relates primarily to the financial report assertion, valuation and
allocation?
A. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.
B. Inventory quantities include all products, materials and supplies owned by the company that are in transit.
C. Slow-moving, excess, defective and obsolete items included in inventories are properly identified.
D. Inventories exclude items billed to customers or owned by others.
Difficulty: Medium

4. Which of the following is not a financial report assertion?

A. Inspection.
B. Rights and obligations.
C. Valuation and allocation.
D. Existence.
Difficulty: Easy
5. Your audit client is a shop that sells some of its own merchandise and some merchandise held on
consignment.
Which account balance assertion for inventory would you be most concerned about verifying?
A. Existence.
B. Completeness.
C. Rights and obligations.
D. Valuation and allocation.
Difficulty: Medium
6. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for
purchases
are you most concerned with?
A. Occurrence.
B. Completeness.
C. Classification.
D. Accuracy.
Difficulty: Medium

7. As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done
mainly to gain evidence about the:
A. valuation and allocation assertion.
B. rights and obligations assertion.
C. completeness assertion.
D. existence assertion.
Difficulty: Medium
Learning Objective: 10.2 Identify and understand that the auditor is required to respond to assessed risks at the financial report level and at the assertion level for
transactions and events and account balances, and explain how these risks of material misstatement lead to an appropriate auditor response with specific audit
procedures.
Learning Objective: 5.3 Explain the relationships between audit procedures and evidence, and describe common audit procedures used in an audit of a financial
report.
Learning Objective: 5.4 Define sufficient appropriate audit evidence and its relationship to auditing procedures.
8.
This is your first audit of XYZ Ltd. During the initial planning you have discovered that the client lacks receiving reports and a policy as to the
timing within which to record purchases. You have also observed that there are many adjusting entries to accounts payable, which is a material
balance. The audit assertion most at risk when auditing accounts payable is:
A. existence.
B. valuation and allocation.
C. completeness.
D. rights and obligations.
Difficulty: Medium
9. Which of the following procedures would an auditor most likely rely on to verify management's assertion of
completeness?
A. Comparing a sample of shipping documents to related sales invoices.
B. Reviewing a standard bank confirmation.
C. Confirming a sample of recorded receivables by direct communication with the debtors.
D. Observing the client's distribution of payroll cheques.
Difficulty: Hard
procedures.
report.

10. Which of the following audit objectives relates primarily to the financial report assertion, rights and
obligations?
A. Inventories are properly classified in the statement of financial position as current assets.
B. Inventories exclude items billed to customers or owned by others.
C. Slow-moving, excess, defective and obsolete items included in inventories are properly identified.
D. Inventory quantities include all products, materials and supplies owned by the company.

Difficulty: Medium
11.
While undertaking the audit of the inventory balance, you use your audit software to extract, from the inventory
master file, a report that shows those with a negative gross margin. The financial report assertion at which such
a report is aimed is:
A. existence.
B. valuation and allocation.
C. occurrence.
D. completeness.

Difficulty: Medium
procedures.
report.
12. Which of the following audit objectives relates primarily to the financial report assertion of presentation
and disclosure—classification
and understandability?
A. Inventories are included in the statement of financial position as current assets.
B. Inventories exclude items billed to customers or owned by others.
C. Inventories are included in the statement of financial position at the lower of cost and net realisable value.
D. Inventory quantities include all products, materials and supplies owned by the company that are in transit.

Difficulty: Medium

13. Which of the following audit objectives does not relate primarily to the financial report assertion of
completeness?
A. Inventories are reduced, when appropriate, to net realisable value.
B. Inventory quantities include all products, materials and supplies on hand.
C. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.
D. Inventory quantities include products and materials owned by the company that are in transit or stored at
outside locations.

Difficulty: Medium
14. When reviewing a loan agreement to ascertain whether the bank's security over any of the client's assets
has
been included in the financial report, the audit assertion being achieved is:
A. valuation and allocation.
B. completeness.
C. presentation and disclosure— accuracy and valuation.
D. presentation and disclosure —completeness.

Difficulty: Hard
15. Which of the following does NOT assist in the achievement of the audit assertion of existence in relation to
an investment in listed shares?
A. A confirmation of shares held on the client's behalf.
B. A review of share prices quoted at the financial year-end.
C. A test of details of transactions of share purchases and sales during the year.
D. An analytical review of rate of return on investments.

Difficulty: Easy
procedures.
report.

16. In testing the existence assertion for an asset, an auditor ordinarily works from the:
A. potentially unrecorded items to the financial report.
B. financial report to the potentially unrecorded items.
C. supporting evidence to the accounting records.
D. accounting records to the supporting evidence.

Difficulty: Medium
17. Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock
sheets
helps address which of the following assertions in respect of inventory?
A. Completeness.
B. Valuation and allocation.
C. Existence.
D. Rights and obligations.

Difficulty: Medium
procedures.
report.
18. Auditors are most likely to use focused audit procedures to examine:
A. routine transactions.
B. low-risk assertions.
C. only the rights and obligations assertion.
D. high-risk assertions.

Difficulty: Easy
report.
Section: Audit procedures and evidence

19. Your audit client is under intense pressure to meet an earnings target. Which audit procedure are you most
likely
to use when auditing purchases?
A. Vouching.
B. Tracing.
C. Recalculation.
D. Confirmation.

Difficulty: Hard
report.
20. In the context of an audit of a financial report, substantive tests are audit procedures that:
A. may be eliminated under certain conditions.
B. are designed to discover significant subsequent events.
C. may be either tests of details of transactions, tests of details of account balances, tests of disclosure,
or analytical procedures.
D. will increase proportionately with the auditor's reliance on internal control.

Difficulty: Easy
report.
21. Most of the independent auditor's work in formulating an opinion on a financial report consists of:
A. obtaining an understanding of the internal control.
B. obtaining and examining audit evidence.
C. examining cash transactions.
D. comparing recorded accountability with assets.

Difficulty: Easy
report.

22. You are concerned about whether all sales have occurred. The procedure that will be most effective in
verifying
this assertion is:
A. selecting a sample of invoices and tracing them to delivery dockets.
B. selecting a sample of customers' orders and tracing them to delivery dockets.
C. checking the sequence of delivery dockets and tracing them to customers' orders.
D. selecting a sample of delivery dockets and tracing them to invoices.

Difficulty: Medium
procedures.
report.
23. The audit trail includes all of the following except:

A. journals and journal files.
B. segregation of duties.
C. ledgers and ledger files.
D. source documents and transaction files.

Difficulty: Easy
report.
24. Which of the following is not an auditing procedure?

A. Physical examination.
B. Disclosure.
C. Vouching.
D. Confirmation.

Difficulty: Easy
report.

25. In a financial report audit, substantive tests are audit procedures that:
A. a re designed to discover significant subsequent events.
B. may be either tests of transactions, tests of balances, tests of disclosure or analytical procedures.
C. will decrease proportionately with the auditor's assessed level of control risk.
D. may be eliminated under certain conditions.

Difficulty: Easy
report.
26. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must:
A. be well documented and cross-referenced in the audit documents.
B. be based on sources that are considered reliable.
C. bear a direct relationship to the audit objective.
D. be of a quantity to enable the auditor to form an opinion.

Difficulty: Easy
Section: Sufficient appropriate audit evidence
27.
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is
designed to obtain evidence concerning management's assertions about classes of transactions and events and specifically, which assertion?
A. Occurrence.
B. Cut-off.
C. Accuracy.
D. Classification.

Difficulty: Easy
procedures.
report.

28. Tracing is used primarily to test which of the following assertions about classes of transactions?
A. Occurrence.
B. Completeness.
C. Cut-off.
D. Classification.

Difficulty: Easy
procedures.
report.
29. Vouching is used primarily to test which of the following assertions about classes of transaction?
A. Occurrence.
B. Completeness.
C. Authorisation.
D. Classification.

Difficulty: Easy
procedures.
report.
30. In determining whether transactions have been recorded, the direction of the audit testing should be from
the:
A. general ledger balances.
B. adjusted trial balance.
C. original source documents.
D. general journal entries.

Difficulty: Easy

31. Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control system provides more reliable audit evidence than does an ineffective
internal control system.

Difficulty: Easy
32. The following statements were made in a discussion of audit evidence between two auditors. Which
statement
is not valid concerning audit evidence?
A. 'I am seldom convinced beyond all doubt with respect to all aspects of the reports being examined.'
B. 'I would not undertake that procedure because at best the results would only be persuasive and I'm
looking for convincing evidence.'
C. 'I evaluate the degree of risk involved in deciding the kind of evidence I will gather.'
D. 'I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it.'

Difficulty: Easy
33. Which of the following statements concerning evidence is correct?

A. Appropriate evidence supporting management's assertions must be convincing rather than merely persuasive.
B. A client's accounting data cannot be considered sufficient audit evidence to support the financial report.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence
should be obtained.
D. Effective internal control contributes little to the reliability of the evidence created within the entity.

Difficulty: Medium

34. Which of the following is the least persuasive documentation in support of an auditor's opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of inferences drawn from ratios and trends.
C. Notation of appraisers' conclusions documented in the auditor's work papers.
D. Lists of negative confirmation requests for which the auditor received no response.

Difficulty: Medium
35. Which of the following factors is most important in determining the appropriateness of audit evidence?
A. The reliability of the evidence in meeting the audit objective.
B. The sampling method used by the auditor.
C. The quantity of the evidence obtained.
D. The objectivity of the auditor gathering the evidence.

Difficulty: Easy
36. To be appropriate, evidence must be both:

A. reliable and well documented.
B. reliable and relevant.
C. useful and independent.
D. extensive and timely.

Difficulty: Easy
37. The weakest form of audit evidence among the following is:
A. a letter of representation from management.
B. confirmation of an inter-company receivable from a related company.
C. a letter of representation from the client's solicitors.
D. a bank statement.

Difficulty: Easy

38. Evidence is reliable if it:

A. signals the true state of an assertion.
B. applies to the period being audited.
C. relates to the audit objective being tested.
D. corroborates management's assertions.

Difficulty: Medium
39. An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of details
usually
is determined by the:
A. availability of data aggregated at a high level.
B. relative effectiveness and efficiency of the tests.
C. timing of tests performed after the balance date.
D. auditor's familiarity with industry trends.

Difficulty: Medium
40. Which of the following statements relating to the appropriateness of audit evidence is always true?
A. Evidence gathered by an auditor from outside an entity is reliable.
B. Accounting data developed under a satisfactory internal control are more relevant than data
developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

Difficulty: Hard

41. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the
following is
the least persuasive type of evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and suppliers.
C. Sales invoices inspected by the auditor.
D. Calculations made by the auditor.

Difficulty: Easy
42. The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist
in
an account balance when, in fact, such a misstatement does exist is:
A. audit risk.
B. detection risk.
C. control risk.
D. inherent risk

Difficulty: Easy
Learning Objective: 5.5 Outline the audit risk model.
Section: Overview of the audit risk model
43. Which of the following audit risk components may be assessed in non-quantitative terms?
Control risk Detection risk Inherent risk
A.
Yes Yes Yes
B.
Yes No Yes
C.
Yes Yes No
D.
No Yes Yes

Difficulty: Medium

44. Auditors can eliminate engagement risk:

A. under no circumstances.
B. by establishing policies for client acceptance and continuance.
C. by lowering audit risk.
D. by lowering materiality.

Difficulty: Easy
45. The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an
account balance when, in fact, such error does exist is referred to as:
A. sampling risk.
B. detection risk.
C. non-sampling risk.
D. inherent risk.

Difficulty: Easy
46. As the acceptable level of detection risk decreases, an auditor may change the:
A. timing of substantive tests by performing them at an interim date rather than at balance date.
B. assessed level of inherent risk to a higher amount.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. nature of substantive tests from a less effective to a more effective procedure.

Difficulty: Hard
47. As the acceptable level of detection risk decreases, an auditor may change the:
A. timing of substantive tests by performing them at an interim date rather than at year-end.
B. nature of substantive tests from less effective to more effective procedures.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. assessed level of inherent risk to a higher amount.

Difficulty: Hard

48. As the acceptable level of detection risk decreases, the assurance directly provided from:
A. substantive tests should increase.
B. substantive tests should decrease.
C. tests of controls should increase.
D. tests of controls should decrease.

Difficulty: Medium
49. As the acceptable level of detection risk increases, an auditor may change the:
A. assessed level of control risk from less than high to high.
B. assurance provided by tests of controls by using a larger sample size than planned.
C. timing of substantive tests from year-end to an interim date.
D. nature of substantive tests from less effective to more effective procedures.

Difficulty: Hard
50. The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting
process.
In regard to minimising this risk, the auditor primarily relies on:
A. substantive tests.
B. tests of controls.
C. internal control.
D. statistical analysis.

Difficulty: Easy

51. The situation and circumstances can dictate the level of certain risks no matter what the auditor does.
However,
the auditor is always able to decide to reduce one of the following risks:
A. control risk.
B. risk of management fraud.
C. detection risk.
D. inherent risk.

Difficulty: Easy
52. The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a
relationship that is ordinarily:
A. opposite.
B. inverse.
C. direct.
D. unequal.

Difficulty: Easy
53. Which of the following best describes the concept of audit risk?
A. The risk of the auditor being sued because of association with an audit client.
B. The risk that the auditor will provide an unmodified opinion on a materially misstated financial report.
C. The overall risk that a material misstatement exists in the financial report.
D. The risk that auditors use audit procedures that are inappropriate.

Difficulty: Medium

54. Engagement risk is:

A. the risk of issuing an incorrect auditor's opinion.
B. the auditor's risk of loss from events arising in connection with the financial report audited and reported
upon.
C. the overall risk of material misstatements.
D. the risk of entity financial failure.

Difficulty: Medium
55. Inherent risk and control risk differ from detection risk in that they:
A. arise from the misapplication of auditing procedures.
B. may be assessed in either quantitative or non-quantitative terms.
C. exist independently of the financial report audit.
D. can be changed at the auditor's discretion.

Difficulty: Medium
56. Which of the following is intended to detect deviations from prescribed Accounting Department
procedures?
A. Substantive tests specified by a standardised audit program.
B. Tests of controls designed specifically for the client.
C. Analytical tests as designed in the industry audit guide.
D. Computerised analytical tests tailored for the configuration of CIS equipment in use.

Difficulty: Easy
Learning Objective: 5.6 Define types of audit tests.
Section: Types of audit tests
57. Which of the following would be least likely to be included in an auditor's test of controls?
A. Observation.
B. Inquiry.
C. Confirmation.
D. Inspection.

Difficulty: Easy

58. All of the following are substantive tests except:

A. analytical procedures.
B. tests of approvals on invoices.
C. direct tests of sales transactions.
D. confirmation of bank balances at year-end.

Difficulty: Medium
59. 'Dual-purpose tests' is a term used for:

A. tests of controls that address both the design of the control procedures and their operating effectiveness.
B. tests of transactions that include substantive procedures as well as tests of controls.
C. tests that address both balances and transaction classes.
D. tests performed because of client expectations as well as for gathering audit evidence.

Difficulty: Easy
60. Which of the following statements concerning the auditor's use of the work of an expert is correct?
A. If the auditor believes that the determinations made by the expert are unreasonable, only an adverse opinion
may be issued.
B. If the expert is related to the client, the auditor is not permitted to use the expert's findings as corroborative
evidence.
C. The expert should be identified in the auditor's report if the auditor has relied on the expert in issuing an
unmodified auditor's opinion.
D. The expert should have an understanding of the auditor's corroborative use of the expert's findings.

Difficulty: Medium
Learning Objective: 5.7 Explain how an auditor may use the work of an expert or component auditor.
Section: Using the work of an expert or a component auditor

61. Audit documentation prepared on audits of publicly-held clients is the property of the:
A. shareholders.
B. auditor.
C. management of the entity being audited.
D. ASIC.

Difficulty: Easy
Learning Objective: 5.8 Describe the general requirement to document audit work and the contents of audit working papers.
Section: Documentation of audit work: audit working papers
62. All of the following are typically in the current file except:
A. adjusting journal entries.
B. copies of the auditor's report.
C. chart of accounts.
D. copies of mins of important committee meetings.

Difficulty: Easy
63. Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit
documents,
the auditor should remember that:
A. audit documents should be kept on the client's premises so that the client can have access to them
for reference purposes.
B. audit documents should be the primary support for the financial report being examined.
C. audit documents should be considered as a substitute for the client's accounting records.
D. audit documents should be designed to meet the circumstances and the auditor's needs on each engagement.

Difficulty: Easy

64. Audit documents that record the procedures used by the auditor to gather evidence should be:
A. considered the primary support for the financial report being examined.
B. viewed as the connecting link between the accounting records and the financial report.
C. designed to meet the circumstances of the particular engagement.
D. destroyed when the audited entity ceases to be a client.

Difficulty: Easy
65. Audit documentation:

A. must be in electronic form.
B. must be only in paper form.
C. is not required, but is strongly recommended.
D. may be in paper, electronic, or some other form.

Difficulty: Easy
66. Which of the following is not a factor affecting the independent auditor's judgment as to the quantity, type
and content of audit working papers?
A. The need, in the particular circumstances, for supervision and review of the work performed by any
assistants.
B. The nature and conditions of the client's records and internal control.
C. The expertise of client personnel and their expected audit participation.
D. The type of financial report, schedules, or other information upon which the auditor is reporting.

Difficulty: Medium

67. In planning an audit engagement, which of the following is a factor that affects the independent auditor's
judgment
as to the quantity, type and content of working papers?
A. The estimated occurrence rate of attributes.
B. The preliminary evaluations based upon initial substantive testing.
C. The content of the client's representation letter.
D. The anticipated nature of the auditor's report.

Difficulty: Medium
68. Which of the following factors will least affect the independent auditor's judgment as to the quantity, type
and
content of working papers desirable for a particular engagement?
A. Nature of the auditor's report.
B. Nature of the financial report, schedules, or other information upon which the auditor is reporting.
C. Need for supervision and review.
D. Number of personnel assigned to the audit.

Difficulty: Easy
69. An auditor's working papers will generally be least likely to include documentation showing how the:
A. client's schedules were prepared.
B. engagement had been planned.
C. client's internal control had been understood and the level of control risk assessed.
D. unusual matters were resolved.

Difficulty: Easy

70. The current file of an auditor's working papers is most likely to include a copy of the:
A. superannuation fund contract.
B. constitution.
C. flowcharts of the internal control activities.
D. bank reconciliation.

Difficulty: Easy
71. Which of the following is not a primary purpose of audit working papers?
A. To assist in preparation of the auditor's report.
B. To support the financial report.
C. Report to provide evidence of the audit work performed.
D. To co-ordinate the audit.

Difficulty: Easy
72. When preparing audit working papers, the auditor should remember that working papers should be:
A. kept on the client's premises so that the client can have access to them for reference purposes.
B. the primary support for the financial report being audited.
C. considered as a part of the client's accounting records that are retained by the auditor.
D. designed to meet the circumstances and the auditor's needs on each engagement.

Difficulty: Easy

Chapter 06 Key
1. Before accepting an engagement to audit a new client, an auditor is required to:

A. make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
B. obtain the prospective client's signature on the engagement letter.
C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D. discuss the management representation letter with the prospective client's audit committee.
Difficulty: Easy
Learning Objective: 6.1 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the
purpose and content of an audit engagement letter.
Section: Client acceptance and continuance
2. In assessing whether to accept a client for an audit engagement, an auditor should consider the:
Entity's business risk Auditor's engagement risk
A.
Yes Yes
B.
Yes No
C.
No Yes
D.
No No
Difficulty: Easy

3. A prospective client's refusal to give permission to communicate with the previous auditor and review
certain portions
of the previous auditor's working papers will bear directly on the auditor's decision concerning the:
A. ability to establish consistency in application of accounting principles.
B. apparent scope limitation.
C. integrity of management.
D. adequacy of the planned audit program.
Difficulty: Medium
4. Inquiry of the previous auditor is:

A. required about matters that have a bearing on acceptance of the client.
B. required after acceptance of a new client regarding matters the successor believes may affect
the conduct of his or her audit.
C. helpful to the successor and may facilitate the successor's audit, but is not required either before
or after acceptance of the client.
D. required only if the change in auditors resulted from a disagreement between the client and previous
auditors.
Difficulty: Easy
5.
When an auditor is approached to perform an audit for the first time, the auditor should make inquiries of the previous auditor. This is a necessary
procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:
A. whether the predecessor's work should be utilised.

B. whether the company follows the policy of rotating its auditors.
C. whether the predecessor's assessment of control risk has been high.
D. whether the engagement should be accepted.
Difficulty: Easy

6. What is the responsibility of an auditor with respect to communicating with the previous auditor in
connection with
a prospective new audit client?
A. The auditor has no responsibility to contact the previous auditor.
B. The auditor should contact the previous auditor regardless of whether the prospective client
authorises contact.
C. The auditor need not contact the previous auditor if the successor is aware of all available facts.
D. The auditor should obtain permission from the prospective client to contact the previous auditor.
Difficulty: Medium
7. Which of the following should an auditor obtain from the previous auditor prior to accepting an audit
engagement?
A. Analysis of statement of financial position accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on the integrity of management.
Difficulty: Easy
8. Which of the following factors most likely would cause an auditor to not accept a new audit engagement?
A. An inadequate understanding of the entity's internal control.
B. The close proximity to the end of the entity's fiscal year.
C. The conclusion that the entity's management probably lacks integrity.
D. An inability to perform preliminary analytical procedures before assessing control risk.
Difficulty: Easy

9. Engagement letters include all of the following except:

A. a list of additional services that will be provided.
B. a list of adjusting journal entries.
C. information about the audit fee.
D. arrangements involving the use of experts.
Difficulty: Easy
10. The scope and nature of an auditor's contractual obligation to a client ordinarily is established in the:
A. engagement letter.
B. Corporations Act 2001.
C. management letter.
D. client's constitution.

Difficulty: Easy
11. An audit firm's quality control procedures pertaining to the acceptance of a prospective audit client would
most likely include:
A. inquiry of management as to whether disagreements between the previous auditor and the
prospective client were resolved satisfactorily.
B. consideration of whether sufficient appropriate audit evidence may be obtained to afford a
reasonable basis for an opinion.
C. inquiry of third parties, such as the prospective client's bankers and solicitors, about information
regarding the prospective client and its management.
D. consideration of whether the internal control is sufficiently effective to permit a reduction in the extent
of required substantive tests.

Difficulty: Hard

12. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the
engagement when the:
A. illegal act affects the auditor's ability to rely on management representations.
B. illegal act has material financial report implications.
C. illegal act has received widespread publicity.
D. auditor cannot reasonably estimate the effect of the illegal act on the financial report.

Difficulty: Hard
13. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
previous
auditor, the proposed auditor should:
A.
contact the previous auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination with the understanding that all information disclosed will be kept confidential.
B. accept the engagement without contacting the previous auditor, since the proposed auditor can include
audit procedures to verify the reason given by the client for the termination.
C. not communicate with the previous auditor, because this would in effect be asking the auditor to
violate the confidential relationship between auditor and client.
D. advise the client of the intention to contact the previous auditor and request permission for the contact.

Difficulty: Medium
14. Because of the risk of material misstatement, an audit of a financial report in accordance with the auditing
standards
should be planned and performed with an attitude of:
A. objective judgment.
B. independent integrity.
C. professional scepticism.
D. impartial conservatism.

Difficulty: Easy
Learning Objective: 6.2 Describe the decisions made by an auditor in preparing an audit plan, the knowledge on which the decisions are based and the procedures
used to obtain that knowledge.
Section: Audit planning

15. During preliminary audit planning:

A. the auditor considers the possibility of business failure.
B. the auditor designs the audit to search for evidence to support the company's continued existence.
C. the auditor does not need to consider the possibility of business failure because that is a procedure
performed
during the overall evaluation at the end of the audit.
D. the auditor inquires of the company's legal advisers concerning the possibility of going concern problems.

Difficulty: Medium
16. Which of the following situations would most likely require special audit planning by the auditor?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client's tax return differ from those used on the books.
C. Assets costing less than $500 are expensed even though the expected life exceeds one year.
D. Inventory is comprised of precious gemstones.

Difficulty: Easy
17. An audit program should be designed for each individual audit and should include audit steps and
procedures to:
A. ensure that only material items are audited.
B. detect all fraud.
C. identify all internal control weaknesses.
D. ensure an efficient and effective audit.

Difficulty: Medium
Learning Objective: 6.3 Explain how an auditor develops an overall audit strategy and prepares an audit plan.
Section: Developing an overall audit strategy

18. Time budgets on audit engagements are not used for which of the following reasons?
A. Monitor actual audit hours worked by staff on an engagement.
B. Ensure that adequate time is allocated to significant areas of the audit.
C. Estimate an appropriate fee for the engagement.
D. To ensure that audit staff working on the engagement are paid the correct amount.

Difficulty: Easy
Learning Objective: 6.4 Describe the process of assigning and scheduling audit staff.
Section: Assigning and scheduling audit staff
19. An auditor obtains knowledge about a new client's business and its industry in order to:
A. make constructive suggestions concerning improvements to the client's internal control.
B. develop an attitude of professional scepticism concerning management's financial report assertions.
C. evaluate whether the aggregation of known misstatements causes the financial report taken as a
whole to be materially misstated.
D. understand the events and transactions that may have an effect on the client's financial report.

Difficulty: Easy
Learning Objective: 6.5 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Section: Understanding of the entity and its environment
20. To ascertain the exact name of the corporate client, the auditor relies primarily on:
A. corporate minutes.
B. by-laws.
C. company constitution.
D. tax returns.

Difficulty: Easy

21. An auditor searching for related-party transactions should obtain an understanding of each subsidiary's
relationship to the total entity because:
A. intercompany transactions may have been consummated on terms equivalent to arm's length
transactions.
B. this might reveal whether particular transactions would have taken place if the parties had not
been related.
C. the business structure may be deliberately designed to obscure related-party transactions.
D. this might permit the audit of intercompany account balances to be performed as of concurrent dates.

Difficulty: Medium
22. Which of the following procedures would not be used to obtain an understanding of the entity and its
environment?
A. Observe entity operations.
B. Re-perform entity processes.
C. Verify proper evaluation of inventory subject to technological obsolescence.
D. Review prior year's audit documentation.

Difficulty: Medium
23. An auditor who accepts an audit engagement and does not possess the industry expertise of the business
entity should:
A. engage financial experts familiar with the nature of the business entity.
B. obtain knowledge of matters that relate to the nature of the entity's business.
C. refer a substantial portion of the audit to another auditor, who will act as the principal auditor.
D. first inform management that an unmodified auditor's opinion cannot be issued.

Difficulty: Medium

24. Which of the following is the most likely first step that an auditor will perform after accepting an initial
audit engagement?
A. Prepare a rough draft of the financial report and of the auditor's report.
B. Assess control risk for the assertions embodied in the financial report.
C. Tour the client's facilities and review the general records.
D. Consult with and review the work of the previous auditor prior to discussing the engagement with the client
management.

Difficulty: Medium
25. Which of the following is not an important consideration in an auditor's evaluation of an entity's business
risk?
A. The specific business risks that an entity faces may result in financial report errors and fraud.
B. Business risk factors affect the ability of an entity to be profitable and survive.
C. Auditing standards include many entity business risk factors that identify circumstances that
increase the likelihood of material misstatements.
D. Auditing standards require the auditor to evaluate the entity's business risk in order to provide
suggestions to improve the entity's profitability.

Difficulty: Medium
Learning Objective: 6.6 Assess entity business risk.
Section: Business risk
26. Which of the following is not a threat in a SWOT analysis?

A. Changing buyer tastes.
B. Additional regulatory requirements.
C. Rising sales of substitute products.
D. Diversifying into related products.

Difficulty: Medium
Learning Objective: 6.6 Assess entity business risk.
Section: Business risk

27. Analytical procedures used in planning an audit should focus on identifying:

A. the predictability of financial data from individual transactions.
B. the various assertions that are embodied in the financial report.
C. areas that may represent specific risk relevant to the audit.
D. material weaknesses in internal control.

Difficulty: Medium
Learning Objective: 6.7 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and
assessing business risk.
Section: Analytical procedures
28. Which of the following is not a typical analytical procedure?

A. Study of relationships of the financial information with relevant non-financial information.
B. Comparison of the financial information with similar information regarding the industry in which
the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.

Difficulty: Easy
29. Analytical procedures may be classified as being primarily:

A. tests of control.
B. detailed tests of balances.
C. tests of ratios.
D. substantive tests.

Difficulty: Easy

30. Analytical procedures are:

A. never required.
B. required for planning, substantive testing and overall review of the financial report.
C. required for planning and overall review of the financial report.
D. required during planning only.

Difficulty: Medium
31. The auditor generally gives most emphasis to ratio and trend analysis in the examination of:
A. retained earnings.
B. income.
C. financial position.
D. cash flows.

Difficulty: Medium
32. An example of an analytical procedure is the comparison of:

A. recorded amounts of major disbursements with appropriate invoices.
B. results of a statistical sample with the expected characteristics of the actual population.
C. computer-generated data with similar data generated by a manual accounting system.
D. financial information with similar information regarding the industry in which the entity operates.

Difficulty: Medium

33. Which of the following tends to be most predictable for purposes of analytical procedures applied as
substantive tests?
A. Relationships involving statement of financial position accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.

Difficulty: Easy
34. Analytical procedures that are required in all audits of financial reports are analytical procedures:
A. relevant to achieving important audit objectives related to particular assertions.
B. expected to be efficient and effective in the circumstances.
C. based on available and reliable financial data.
D. used in the planning and overall review stages.

Difficulty: Easy
35. In applying analytical procedures, the identification of the relationships and types of data used, as well as
conclusions reached when recorded amounts are compared to expectations, requires:
A. judgment by the auditor.
B. participation by senior audit team members.
C. understanding of complex models.
D. advanced training in plausibility formulation.

Difficulty: Easy

36. An auditor compares this year's revenues and expenses with those of the previous year and investigates all
changes
exceeding 10 per cent. By carrying out this procedure the auditor would be most likely to learn that:
A. an increase in property tax rates has not been recognised in the client's accrual.
B. the provision for uncollectible accounts is inadequate because of worsening economic conditions.
C. fourth-quarter payroll taxes were not paid.
D. the client changed its capitalisation policy for small tools.

Difficulty: Hard
37. Which of the following is not a benefit of analytical procedures?

A. Assists in understanding a client's business and identifying areas of potential risk.
B. Enables the auditor to review the financial and non-financial information of a client.
C. May reduce the level of detailed audit testing if the control system surrounding the reliability of
the information is strong.
D. Provides adjustments to error levels during tests of control.

Difficulty: Easy
38. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in
the
ratio of gross profit to sales may suggest which of the following possibilities?
A. Unrecorded sales.
B. Merchandise purchases charged to selling and general expense.
C. Fictitious sales.
D. Unrecorded purchases.

Difficulty: Hard

39. One reason why the independent auditor performs analytical procedures of the client's operations is to
identify:
A. deficiencies of a material nature in the internal control.
B. unusual transactions.
C. non-compliance with prescribed control procedures.
D. improper separation of accounting and other financial duties.

Difficulty: Easy
40. The auditor is most likely to rely on analytical procedures alone if a balance is:
A. material and internal controls are good.
B. immaterial and internal controls are poor.
C. immaterial and inherent risk is high.
D. immaterial and internal controls are good.

Difficulty: Easy
41. Significant unexpected differences identified by analytical procedures will usually necessitate:
A. a review of internal control.
B. an explanation in the representation letter.
C. investigation by the auditor.
D. addition of an 'emphasis of matter' paragraph to the auditor's report.

Difficulty: Medium

42. Which of the following is a nonfinancial performance measure?

A. Warranty rates.
B. Return on investment.
C. Net profit.
D. Sales.

Difficulty: Medium
43. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales
and
inventories would most likely be identified in the planning phase of the audit by the use of:
A. tests of transactions and balances.
B. a preliminary review of internal accounting control.
C. specialised audit programs.
D. analytical procedures.

Difficulty: Medium
44. The auditor notices significant fluctuations in key elements of the company's financial report. If
management is
unable to provide an acceptable explanation, the auditor should:
A. consider the matter a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting management fraud.
D. withdraw from the engagement.

Difficulty: Medium

45. An auditor would place most reliance on the results of analytical procedures when there is:
A. material balance, low inherent risk, low control risk.
B. immaterial balance, high inherent risk, high control risk.
C. material balance, low inherent risk, high control risk.
D. immaterial balance, low inherent risk, low control risk.

Difficulty: Medium

Chapter 07 Key
1. Which of the following inventory items is likely to have high inherent risk?
A. Internet computer software.
B. Cement.
C. Washing machines.
D. Office furniture.
Difficulty: Easy
Learning Objective: 7.1 Explain the factors that influence the assessment of inherent risk.
Section: Inherent risk
2. Which of the following actions cannot be taken by the auditors to reduce audit risk?
A. Increase the amount of substantive testing of balances at year-end.
B. Reduce the level of inherent risk.
C. Increase the use of analytical procedures.
D. Reduce the level of detection risk.
Difficulty: Easy
3. Some account balances, such as those for foreign currency transactions or leases, are the results of complex
calculations.
The susceptibility to material misstatements in these types of accounts is defined as:
A. detection risk.
B. audit risk.
C. sampling risk.
D. inherent risk.
Difficulty: Easy

4. Which of the following statements is true?

A. The risk that material misstatement will not be prevented or detected on a timely basis by the internal
control can
be reduced to zero by effective control activities.
B. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
C. Detection risk is a function of the efficiency of an auditing procedure.
D. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the
auditor.
Difficulty: Easy
5.
Your audit client has a new management incentive scheme in place, with the bonus 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 poor year and will not meet its budget or
last year's net profit. Which of the following represents an inherent risk?
A. Insufficient provisions.
B. Next year's expenses taken up this year.
C. Next year's sales incorrectly taken up this year.
D. Overstatement of debtors.
Difficulty: Medium
6. With respect to fraud and error, which of the following should be part of an auditor's planning of the audit
engagement?
A. Plan to search for fraud or errors that would have a material or immaterial effect on the financial report.
B. Plan to search for fraud or errors that would have a material effect on the financial report.
C. Plan to discover fraud or errors that are material.
D. Plan to discover fraud or errors that are either material or immaterial.
Difficulty: Medium
Learning Objective: 7.2 Explain the auditor’s consideration of the risk of fraud.
Section: Other specific business risks: fraud

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

A. Significant related-party transactions.
B. The auditor's relationship with management is strained.
C. Management is dominated by a single person.
D. The financial report included highly subjective estimates.
Difficulty: Easy
8. The auditor can respond to an increased risk of fraud by doing all of the following except:
A. increasing professional scepticism.
B. assigning more experienced personnel to the audit.
C. increasing acceptable audit risk.
D. taking steps to obtain more reliable evidence.
Difficulty: Easy
9. 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:
A. disclose the fraud to the appropriate level of the client's management.
B. disclose the fraud to appropriate authorities external to the client.
C. discuss with the client the additional audit procedures that will be needed to identify the exact amount of the
fraud.
D. modify the audit program to include tests specifically designed to identify the fraud and its impact on the
financial report.
Difficulty: Easy

10. The primary factor that distinguishes errors from fraud is:
A. whether the underlying cause of misstatement relates to the misapplication of accounting principles or to
clerical processing.
B. whether the misstatement is perpetrated by an employee or by a member of management.
C. whether the underlying cause of a misstatement is intentional or unintentional.
D. whether the misstatement is concealed.

Difficulty: Easy
11. With respect to illegal acts, the auditor's responsibility is to:

A. be aware of the possibility that illegal acts may have occurred.
B. design the audit to provide reasonable assurance of detecting illegal acts that are material to the financial
report.
C. plan the audit to search for illegal acts that could be material to the financial report.
D. rely on the client's solicitor to identify illegal acts that should be disclosed.

Difficulty: Easy
12. 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:
A. express a qualified or adverse opinion, depending on materiality.
B. notify appropriate law enforcement agencies.
C. withdraw from the engagement.
D. consider the effect on the financial report as well as the implications for other aspects of the audit.

Difficulty: Easy

13. The auditor is most likely to presume that a high risk of a fraud exists if:
A. the client is a multinational company that does business in numerous foreign countries.
B. the client does business with several related parties.
C. inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.
D. inadequate employee training results in lengthy IT exception reports each month.

Difficulty: Easy
14. In general, material frauds perpetrated by which of the following people are most difficult to detect?
A. Internal auditor.
B. Keypunch operator.
C. Cashier.
D. Financial controller.

Difficulty: Medium
15. Which of the following factors would most likely heighten an auditor's concern about the risk of fraudulent
financial reporting?
A. Inability to generate cash flows from operations while reporting substantial earnings growth.
B. Management's lack of interest in increasing the entity's earnings trend.
C. Large amounts of liquid assets that are easily converted into cash.
D. Inability to borrow necessary capital without granting debt covenants.

Difficulty: Medium

16. 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?
A. Consult with the client's legal counsel and with the auditor's legal counsel to determine how the suspected
illegal acts will be communicated to the shareholders.
B. Extend normal auditing procedures to ascertain whether the suspected illegal acts may have a material effect
on the financial report.
C. 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.
D. Notify each member of the audit committee of the board of directors about the nature of the acts and request
that
they give guidance with respect to the approach to be taken by the auditor.

Difficulty: Medium
17. If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the
engagement, the auditor should:
A. notify all parties who may rely upon the company's illegal act.
B. consult with legal counsel as to what other action, if any, should be taken.
C. return all incriminating evidence and working papers to the client's audit committee for follow-up.
D. contact the successor auditor to make the successor aware of the possible consequences of relying on
management's representations.

Difficulty: Medium
18. Which of the following situations would be defined as fraud under the auditing standards?
A. Errors in the application of accounting principles.
B. Errors in the accounting data underlying the financial report.
C. Misinterpretation of facts that existed when the financial report was prepared.
D. Misappropriation of assets.

Difficulty: Easy

19. 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?
A. Reading 'conflict-of-interest' statements obtained by the client from its management.
B. Scanning accounting records for large transactions at or just prior to the end of the period under audit.
C. Inspecting invoices from law firms.
D. Confirming large purchase and sales transactions with the suppliers and/or customers involved.

Difficulty: Medium
Learning Objective: 7.3 Explain the auditor’s consideration of related parties.
Section: Other specific business risks: related parties
20. An example of a transaction that may be indicative of the existence of related parties is:
A. borrowing or lending at a rate of interest that equals the current market rate.
B. selling real estate at a price that is comparable to its appraised value.
C. making large loans with specified terms as to when or how the funds will be repaid.
D. exchanging property for similar property in a non-monetary transaction.

Difficulty: Easy
21. For a reporting entity that has participated in related-party transactions that are material, disclosure in the
financial report should include:
A. the nature of the relationship and the terms and manner of settlement.
B. details of the transactions within major classifications.
C. a statement to the effect that a transaction was consummated on terms no less favourable than those that
would
have been obtained if the transaction had been with an unrelated party.
D. a reference to deficiencies in the entity's internal control.

Difficulty: Medium

22. An independent auditor finds that Hollow Pty Ltd occupies office space, at no charge, in an office building
owned by
a shareholder of Hollow Pty Ltd. This finding indicates the existence of:
A. management fraud.
B. related-party transactions.
C. window dressing.
D. weak internal control.

Difficulty: Medium
23. 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?
A. Cash flows from operating activities are negative.
B. Research and development projects are postponed.
C. Significant related party transactions are pervasive.
D. Share dividends have replaced annual cash dividends.

Difficulty: Medium
Learning Objective: 7.4 Explain the auditor’s consideration of the appropriateness of the going concern basis.
Section: Other specific business risks: going concern
24. Which of the following is not a qualitative factor that may affect an auditor's establishment of
materiality?
A. Potential for fraud.
B. The entity is close to violating loan covenants.
C. Firm policy sets materiality at five per cent of pre-tax income.
D. A small misstatement would interrupt an earnings trend.

Difficulty: Easy
Learning Objective: 7.5 Explain the concept of materiality.
Section: Materiality

25. The allowance for undetected misstatement is the preliminary judgment about materiality for the financial
report minus the:
A. estimate of total anticipated uncorrected known misstatement and estimate of total anticipated likely
misstatement.
B. estimate of total anticipated uncorrected known and unknown misstatement.
C. estimate of total anticipated corrected known misstatement and estimate of total anticipated likely
misstatement.
D. estimated monetary understatement and estimated monetary overstatement.

Difficulty: Hard
26. Which one of the following statements is correct concerning the concept of materiality?
A. Materiality is determined by reference to guidelines established by ASIC.
B. Materiality depends only on the dollar amount of an item relative to other items in the financial report.
C. Materiality depends on the nature of an item rather than on the dollar amount.
D. Materiality is a matter of professional judgment.

Difficulty: Easy
27. Which of the following relatively small misstatements would most likely have a material effect on an
entity's financial report?
A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorised.
D. An uncollectible account receivable that was not written off.

Difficulty: Medium

28. Your preliminary audit plan for Solar Ltd states that planning materiality is set at one per cent of total
assets. This planning materiality amount:
A. will need to be used for evaluation at the end of the engagement to judge the overall presentation of the
financial report,
because that was the level used to set the scope of testing.
B. should not be revised in mid-audit except in unusual circumstances and the audit planning procedures and
documentation
will need to be redone.
C. may be revised based on the results of audit tests and new information as the audit progresses.
D. is appropriate for planning, but the evaluation materiality amount must be based on a percentage of revenue.

Difficulty: Medium
29.
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10 000 would have a material effect on an
entity's income statement, but that misstatements would have to aggregate $20 000 to materially affect the statement of financial position.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A. $10 000.
B. $15 000.
C. $20 000.
D. $30 000.

Difficulty: Medium

Chapter 08 Key
1. Assessing control risk at less than high involves all of the following except:
A. identifying specific controls to rely on.
B. concluding that controls are ineffective.
C. performing tests of controls.
D. analysing the achieved level of control risk after performing tests of controls.
Difficulty: Easy
Learning Objective: 8.1 Define internal control, and explain the audit logic of assessing control risk.
Section: Audit strategy and internal control
2. Obtaining an understanding of the internal control and assessing control risk:

A. may be performed concurrently in an audit.
B. needs to be documented only if the assessed level is less than high.
C. is possible but not necessary in performing an audit.
D. is necessarily sequential audit steps.
Difficulty: Easy
3. Tests of controls are performed to determine whether or not:

A. control policies and procedures are functioning as designed.
B. necessary controls are absent.
C. incompatible functions exist.
D. material dollar misstatements exist.
Difficulty: Easy
Learning Objective: 9.1 Understand that tests of controls are undertaken when the auditor intends to rely on a control to reduce a risk of material misstatement.

4. The conclusion reached as a result of assessing control risk is referred to as the:

A. assurance provided by internal control.
B. determined level of acceptable detection risk.
C. product of the understanding of internal control.
D. assessed level of control risk.
Difficulty: Easy
5. An auditor assesses the level of control risk to:

A. determine the extent of tests of controls to be performed.
B. determine the extent of substantive tests to be performed.
C. ascertain whether irregularities are probable.
D. ascertain whether any employees have incompatible duties.
Difficulty: Easy
6. How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary
with the auditor's
assessment of control risk?
A. Randomly.
B. Disproportionately.
C. Directly.
D. Inversely.
Difficulty: Medium

7. After obtaining an understanding of internal control in an audit engagement, the auditor should perform tests
of controls on:
A. those control activities for which reportable conditions were identified.
B. a random sample of the control activities that were identified.
C. those control activities that have a material effect upon the financial report balances.
D. those control activities that the auditor identified to reduce the assessed level of control risk.
Difficulty: Easy
8. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:
A. factors that raise doubts about the auditability of the financial report.
B. operating effectiveness of internal control policies and procedures.
C. risk that material misstatements exist in the financial report.
D. possibility that the nature and extent of substantive tests may be reduced.
Difficulty: Easy
9. Assessing control risk as less than high would most likely involve:
A. changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
B. identifying specific internal controls relevant to specific assertions.
C. performing more extensive substantive tests with larger sample sizes than originally planned.
D. reducing inherent risk for most of the assertions relevant to significant account balances.
Difficulty: Medium
10. A primary purpose of internal controls is to:

A. form a basis for evaluating employees.
B. monitor production quality.
C. avoid clerical errors.
D. meet objectives of maintaining sound documents and records and accurate financial reporting.

Difficulty: Easy
Learning Objective: 8.2 Understand the concepts of inherent limitations and reasonable assurance with regard to internal control.
Section: Internal control concepts

11. The basic concept of internal control which recognises that the cost of internal control should not exceed
the benefits expected
to be derived is known as:
A. reasonable assurance.
B. management responsibility.
C. limited liability.
D. management by exception.

Difficulty: Easy
12. When obtaining an understanding of the entity and its environment, the auditor should obtain an
understanding of internal
controls primarily to:
A. assess the risk of material misstatement and plan the audit.
B. provide suggestions for improvement to the client.
C. serve as a basis for setting audit risk and materiality.
D. comply with the Corporations Act 2001.

Difficulty: Easy
13. Which of the following would be least likely to suggest to an auditor that the client's management may
have overridden
the internal control?
A. Differences are always disclosed on a computer exception report.
B. Management does not correct internal control deficiencies that it knows about.
C. There have been two new controllers this year.
D. There are numerous delays in preparing timely internal financial reports.

Difficulty: Easy

14. In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance
that:
A. controls have not been circumvented by collusion.
B. misstatements have been prevented or detected.
C. operational efficiency has been achieved in accordance with management plans.
D. management cannot override the system.

Difficulty: Easy
15. Of the following statements about an internal control, which one is not valid?
A. No one person should be responsible for the custodial responsibility and the recording responsibility for an
asset.
B. Transactions must be properly authorised before such transactions are processed.
C. Because of the cost–benefit relationship, a client may apply control procedures on a test basis.
D. Control procedures reasonably ensure that collusion among employees cannot occur.

Difficulty: Easy
16. Which of the following statements about internal control is correct?

A. The establishment and maintenance of internal control is an important responsibility of the internal auditor.
B. Properly maintained internal control reasonably ensures that collusion among employees cannot occur.
C. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
D. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant
account balance.

Difficulty: Medium
Learning Objective: 8.3 Describe the general objectives of internal control and how the auditor uses them to develop specific control objectives.
Section: Internal control objectives

17. For internal control purposes, which of the following individuals should preferably be responsible for the
distribution of payroll cheques?
A. Bookkeeper.
B. Payroll clerk.
C. Cashier.
D. Receptionist.

Difficulty: Easy
18. Which of the following is one of the overriding principles of internal control?
A. Responsibility for accounting and financial duties should be assigned to one responsible officer.
B. Responsibility for the performance of each duty must be fixed.
C. Responsibility for the accounting duties must be borne by the audit committee of the company.
D. All of the options listed here are correct

Difficulty: Easy
19. For effective internal control purposes, which of the following individuals should be responsible for
mailing signed cheques?
A. Computer operator.
B. Financial controller.
C. Accounts payable clerk.
D. Payroll clerk.

Difficulty: Easy

20.
Peter Budd, the purchasing officer of Lake Hardware Wholesalers Pty Ltd (Lake), has a relative who owns a retail hardware store. Peter Budd
arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake's wholesale
prices. Budd was probably able to accomplish this because of Lake's poor internal control for:
A. purchase requisitions.
B. cash receipts.
C. perpetual inventory records.
D. purchase orders.

Difficulty: Easy
21. A company policy should clearly indicate that defective merchandise returned by customers is to be
delivered to the:
A. sales clerk.
B. receiving clerk.
C. inventory control clerk.
D. accounts receivable clerk.

Difficulty: Easy
22. An effective internal control for the payroll function would generally include which of the following?
A. Total time recorded on time-clock cards should be reconciled to job reports by employees responsible for
those specific jobs.
B. Payroll department employees should be supervised by the management of the personnel department.
C. Payroll department employees should be responsible for maintaining employee personnel records.
D. Total time spent on jobs should be compared with total time indicated on time-clock cards.

Difficulty: Easy

23. An auditor reviews a client's payroll procedures. The auditor would consider the internal control to be less
than effective
if a payroll department supervisor was assigned the responsibility for:
A. reviewing and approving time reports for subordinate employees.
B. distributing payroll cheques to employees.
C. hiring subordinate employees.
D. initiating requests for salary adjustments for subordinate employees.

Difficulty: Medium
24. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit
goals most likely
would significantly influence an entity's control environment when:
A. external policies established by parties outside the entity affect its accounting practices.
B. management is dominated by one individual.
C. internal auditors have direct access to the board of directors and the entity's management.
D. the audit committee is active in overseeing the entity's financial reporting policies.

Difficulty: Easy
Learning Objective: 8.4 Identify and define each of the components of internal control.
Section: Components of internal control
25. The control environment component of internal controls includes all of the following except:
A. management's operating style.
B. access to computer programs.
C. organisational structure.
D. human resource policies and practices.

Difficulty: Medium

26. The risk assessment component of internal controls refers to:

A. the auditor's assessment of control risk.
B. the auditor's assessment of engagement risk.
C. the entity's identification and analysis of risks relevant to achievement of its objectives.
D. the entity's monitoring of the potential for material misstatements.

Difficulty: Easy
27. Which of the following is not one of the five elements of internal control?
A. Corporate governance.
B. Control procedures.
C. Control environment.
D. Information system.

Difficulty: Easy
28. The internal control environment includes all of the following except:
A. organisational structure.
B. management philosophy and operating style.
C. human resource policies and procedures.
D. tests of control.

Difficulty: Easy
29. Transaction authorisation within an organisation may be either specific or general. An example of specific
transaction
authorisation is the:
A. setting of automatic reorder points for material or merchandise.
B. approval of a detailed construction budget for a warehouse.
C. establishment of requirements to be met in determining a customer's credit limits.
D. establishment of sales prices for products to be sold to any customer.

Difficulty: Medium

30. An effective internal control requires organisational independence of departments. Organisational

independence would be
impaired in which of the following situations?
A. The internal auditors report to the audit committee of the board of directors.
B. The financial controller reports to the marketing director.
C. The payroll accounting department reports to the chief accountant.
D. The cashier reports to the treasurer.

Difficulty: Easy
31. A well-prepared flowchart should make it easier for the auditor to:
A. prepare audit procedure manuals.
B. prepare detailed job descriptions.
C. perform walkthroughs.
D. assess the degree of accuracy of financial data.

Difficulty: Easy
Learning Objective: 8.5 Identify the steps in a financial report audit by which the auditor obtains an understanding of internal control and assesses control risk, and the
methods and procedures used by the auditor in each step.
Section: Considering internal control in a financial report audit
32. A flowchart is most frequently used by an auditor in connection with the:

A. preparation of generalised computer audit programs.
B. review of the client's internal accounting controls.
C. use of statistical sampling in performing an audit.
D. performance of analytical procedures on account balances.

Difficulty: Easy

33. An advantage of using systems flowcharts to document information about internal control instead of using
internal control
questionnaires is that systems flowcharts:
A. identify internal control weaknesses more prominently.
B. provide a visual depiction of clients' activities.
C. indicate whether controls are operating effectively.
D. reduce the need to observe clients' employees performing routine tasks.

Difficulty: Easy
34. For a complex system, auditors are least likely to use which of the following when documenting their
understanding
of internal controls?
A. Narratives.
B. Internal control questionnaires.
C. Flowcharts.
D. Organisation charts.

Difficulty: Easy
35. Walk-throughs usually involve all of the following audit procedures except:
A. re-performance.
B. inquiry.
C. observation.
D. inspection.

Difficulty: Easy

36. Which of the following is not a reason to assess control risk as high?
A. Internal control policies or procedures are unlikely to be effective.
B. Evaluating the effectiveness of the internal control policies or procedures would be more time consuming
than
another audit approach.
C. The auditor has assessed detection risk as high.
D. Internal control policies or procedures are unlikely to pertain to an assertion.

Difficulty: Medium
37. In obtaining an understanding of the internal control policies and procedures that are relevant to audit
planning, the auditor
should perform procedures to provide sufficient knowledge of:
A. design of the relevant policies, procedures and records and their operating effectiveness.
B. design of the relevant policies, procedures and records and their relationships to assertions.
C. the complexity of the entity and the sophistication of its systems and operations.
D. design of the relevant policies, procedures and records and whether they have been placed in operation.

Difficulty: Medium
38. Which of the following is not a medium that can normally be used by an auditor to record information
concerning a
client's internal control?
A. Narrative memorandum.
B. Procedures manual.
C. Flowchart.
D. Decision table.

Difficulty: Easy

39. When the auditor has assessed the level of control risk at less than high, the auditor should document:
A. the understanding of the entity's internal control elements obtained to plan the audit.
B. the conclusion and the basis for that conclusion.
C. the implications for the overall audit strategy.

Difficulty: Medium
40. Procedures directed towards obtaining evidence concerning the effectiveness of the design or operation of
an internal control
policy or procedure are referred to as:
A. analytical procedures.
B. substantive tests.
C. tests of controls.
D. confirmations.

Difficulty: Easy
41. The auditor observes client employees in obtaining an understanding of the internal control in order to:
A. prepare a flowchart.
B. update information contained in the organisation and procedure manuals.
C. corroborate the information obtained during the initial phases of obtaining an understanding of the internal
control.
D. determine the extent of compliance with quality control standards.

Difficulty: Easy

42. The following are steps in the audit process:
I. prepare flowchart.
II. gather exhibits of all documents.
III. interview personnel.
The most logical sequence of steps is:

A. I, II, III.
B. I, III, II.
C. III, II, I.
D. II, I, III.

Difficulty: Easy
43. The auditor's understanding of the client's internal control is documented to substantiate:
A. conformity of the accounting records with the accounting standards.
B. representation as to adherence to requirements of management.
C. compliance with the auditing standards.
D. the fairness of the financial report presentation.

Difficulty: Easy
44. After the auditor has prepared a flowchart of the accounting system and control procedures surrounding
sales, and assessed
the design of the system, the auditor would perform tests of controls for all control procedures:
A. documented in the flowchart.
B. considered to be deficiencies that might allow errors to enter the accounting system.
C. considered to be strengths that the auditor plans to use as a basis for an assessed level of control risk less
than high.
D. that would aid in preventing irregularities.

Difficulty: Easy

45. Which of the following internal control features would an auditor be least likely to review?
A. Segregation of the asset-handling and record-keeping functions.
B. Company policy regarding credit and collection efforts.
C. Classification of sales and cost records by products.
D. Authorisation of additions to plant and equipment.

Difficulty: Medium
46. When considering the internal control for inventory with respect to segregation of duties, an auditor would
be least likely to:
A. inspect documents.
B. make inquiries.
C. observe procedures.
D. consider policy and procedure manuals.

Difficulty: Medium
47.
In the weekly computer run to prepare payroll cheques, a cheque was printed for an employee whose employment was terminated the previous
week. Which of the following controls, if properly used, would have been most effective in preventing this error or ensuring its prompt detection?
A. A control total for hours worked, prepared from time cards collected by the timekeeping department
and compared to the payroll sheets.
B. Requiring the accounting department to account for all pre-numbered cheques issued to the IT department
for the processing of the payroll.
C. The use of check digits on employee numbers.
D. The use of a header label on the payroll input sheet.

Difficulty: Medium

48. The auditor obtains evidence supporting the notion that proper segregation of duties exists by:
A. personally observing the employees who apply the control procedures.
B. reviewing job descriptions in the personnel department.
C. preparing a flowchart of duties performed by personnel.
D. performing tests to determine whether control procedures operated consistently throughout the period.

Difficulty: Medium
49. Which of the following is essential to determine whether effective internal control policies and procedures
have been
prescribed and are being followed?
A. Developing questionnaires and checklists.
B. Understanding control policies directed towards operating efficiency.
C. Understanding the internal control and performing tests of controls.
D. Observing employee functions and making inquiries.

Difficulty: Easy
50. Which of the following input controls is a numeric value computed to provide assurance that the original
value has not been
altered in construction or transmission?
A. Hash total.
B. Parity check.
C. Encryption.
D. Check digit.

Difficulty: Easy
Learning Objective: 8.6 Distinguish between user controls and information technology (IT) controls, between general controls and application controls and between
programmed controls and manual controls, and identify the general controls and application controls that affect the auditor’s assessment of control risk in a
computerised system.
Section: Computerised systems

51. A limit test is a:

A. test to ensure that a numerical value does not exceed some predetermined value.
B. check to ensure that the value in a field falls within an allowable range of values.
C. check to ensure that the data in a field have the proper arithmetic sign.
D. check on a field to ensure that it contains either all numeric or alphabetic characters.

Difficulty: Easy
52. An IT input control is designed to ensure that:

A. machine processing is accurate.
B. only authorised personnel have access to the computer area.
C. data received for processing are properly authorised and converted to machine readable form.
D. electronic data processing has been performed as intended for the particular application.

Difficulty: Easy
53. For good internal control, which of the following functions should not be the responsibility of the treasurer's
department?
A. Data processing.
B. Handling of cash.
C. Custody of securities.
D. Establishing credit policies.

Difficulty: Easy

54. In updating a computerised accounts receivable file, which one of the following would be used as a batch
control to verify
the accuracy of the postings of cash receipts remittances?
A. The sum of the cash deposits, plus the discounts, less the sales returns.
B. The sum of the cash deposits.
C. The sum of the cash deposits, less the discounts taken by customers.
D. The sum of the cash deposits, plus the discounts taken by customers.

Difficulty: Hard
55.
After obtaining an initial understanding of a client's IT controls, an auditor may decide not to perform tests of controls related to the control
procedures within the IT portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit tests of
controls?
A. The controls appear adequate.

B. The controls duplicate operative controls existing elsewhere in the system.
C. There appear to be major deficiencies that would preclude using the stated procedure as a basis to reduce
the assessed level.
D. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests
of controls show the controls to be operative.

Difficulty: Easy
56. Which of the following computer documentation would an auditor most likely utilise in obtaining an
understanding of internal control?
A. Systems flowcharts.
B. Record layouts.
C. Program listings.
D. Record counts.

Difficulty: Easy

57. Which of the following situations most likely represents a weakness in IT internal control?
A. The accounts payable clerk prepares data for computer processing and enters the data into the computer.
B. The systems analyst reviews output and controls the distribution of output from the IT department.
C. The control clerk establishes control over data received by the IT department and reconciles control totals
after processing.
D. The systems programmer designs the operating and control functions of programs and participates in testing
operating systems

Difficulty: Hard
58. Which of the following would lessen the effectiveness of the internal control in a computer system?
A. The computer librarian maintains custody of computer program instructions and detailed program listings.
B. Computer operators have access to operator instructions and detailed program documentation.
C. The control group maintains sole custody of all computer output before distribution.
D. Computer programmers write and debug.

Difficulty: Hard
59. Which of the following is likely to be least important to an auditor who is reviewing the internal control of
the data processing function?
A. Ancillary program functions.
B. Disposition of source documents.
C. Operator competence.
D. Bit storage capacity.

Difficulty: Easy

60. Which of the following is likely to be of least importance to an auditor in obtaining an understanding of the
internal control?
A. The segregation of duties within the IT centre.
B. The control over source documents.
C. The documentation maintained for accounting applications.
D. The cost–benefit ratio of data processing operations.

Difficulty: Easy
61. A procedural control used in the management of a computer centre to minimise the possibility of data or
program file
destruction through operator error includes:
A. control figures.
B. cross-adding tests.
C. limit checks.
D. external labels.

Difficulty: Easy
62. The use of a header label in conjunction with magnetic tape is most likely to prevent errors by the:
A. computer operator.
B. key entry operator.
C. computer programmer.
D. maintenance technician.

Difficulty: Easy

63. When erroneous data are detected by computer program controls, such data may be excluded from
processing and printed
on an error report. The error report should most probably be reviewed and followed up by the:
A. IT control group.
B. system analyst.
C. supervisor of computer operations.
D. computer programmer.

Difficulty: Easy
64. Internal control procedures within the IT activity may leave no visible evidence indicating that the
procedures were performed.
In such instances, the auditor should test these controls by:
A. making corroborative inquiries.
B. observing the separation of duties of personnel.
C. reviewing transactions submitted for processing and comparing them to related output.
D. reviewing the run manual.

Difficulty: Medium
65. Totals of amounts in computer-record data fields that are not usually added, but are used only for
data-processing control
purposes, are called:
A. record totals.
B. hash totals.
C. processing data totals.
D. field totals.

Difficulty: Easy

66. Which of the following activities would most likely be performed in the IT department?
A. Initiation of changes to master records.
B. Conversion of information to machine-readable form.
C. Correction of transactional errors.
D. Initiation of changes to existing applications.

Difficulty: Easy
67. Which of the following is an example of a check digit?

A. An agreement of the total number of employees to the total number of cheques printed by the computer.
B. An algebraically determined number produced by the other digits of the employee number.
C. A logic test that ensures all employee numbers have nine digits.
D. A limit check that an employee's hours do not exceed 50 hours per work week.

Difficulty: Easy
68. For control purposes, which of the following should be organisationally segregated from the computer
operations function?
A. Data conversion.
B. Surveillance of CRT messages.
C. Systems development.
D. Minor maintenance according to a schedule.

Difficulty: Medium

69. An input control is designed to ensure that:

A. machine processing is accurate.
B. only authorised personnel have access to the computer area.
C. data received for processing are properly authorised and converted to machine-readable form.
D. electronic data processing has been performed as intended for the particular application.

Difficulty: Easy
70.
Carmela Department Stores Ltd has a fully integrated IT accounting system and is planning to issue credit cards to credit-worthy customers. To
strengthen the internal control by making it difficult for one to create a valid customer account number, the company's independent auditor has
suggested the inclusion of a check digit that should be placed:
A. at the beginning of a valid account number, only.

B. in the middle of a valid account number, only.
C. at the end of a valid account number, only.
D. consistently in any position.

Difficulty: Easy
71. After obtaining an understanding of a client's IT control, an auditor may decide not to perform tests of
controls within the
IT portion of the client's system. Which of the following would not be a valid reason for choosing to omit tests
of controls?
A. There appear to be major deficiencies that preclude reliance on the stated procedure.
B. The time and dollar costs of testing controls exceed the savings in substantive testing if the tests show the
controls to be operative.
C. The controls appear to be adequate and thus can be relied upon in assessing the level of control risk.
D. The controls duplicate controls existing elsewhere in the system.

Difficulty: Easy

72. The completeness of IT-generated sales figures can be tested by comparing the number of items listed on
the daily sales
report with the number of items billed on the actual invoices. This process uses:
A. control totals.
B. validity tests.
C. process tracing data.
D. check digits.

Difficulty: Easy
73. If a control total were to be computed on each of the following data items, which would best be identified
as a hash total for
a payroll IT application?
A. Hours worked.
B. Employee's identification number.
C. Number of employees.
D. Gross pay.

Difficulty: Easy
74. If a control total were to be calculated on each of the following data items, which would best be identified
as a hash total for
a payroll IT application?
A. Net pay.
B. Department numbers.
C. Hours worked.
D. Total debits and total credits.

Difficulty: Easy

75. One of the major problems with IT systems is that incompatible functions may be performed by the same
individual.
One compensating control for this is the use of:
A. a tape library.
B. a check-digit system.
C. computer-generated hash totals.
D. a computer log.

Difficulty: Medium
76. In which of the following situations would an auditor most likely use a strategy of reliance on internal
control?
A. The systems analyst reviews output and controls the distribution of output from the IT department.
B. The entity has been slow to update its IT system to reflect changes in billing practices.
C. No paper trail is generated, as the entity receives sales orders, bills customers and receives payment based
only on information generated from IT.
D. The auditor has been unable to determine whether all changes to a client's IT were properly authorised.

Difficulty: Hard
77.
When an independent auditor decides that the work performed by internal auditors may have a bearing on the nature, timing and extent of
contemplated audit procedures, the independent auditor should plan to evaluate the objectivity of the internal auditors. Relative to objectivity, the
independent auditor should:
A. consider the organisation level to which internal auditors report the results of their work.
B. review the quality control program in effect for the internal audit staff.
C. examine the quality of the internal audit reports.
D. consider the qualifications of the internal audit staff.

Difficulty: Medium
Learning Objective: 8.7 Explain the role of the internal audit function in internal control and how it may affect the audit.
Section: Considering the work of an internal auditor

78. To provide for the greatest degree of independence in performing internal auditing functions, an internal
auditor most likely
should report to the:
A. chief financial officer.
B. corporate controller.
C. audit committee.
D. shareholders.

Difficulty: Easy
79.
Maxi Sales Corp. maintains a large, full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal
auditors indicate that the structure is functioning as it should be and that the accounting records are reliable. The external auditor will probably:
A. eliminate tests of controls.

B. increase the depth of the procedures to obtain an understanding of controls directed towards operating
efficiency.
C. avoid duplicating the work performed by the internal audit staff.
D. place limited reliance on the work performed by the internal audit staff.

Difficulty: Medium

Chapter 09 Key
1. Assessing control risk at a level below high most likely would involve:
A. identifying specific internal controls relevant to specific assertions.
B. changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
C. reducing inherent risk for most of the assertions relevant to significant account balances.
D. performing more extensive substantive tests with larger sample sizes than originally planned.
Difficulty: Easy
Est time: < 1 min
Section: Tests of controls.
2. An auditor may decide to assess control risk at high for certain assertions because the auditor believes:
A. evaluating the effectiveness of control policies and procedures is inefficient.
B. sufficient evidential matter to support the assertions is likely to be available.
C. considering the relationship of assertions to specific account balances is more efficient.
D. more emphasis on tests of controls than substantive tests is warranted.
Difficulty: Easy
Est time: < 1 min
3. After obtaining an understanding of an entity's internal control system, an auditor may assess control risk at
the maximum
level for some account balances because he or she:
A. identifies internal controls that are likely to prevent material misstatements.
B. performs tests of controls to reduce detection risk to an acceptable level.
C. determines that the pertinent internal control components are not well documented.
D. believes the internal controls are unlikely to be operating effectively.
Difficulty: Easy
Est time: < 1 min
Est time: 1–3 mins

4. Which of the following audit tests would be regarded as a test of controls?

A. Tests comparing inventory pricing to vendors' invoices.
B. Tests of the specific items making up the balance in a given general ledger account.
C. Tests of the additions to property, plant and equipment by physical inspections.
D. Tests of the signatures on purchase orders to a list of approved signatories.
Difficulty: Medium
5. Test of controls must be performed:

A. to ensure that controls that are to be relied upon are operating effectively throughout the entire year.
B. when inherent risk is high.
C. in areas of business risk.
D. when control risk is high.
Difficulty: Easy
Est time: < 1 min
Learning Objective: 9.2 Appreciate that when undertaking tests of controls, the auditor must collect audit evidence about the existence, effectiveness and continuity of
controls.
Section: Existence, effectiveness and continuity of controls
6. A procedure that would most likely be used by an auditor in performing tests of controls that involve
segregation of functions
and that leave no transaction trail is:
A. observation.
B. inspection.
C. reconciliation.
D. re-performance.
Difficulty: Easy
controls.

7. Which of the following procedures most likely would be included as part of an auditor's tests of controls?
A. Reconciliation.
B. Inspection.
C. Analytical procedures.
D. Confirmation.
Difficulty: Medium
Est time: < 1 min
controls.
8. Evidence about which aspect(s) of internal control is usually gained when the auditor is assessing control
risk?
A. Existence.
B. Effectiveness.
C. Continuity.
D. All of the given answers.
Difficulty: Medium
controls.
9. Which of the following procedures most likely would provide an auditor with evidence about whether an
entity's internal control
activities are suitably designed to prevent or detect material misstatements?
A. Performing analytical procedures using data aggregated at a high level.
B. Re-performing the controls for a sample of transactions.
C. Observing the entity's personnel applying the controls.
D. Vouching a sample of transactions directly related to the controls.
Difficulty: Medium
controls.

10. Based on a study and evaluation completed at an interim date, the auditor concludes that no significant
internal accounting control weaknesses
exist. The records and procedures would most likely be tested again at year-end if:
A. the internal accounting control system provides a basis for reliance in reducing the extent of substantive
testing.
B. tests of controls were not performed by the internal auditor during the remaining period.
C. inquiries and observations lead the auditor to believe that conditions have changed.
D. the auditor used non-statistical sampling during interim compliance testing.

Difficulty: Medium
controls.
11. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control
procedures leave
no audit trail of documentary evidence, the auditor most likely will test the procedures by:
A. inquiry and analytical procedures.
B. confirmation and observation.
C. observation and inquiry.
D. analytical procedures and confirmation.

Difficulty: Medium
controls.
12. When undertaking tests of controls which are related to controls built around a major transaction flow,
which assertion would
be of least interest to the auditor?
A. Occurrence.
B. Accuracy.
C. Cut-off.
D. Valuation or allocation.

Difficulty: Medium
Learning Objective: 9.3 Identify factors affecting the auditor’s assessment of the sufficiency and appropriateness of evidence of tests of controls.
Section: Sufficiency and appropriateness of evidence

13. When undertaking tests of controls which are related to controls built around a major transaction flow,
which assertion would
be of least interest to the auditor?
A. Accuracy.
B. Completeness.
C. Occurrence.
D. Rights and obligations.

Difficulty: Medium
Learning Objective: 9.3 Identify factors affecting the auditor’s assessment of the sufficiency and appropriateness of evidence of tests of controls.
Section: Sufficiency and appropriateness of evidence
14. In the examination of which of the following general ledger accounts will tests of controls be particularly
appropriate?
A. Loans payable.
B. Equipment.
C. Sales.
D. Bank charges.

Difficulty: Easy
Learning Objective: 9.4 Describe the audit procedures for testing controls in the revenues, receivables and receipts system.
Section: Revenues, receivables and receipts
15. Tests designed to detect credit sales made before the end of the year that have been recorded in the
subsequent year provide assurance about management's assertion of:
A. Classification.
B. Cut-off.
C. Occurrence.
D. Accuracy.

Difficulty: Easy
Est time: < 1 min

16. Which of the following tests of control most likely would help assure an auditor that goods shipped are
properly billed? Checking that the client has:
A. scanned the sales journal for sequential and unusual entries.
B. examined shipping documents for matching sales invoices.
C. compared the accounts receivable ledger to daily sales summaries.
D. inspected unused sales invoices for consecutive pre-numbering.

Difficulty: Medium
17. To determine whether internal control structure policies and procedures operated effectively to minimise
errors of failure to invoice
a shipment, the auditor would select a sample of transactions from the population represented by the:
A. bill of lading file.
B. customer order file.
C. sales invoice file.
D. subsidiary customer accounts ledger.

Difficulty: Medium
18. For effective internal control, the billing function should be performed by the:
A. accounting department.
B. sales department.
C. shipping department.
D. credit and collection department.

Difficulty: Medium

19. Tracing shipping documents to pre-numbered sales invoices provides evidence that:
A. no duplicate shipments or billings occurred.
B. shipments to customers were properly invoiced.
C. all goods ordered by customers were shipped.
D. all pre-numbered sales invoices were accounted for.

Difficulty: Medium
20. Tracing bills of lading to sales invoices provides evidence that:

A. invoiced sales were shipped.
B. recorded sales were shipped.
C. shipments to customers were recorded as sales.
D. shipments to customers were invoiced.

Difficulty: Medium
21. Tracing copies of sales invoices to shipping documents will provide evidence that all:
A. shipments to customers were billed.
B. debits to the accounts receivable master file are for sales shipped.
C. billed sales were shipped.
D. shipments to customers were recorded as receivables.

Difficulty: Medium
22. Which is not a key segregation of duties for the revenue process? Different parties should:
A. prepare shipping orders and prepare bills of landing.
B. perform the credit and billing functions.
C. perform the shipping and billing functions.
D. receive cash and adjust accounts receivable.

Difficulty: Medium

23. All of the following are important controls over credit memos except:
A. proper segregation of duties to ensure that sales discounts taken were earned.
B. credit memos should be approved by someone other than whoever initiated it.
C. credit memos should be supported by a receiving document for returned goods.
D. proper segregation of duties between access to customer records and authorising credit memos.

Difficulty: Medium
24. When undertaking tests of controls for revenues, auditors are more concerned with controls associated with
the occurrence
assertion than they are with the completeness assertion because:
A. clients are more likely to overstate than understate revenues.
B. clients are more likely to understate than overstate revenues.
C. it is difficult to determine when services have been performed.
D. the allowance for doubtful accounts is often understated.

Difficulty: Medium
25. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed
to assess which assertion for sales?
A. Accuracy.
B. Completeness.
C. Cut-off.
D. Occurrence.

Difficulty: Medium

26. Which of the following is a test of controls for the control assertion of completeness for revenue?
A. Test a sample of sales invoices for authorised customer orders.
B. Review sales orders for proper credit approval.
C. Trace shipping documents to sales invoices and the sales journal.
D. Examine reconciliation of accounts receivable subsidiary ledger to general ledger control account.

Difficulty: Medium
27. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed
as low for the
occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:
A. opening and closing inventory balances.
B. cash receipts and accounts receivable.
C. shipping and receiving activities.
D. cut-offs for sales and purchases.

Difficulty: Medium
28. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control
procedures over the invoicing
function allow goods to be invoiced that are not shipped. The inadequate control procedures could cause an:
A. understatement of revenues, receivables and inventory.
B. overstatement of revenues and receivables, and an understatement of inventory.
C. understatement of revenues and receivables, and an overstatement of inventory.
D. overstatement of revenues, receivables and inventory.

Difficulty: Hard

29. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control
procedures over the invoicing
function allow goods to be shipped that are not invoiced. The inadequate control procedures could cause an:
A. understatement of revenues, receivables and inventory.
B. overstatement of revenues and receivables and an understatement of inventory.
C. understatement of revenues and receivables and an overstatement of inventory.
D. overstatement of revenues, receivables and inventory.

Difficulty: Hard
30. Which of the following internal controls would be most likely to deter the lapping of collections from
customers?
A. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
B. Segregation of duties between receiving cash and posting the accounts receivable ledger.
C. Authorisation of write-offs of uncollectible accounts by a supervisor independent of the credit approval
function.
D. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash
summaries.

Difficulty: Hard
31. Purchase cut-off procedures should be designed to test whether or not all inventory:
A. on the statement of financial position was carried at lower of cost or market.
B. purchased and received before the year-end was recorded at year-end.
C. owned by the company is in the possession of the company.
D. on the year-end statement of financial position was paid for by the company.

Difficulty: Easy
Learning Objective: 9.5 Describe the audit procedures for testing controls in the expenditures, payables and disbursements system.

32. The cut-off assertion for accounts payable includes:

A. determining whether all accounts payable are recorded at their correct amount.
B. determining whether all accounts payable are actually liabilities.
C. determining whether all accounts payable are recorded in the proper period.
D. determining whether all accounts payable are properly classified in the financial statements.

Difficulty: Easy
Est time: < 1 min
Section: Expenditures, payables and disbursements
33. Which of the following is a primary function of the purchasing department?

A. Reducing expenditures for goods acquired.
B. Verifying the propriety of goods acquired.
C. Ensuring the acquisition of goods of a specified quality.
D. Authorising the acquisition of goods.

Difficulty: Easy
Est time: < 1 min
34. Which of the following control activities is not usually performed in the vouchers payable department?
A. Controlling the mailing of the cheque and remittance advice.
B. Matching the receiving report with the purchase order.
C. Determining the mathematical accuracy of the vendor's invoice.
D. Having an authorised person approve the voucher.

Difficulty: Medium

35. To ensure the completeness of purchases made during the year, the auditor should:
A. select a sample of transactions from the accounts payable master file and vouch to related invoices.
B. select a sample of invoices received before the year-end and ensure that they are appropriately recorded in
the
accounts payable master file.
C. perform a bank reconciliation.
D. select a sample of receiving reports before and after the year-end and ensure they have been appropriately
recorded.

Difficulty: Medium
36.
An internal control questionnaire indicates that an approved receiving report is required to accompany every cheque request for payment of
merchandise. Which of the following tests of control provides the greatest assurance that this control is operating effectively?
A. Select and examine receiving reports and ascertain that the related voucher documents are dated no later
than
the receiving reports.
B. Select and examine receiving reports and ascertain that the cancelled voucher documents are dated no
earlier
than the receiving reports.
C. Select and examine voucher documents and ascertain that the related receiving reports are dated no later
than
the date of payment.
D. Select and examine voucher documents and ascertain that the related receiving reports are dated no earlier
than
the date of payment.

Difficulty: Medium

37. An audit client erroneously recorded a large purchase twice. Which of the following tests of control
measures would be most
likely to detect this error in a timely and efficient manner?
A. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
B. Footing the purchases journal.
C. Sending written quarterly confirmations to all vendors.
D. Tracing totals from the purchases journal to the ledger accounts.

Difficulty: Medium
38. When goods are received, the receiving clerk should match the goods with:
A. the receiving report and the vendor shipping document.
B. the vendor shipping document and the purchase order.
C. the vendor invoice and the receiving report.
D. the purchase order and the requisition form.

Difficulty: Medium
39. In a properly-designed accounts payable system, a voucher is prepared after the invoice, purchase order,
requisition and receiving
report are verified. The next step in the system is:
A. approval of the voucher for payment.
B. entering of the voucher into the voucher register.
C. entry of the cheque amount in the cheque register.
D. cancellation of the supporting documents.

Difficulty: Medium

40. To check the accuracy of the accounting records with regards to the recorded hours worked, an auditor
would ordinarily
compare time clock cards with:
A. shop job time tickets.
B. personnel records.
C. time recorded in the payroll register.
D. labour variance reports.

Difficulty: Medium
41. In auditing the purchases system, an auditor vouches a sample of entries in the voucher register (accounting
records) to
the supporting documents. Which assertion would this test of controls most likely support?
A. Completeness.
B. Occurrence.
C. Accuracy.
D. Classification

Difficulty: Medium
42. Tests of controls for the occurrence assertion for purchases include all of the following except:
A. evaluating proper segregation of duties.
B. testing a sample of vouchers to an authorised purchase order.
C. testing a sample of vouchers to receiving reports.
D. tracing a sample of vouchers to the purchases journal.

Difficulty: Medium

43. Which of the following is the most effective test of control to detect vouchers prepared for the payment of
goods that were not received?
A. Counting of goods upon receipt in the storeroom.
B. Matching of purchase order, receiving report and vendor invoice for each voucher in the accounts payable
department.
C. Comparison of goods received with goods requisitioned in the receiving department.
D. Verification of vouchers for accuracy and approval in the internal audit department.

Difficulty: Medium
44. Which of the following internal control activities is not usually performed in the accounts payable
department?
A. Indicating the asset and expense accounts to be debited.
B. Accounting for unused pre-numbered purchase orders and receiving reports.
C. Matching the vendor's invoice with the related receiving report.
D. Approving vouchers for payment by having an authorised employee sign the vouchers.

Difficulty: Medium
45. In a properly-designed purchasing process, the same employee most likely would match vendors' invoices
with receiving reports and also:
A. cancels vendors' invoices after payment.
B. reconciles the accounts payroll ledger.
C. recomputes the calculations on vendors' invoices.
D. posts the detailed accounts payable records.

Difficulty: Medium

46. Which of the following procedures would be most likely to be considered a weakness in an entity's internal
controls over payroll?
A. The personnel department sends employees' termination notices to the payroll department.
B. The employee who distributes payroll cheques is responsible for later distributing unclaimed payroll
cheques
to the employees absent at time of payroll distribution.
C. Payroll cheques are prepared by the payroll department and signed by the treasurer.
D. A voucher for the amount of the payroll is prepared in the general accounting department based on the
payroll
department's payroll summary.

Difficulty: Medium
Learning Objective: 9.6 Describe the audit procedures for testing controls relating to other types of expenditure transactions, including contractual transactions.
Section: Tests of controls for other types of expenditure transactions, including contractual transactions
47. Selected employee time cards that have been approved by supervisory personnel during the year are
compared to the payroll
register to ensure that they have been recorded. Which of the following assertions for payroll expense does this
test?
A. Occurrence.
B. Completeness.
C. Accuracy.
D. Cut-off.

Difficulty: Medium
48. Selected items from the payroll register are compared to employee time cards that have been approved by
supervisory personnel.
Which of the following assertions for payroll expense does this test?
A. Occurrence.
B. Completeness.
C. Accuracy.
D. Cut-off.

Difficulty: Medium

49.
An auditor decides that it is important and necessary to observe a client's distribution of payroll cheques on a particular audit. The client
organisation is so large that the auditor cannot conveniently observe the distribution of the entire payroll. In these circumstances, which of the
following is most acceptable to the auditor?
A. Observation should be made for all departments regardless of the inconvenience.

B. Observation should be limited to one or more selected departments.
C. Observation should be limited to those departments where employees are readily available.
D. Observation should be eliminated and other alternative auditing procedures should be utilised to obtain
satisfaction.

Difficulty: Medium
50. Possible misstatements related to the occurrence assertion for payroll transactions include all of the
following except:
A. payments to fictitious employees.
B. payments to terminated employees.
C. payments to valid employees who have not worked.
D. payments to valid employees at a rate in excess of the authorised amount.

Difficulty: Medium
51. Auditing by testing the input and output of an IT system instead of the computer program itself will:
A. detect all program errors, regardless of the nature of the output.
B. not detect program errors which do not show up in the output sampled.
C. not provide the auditor with confidence in the results of the auditing procedures.
D. provide the auditor with the same type of evidence.

Difficulty: Easy
Learning Objective: 9.7 Understand the auditing approaches used to test the controls contained in the client’s computer program, including test data and integrated
test facilities.
Section: Testing controls in client computer programs

52. An auditor will use test data in order to gain certain assurances with respect to the:
A. degree of keying accuracy.
B. controls contained within the program.
C. machine capacity.
D. input data.

Difficulty: Easy
Est time: < 1 min
test facilities.
53. Tests of controls of an advanced IT system:

A. can be performed using actual transactions or simulated transactions.
B. can be performed using only actual transactions since testing of simulated transactions is of no consequence.
C. is inadvisable because it may distort the evidence in master files.
D. is impractical since many procedures within the CIS activity leave no visible evidence of having been
performed.

Difficulty: Medium
test facilities.
54. When testing a computerised accounting system, which of the following is not true of the test data
approach?
A. The test data must consist of all possible valid and invalid conditions.
B. Test data are processed by the client's computer programs under the auditor's control.
C. Only one transaction of each type need be tested.
D. The test data need consist of only those valid and invalid conditions in which the auditor is interested.

Difficulty: Medium
test facilities.

55. Which of the following is not among the errors that an auditor might include in the test data when auditing
a client's IT system?
A. Authorisation code.
B. Numeric characters in alphanumeric fields.
C. Illogical entries in fields whose logic is tested by programmed consistency checks.
D. Differences in description of units of measure.

Difficulty: Medium
test facilities.
56. An auditor who is testing IT controls in a payroll system would most likely use test data that contain
conditions such as:
A. payroll cheques with unauthorised signatures.
B. time cards with invalid job numbers.
C. overtime not approved by supervisors.
D. deductions not authorised by employees.

Difficulty: Medium
test facilities.
57. An approach to testing real-time processing of a computer-based information system is known as the
integrated test facility
(ITF) technique. This approach involves:
A. testing the computer hardware at the same time as test transactions enter the real-time system.
B. validating as well as editing all input transactions entering the real-time system.
C. running monthly activities simultaneously with current transactions so that the two are integrated in the
result of the test.
D. setting up a small set of records for a fictitious entity in the master files and then processing dummy
transactions
against the fictitious entity.

Difficulty: Medium
test facilities.

58.
Smith Ltd has numerous customers. Each customer file contains name, address, credit limit and account balance. The auditor wishes to undertake
a test of the programmed control that does not allow account balance to exceed credit limit. The best procedure for the auditor to follow would be
to:
A. develop a program to compare credit limits with account balances and print out the details of any account
with
a balance exceeding its credit limit.
B. develop test data that would cause some account balances to exceed the credit limit and determine if the
system
properly detects such situations.
C. request a printout of a sample of account balances so they can be individually checked against the credit
limits.
D. request a printout of all account balances so they can be manually checked against the credit limits.

Difficulty: Medium
test facilities.
59.
In a daily computer run to update cheque account balances and to print out basic details on any customer's account that was overdrawn, the
overdrawn account of the computer programmer was never printed. Which of the following control procedures would have been most effective in
detecting this irregularity?
A. A manual test check of the information in the master file against the information on the printout.
B. Use of the test data approach by the auditor in testing the client's program and verifying the subsidiary file.
C. Periodic recompiling of programs from approved and documented source code, and comparison with
programs currently in use.
D. A program check for valid customer code.

Difficulty: Hard
test facilities.

Chapter 10 Key
1. The primary difference between an audit of the statement of financial position and an audit of the income
statement
lies in the fact that the audit of the income statement deals with the verification of:
A. authorisations.
B. transactions and events.
C. cut-offs.
D. presentation and disclosure.
Difficulty: Easy
Est time: < 1 min
Learning Objective: 10.1 Identify and distinguish between tests of controls and substantive tests of transactions, and between substantive tests of transactions and
substantive tests of balances.
Section: Relationship between evidence-gathering procedures
2. To test for unsupported entries in the ledger, the direction of audit testing should be from the:
A. journal entries.
B. Ledger entries.
C. original source documents.
D. externally-generated documents.
Difficulty: Medium
Learning Objective: 10.1 Identify and distinguish between tests of controls and substantive tests of transactions, and between substantive tests of transactions and
substantive tests of balances.
Section: Relationship between evidence-gathering procedures
3. In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's
assertion of:
A. existence.
B. rights and obligations.
C. completeness.
D. occurrence.
Difficulty: Easy
Est time: < 1 min
procedures.
Learning Objective: 10.6 Explain the specific audit objectives and the common audit procedures traditionally used to address risks of material misstatement for
accounts payable, payments and payroll
Section: Overall responses, financial report assertions and substantive audit procedures

4. Which of the following is not a primary objective of the auditor in undertaking substantive testing of
accounts receivable?
A. Determine the completeness of the recorded receivables.
B. Establish existence of the receivables.
C. Determine the adequacy of the internal control.
D. Determine the approximate amount that can be expected to be received.
Difficulty: Easy
Est time: < 1 min
procedures.
5. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete
or
slow-moving inventory to support management's account balance assertion of:
B. rights and obligations.
C. existence.
D. completeness.
Difficulty: Easy
Est time: < 1 min
procedures.
purchases and inventories
6.
Tests designed to detect goods which arrived at the warehouse just before year end and for which the audit client
took ownership that have not been recorded in the perpetual inventory records until the subsequent year would most
likely provide evidence about management's assertion of:
A. accuracy.
B. occurrence.
C. valuation and allocation.
D. cut-off.
Difficulty: Easy
Est time: < 1 min
procedures.

7.
An auditor will usually trace the details of the test counts of inventory items selected from the factory floor while
observing the inventory stocktake through to a final inventory schedule. This audit procedure is undertaken to
provide evidence of which assertion(s)?
A. Valuation and allocation.

B. Existence.
C. Completeness.
D. Cut-off.
Difficulty: Medium
procedures.
8.
Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by
a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this
type of misstatement?
A. Analyse bank confirmation information.

B. Analyse the notes payable journal.
C. Prepare a year-end bank transfer schedule.
D. Prepare a year-end bank reconciliation.
Difficulty: Medium
Learning Objective: 10.3 Explain the specific audit objectives and the common audit procedures traditionally used to address risks of material misstatement for cash,
cash receipts and cash payments
Section: Cash, cash receipts and cash payments
9. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts
receivable
subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this
step?
A. All sales invoices have been recorded.
B. Sales invoices represent bona fide sales.
C. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
D. All sales invoices have been properly posted to customer accounts.
Difficulty: Easy
Section: Sales, cash receipts and accounts receivable

10. To verify that all sales transactions have been recorded (the completeness assertion), a test of transactions
should
be completed on a representative sample drawn from:
A. the billing clerk's file of sales orders.
B. entries in the sales journal.
C. the shipping clerk's file of duplicate copies of bills of lading (goods shipped notices).
D. a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been
accounted for.

Difficulty: Medium
11. During the process of confirming receivables as of 30 June 2012, a positive confirmation was returned
indicating
the 'balance owed as of 30 June was paid on 9 July 2012.' The auditor would most likely:
A. determine whether a customary trade discount was taken by the customer.
B. determine whether there were any changes in the account between 1 July and 9 July 2012.
C. check subsequent cash receipts to confirm that the amount was received.
D. reconfirm the zero balance as of 9 July 2012.

Difficulty: Easy
Learning Objective: 10.4 Explain the specific audit objectives and the common audit procedures traditionally used to address risks of material misstatement for sales,
cash receipts and accounts receivable
12. An auditor should perform alternative procedures to substantiate the existence of an accounts receivable
when:
A. no reply to a negative confirmation request is received.
B. no reply to a positive confirmation request is received.
C. pledging of the receivable is probable.
D. collectability of the receivable is in doubt.

Difficulty: Easy
Est time: < 1 min

13. Once an auditor has determined that accounts receivable at year-end have increased due to slow collections
in
a 'tight money' environment, the auditor would be likely to:
A. review the going concern ramifications.
B. increase the balance in the allowance for bad debts account.
C. expand tests for the valuation and allocation assertion.
D. expand tests for the existence assertion.

Difficulty: Easy
14. An aged trial balance of accounts receivable is usually used by the auditor to:
A. verify the existence assertion for recorded receivables.
B. ensure that all accounts receivable are recorded (completeness assertion).
C. evaluate the results of tests of controls for the sales/accounts receivable system.
D. evaluate the provision for bad debts related to the valuation and allocation assertion.

Difficulty: Easy
15. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients received them.
C. Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment.
D. The inference drawn from receiving no reply may not be correct.

Difficulty: Easy

16. An auditor reviews the credit ratings of customers with overdue outstanding accounts receivable balances.
The
auditor's most likely purpose is to obtain evidence concerning management's assertions about:
B. completeness.
C. existence.

Difficulty: Easy
Est time: < 1 min
17. The audit working papers often include a client-prepared, aged trial balance of accounts receivable as at
balance
date. This ageing is best used by the auditor to:
A. test the accuracy of recorded sales.
B. assess control risk for credit sales.
C. verify the existence of the recorded receivables.
D. test the valuation and allocation assertion of accounts receivable.

Difficulty: Easy
18. In auditing accounts receivable the negative form of confirmation request most likely would be used when:
A. recipients are likely to return positive confirmation requests without verifying the accuracy of the
information.
B. the combined assessed level of inherent and control risk relative to accounts receivable is low.
C. a small number of accounts receivable are involved but a relatively large number of errors are expected.
D. the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Difficulty: Medium

19. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control
account,
as at 30 June 2012. By this procedure, the auditor would be most likely to learn of which of the following?
A. An April cheque from a customer was posted in error to the account of another customer with a similar
name.
B. An April invoice was improperly computed.
C. An account balance is past due and should be written off.
D. An opening balance in a subsidiary ledger account was improperly carried forward from the previous
accounting period.

Difficulty: Medium
20.
Johnson is engaged in the audit of a power company which supplies power to a residential community. All accounts
receivable balances are small and the internal control structure is effective. Customers are billed twice monthly. In
order to obtain evidence with regards the valuation and allocation assertion of the accounts receivable balances as
at balance date, Johnson would most likely:
A. send positive confirmation requests.

B. examine evidence of subsequent cash receipts.
C. use statistical sampling instead of sending confirmation requests.
D. send negative confirmation requests.

Difficulty: Medium
21. In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed
upon
which of the following?
A. The credit manager's opinion.
B. An aging schedule of past due accounts.
C. Collection experience of the client's collection agency.
D. Ratios calculated showing the past relationship of accounts receivable to net credit sales.

Difficulty: Medium

22. The negative form of accounts receivable confirmation request is useful except when:
A. a large number of small balances are involved.
B. the internal control structure surrounding accounts receivable is considered to be effective.
C. individual account balances are relatively large and few in number.
D. the auditor has reason to believe the persons receiving the requests are likely to give them consideration.

Difficulty: Medium
23.
During the current financial year, the client company began dealing with certain distributors on a consignment basis
(goods were delivered to the distributor but not deemed sold until the distributor had on-sold them). Which of the
following audit procedures is least likely to bring this new fact to the auditor's attention?
A. Test of cash receipts transactions.

B. Tracing of shipping documents to the sales journal.
C. Observation of physical inventory at the client company's premises.
D. Confirmation of accounts receivable.

Difficulty: Hard
24.
When evaluating the risk of material misstatement with regards to defalcations involving receivables (a credit entry
to accounts receivable for amounts not received), the auditor would expect an experienced bookkeeper to most likely
debit which of the following accounts?
A. Cash.
B. Sales returns.
C. Miscellaneous income.
D. Accounts payable.

Difficulty: Hard

25. An auditor, having accounted for a sequence of inventory tags, traces information on a representative
number of
tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that:
A. inventory sheets do not include untagged inventory items.
B. the final inventory is valued at cost.
C. the inventory listed on the inventory sheets is complete.
D. all inventory represented by an inventory tag is bona fide.

Difficulty: Easy
Section: Purchases and inventories
26. Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:
A. purchased and received before the year-end was recorded.
B. on the year-end statement of financial position was recorded at lower of cost or market.
C. on the year-end statement of financial position was paid for by the company.
D. owned by the company is in the possession of the company.

Difficulty: Easy
27.
Your client sells a high-technology product which is subject to frequent technological improvements and design
changes in order to keep current with the market. Based on this information, for the inventory account, the
assertion upon which you should concentrate your audit procedures is:

B. existence.
C. completeness.

Difficulty: Easy
Est time: < 1 min

28. During a client's stocktake you select a sample of items from the floor, count them and trace the quantities
to
the inventory summary sheet. Which financial report assertion is this audit procedure related to?
A. Valuation and allocation.
C. Completeness.
D. Existence.

Difficulty: Easy
Est time: < 1 min
29. The accuracy of perpetual inventory records may be established, in part, by comparing entries on the
perpetual
records with details from:
A. receiving reports.
B. purchase requisitions.
C. vendor payments.
D. purchase orders.

Difficulty: Easy
30. An auditor would be most likely to learn of slow-moving inventory through:

A. review of the cash payments journal.
B. inquiry of sales personnel.
C. review of perpetual inventory records.
D. physical observation of inventory.

Difficulty: Easy

31. The auditor tests the quantity of materials charged to work-in-process by tracing these quantities to:
A. perpetual inventory records.
B. cost ledgers.
C. material requisition forms.
D. receiving reports.

Difficulty: Easy
32. When perpetual inventory records are maintained, and control risk for inventory is high, the auditor would
probably:
A. insist that the client perform physical counts of inventory items several times during the year.
B. want the client to schedule the physical inventory count at the end of the year.
C. increase tests of controls around sales and purchases.
D. increase the extent of tests for unrecorded liabilities at the end of the year.

Difficulty: Easy
33. Tests designed to detect purchases made just before the end of the year that have been recorded in the
subsequent
year would provide assurance about management's assertion of:
A. accuracy.
B. occurrence.
C. cut-off.
D. classification.

Difficulty: Easy
Est time: < 1 min

34.
An auditor selected items that are on the store floor for test counts while observing a client's physical inventory.
The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained
evidence concerning management's assertion of:
A. rights and obligations.

B. completeness.
C. existence.
D. valuation and allocation.

Difficulty: Medium
35.
An auditor concluded that no excessive costs for idle plant were charged to inventory in a client's standard costing
system. This conclusion most likely related to the auditor's objective to obtain evidence about the account balance
assertion for inventory of:

B. completeness.
C. existence.

Difficulty: Medium
procedures.
36. Which of the following auditing procedures most likely would provide assurance about a manufacturing
entity's
assertion of valuation and allocation of inventory?
A. Testing the entity's computation of standard overhead rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cut-off procedures for inventories.
D. Tracing test counts to the entity's inventory listing.

Difficulty: Medium

37. Which of the following procedures would best detect the theft of valuable items from an inventory that
consists
of hundreds of different items selling for $1 to $10, and a few items selling for hundreds of dollars?
A. Have an independent audit firm prepare an internal control structure report on the effectiveness
of the controls over inventory.
B. Maintain perpetual inventory records with frequent periodic verification of the accuracy of these records.
C. Require an authorised officer's signature on all requisitions for the more valuable items.
D. Have separate warehouse space for the more valuable items with sequentially numbered tags.

Difficulty: Medium
38. From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:
A. accurate perpetual inventory records are maintained.
B. control risk is high.
C. significant amounts of inventory are held on a consignment basis.
D. inventory turnover has decreased from the prior year.

Difficulty: Medium
39. A client's physical count of inventory was higher than the inventory per the perpetual records. This
situation could
be the result of the failure to record:
A. sales discounts.
B. sales.
C. purchase returns.
D. purchases.

Difficulty: Medium

40.
When outside firms of non-accountants specialising in the taking of physical inventories are used to count, list,
price and subsequently compute the total dollar amount of inventory on hand at the date of the physical count,
the auditor will ordinarily:
A. make or observe some physical counts of the inventory, recompute certain inventory calculations
and test certain inventory transactions.
B. consider the report of the outside inventory-taking firm to be an acceptable alternative procedure
to the observation of physical inventories.
C. consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
D. not reduce the extent of work on the physical count of inventory.

Difficulty: Medium
41. An auditor usually examines receiving reports to support entries in the:

A. sales journal and sales returns journal.
B. voucher register and sales returns journal.
C. cheque register and sales journal.
D. voucher register and sales journal.

Difficulty: Medium
42. In a manufacturing company, which one of the following audit procedures would give the least assurance
with
regards to the valuation and allocation assertion for inventory?
A. Examining paid vendors' invoices.
B. Testing the computation of standard overhead rates.
C. Obtaining confirmation of inventories pledged under loan agreements.
D. Reviewing direct labour rates.

Difficulty: Medium

43. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control
risk
is high, an auditor would probably:
A. insist that the client perform physical counts of inventory items several times during the year.
B. apply gross profit tests to ascertain the reasonableness of the physical accounts.
C. increase the extent of tests of controls of the inventory cycle.
D. request the client to schedule the physical inventory count at the end of the year.

Difficulty: Medium
44. Which assertion for ending inventory is most likely at risk of material misstatement if the gross profit
percentage
is much greater than last year?
A. Existence.
B. Completeness.
C. Rights and obligations.
D. Accuracy.

Difficulty: Hard
45. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the
following
could explain the difference?
A. Credit memos for several items returned by customers had not been recorded.
B. Inventory items had been counted but the tags placed on the items had not been taken off the items
and added to the inventory accumulation sheets.
C. An item purchased 'FOB shipping point' had not arrived at the date of the inventory count and had
not been reflected in the perpetual records.
D. No journal entry had been made on the retailer's books for several items that the retailer returned
to its suppliers.

Difficulty: Hard

46. Your client's inventory turnover has decreased from 8.2 times to 5.6 times during the year. Based on this
decrease,
which financial report assertion would you be least concerned with?
A. Existence.
C. Valuation and allocation.
D. Completeness.

Difficulty: Hard
47. To determine whether accounts payable are complete, an auditor commonly performs sampling procedures
to
test whether all merchandise received is recorded. The population of documents for this test consists of all:
A. payment vouchers.
B. receiving reports.
C. purchase requisitions.
D. vendor's invoices.

Difficulty: Medium
Learning Objective: 11.3 Identify planning and design considerations for sampling, including defining audit objectives and the appropriate population, the potential
use of stratification and potential alternative definitions of the sampling unit, including dollar-unit sampling.
Section: Accounts payable, payments and payroll
48. In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to:
A. compare cut-off reports with purchase orders.
B. coordinate cut-off tests with physical inventory observation.
C. coordinate mailing of confirmations with cut-off tests.
D. compare vendors' invoices with vendors' statements.

Difficulty: Medium

49. Which of the following is the best audit procedure for determining the completeness of the accrued
liabilities listing?
A. Examine unusual relationships between monthly accounts payable balances and recorded purchases.
B. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial
balance of accounts payable.
C. Examine a sample of cash disbursements in the period subsequent to year-end.
D. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether
they have been properly recorded.

Difficulty: Medium
50. The auditor is most likely to verify the liability account 'accrued commissions payable' in conjunction with
the:
A. verification of contingent liabilities.
B. review of sales transactions.
C. examination of trade accounts payable.
D. review of disbursements after year-end.

Difficulty: Medium
Learning Objective: 10.9 Identify the different substantive test approaches that may be used for account balances included in the income statement.
51. All of the following can assist the auditor in testing the existence assertion for investment securities except:
A. physical examination.
B. comparing fair value to cost.
C. confirmation with the issuer of the securities.
D. confirmation with the custodian.

Difficulty: Easy
Est time: < 1 min
non-current assets
Section: Non-current assets

52. A normal audit procedure is to analyse the current year's repairs and maintenance accounts to provide
evidence
in support of the audit proposition that:
A. expenditures for fixed assets have been recorded in the proper period.
B. capital expenditures have been properly authorised.
C. non-capitalisable expenditures have been properly expensed.
D. the listing of fixed assets is complete.

Difficulty: Easy
non-current assets
53. In auditing intangible assets, an auditor would determine whether the amortisation amount is reasonable in
support
of management's financial statement assertion of:
B. existence.
C. completeness.

Difficulty: Easy
Est time: < 1 min
non-current assets
54. The auditor may conclude that depreciation charges are insufficient by noting:
A. large amounts of fully depreciated assets.
B. insured values greatly in excess of book values.
C. excessive recurring profits on assets retired.
D. continuous trade-ins of relatively new assets.

Difficulty: Easy
non-current assets

55. Which of the following is the most effective audit procedure for verification of dividends earned on
investments in
marketable equity securities?
A. Tracing deposit of dividend cheques to the cash receipts book.
B. Comparing the amounts received with dividends received in the preceding year.
C. Reconciling amounts received with published dividend records.
D. Recomputing selected extensions and footings of dividend schedules and comparing totals to
the general ledger.

Difficulty: Easy
non-current assets
56. In the examination of property, plant and equipment, which of the following does the auditor not try to
determine?
A. The reasonableness of the depreciation.
B. The capital nature of items included in repairs and maintenance.
C. The extent of property disposed of during the year.
D. The adequacy of future replacement funds.

Difficulty: Easy
non-current assets
57. An auditor analyses repairs and maintenance accounts primarily to obtain evidence that:
A. expenditures for property, plant and equipment have been recorded in the proper period.
B. non-capitalisable expenditures for repairs and maintenance have been recorded in the proper period.
C. expenditures for property, plant and equipment have not been charged to expenses.
D. non-capitalisable expenditures for repairs and maintenance have been properly charged to expenses.

Difficulty: Easy
non-current assets

58. The auditor is least likely to learn of retirements of equipment through which of the following?
A. Review of depreciation calculations.
B. Review of the purchase returns and allowance account.
C. Review of insurance policy correspondence.
D. Analysis of the debits to the accumulated depreciation account.

Difficulty: Easy
non-current assets
59. Which of the following is not one of the auditor's primary objectives when externally confirming holdings
of marketable securities?
A. To determine whether recorded securities are properly classified on the statement of financial position.
B. To determine whether recorded securities are the property of the client.
C. To determine whether recorded securities actually exist.
D. To determine whether recorded securities are authentic.

Difficulty: Medium
non-current assets
60. All of the following evidence-gathering procedures can assist the auditor in testing the existence assertion
for
investment securities except:
A. physical examination.
B. comparing fair value to the original cost.
C. confirmation with the issuer of the securities.
D. confirmation with the custodian.

Difficulty: Medium
non-current assets

61. Which of the following explanations might satisfy an auditor who discovers significant debits to an
accumulated
depreciation account?
A. Prior years' depreciation charges were erroneously understated.
B. There were numerous fixed asset retirements during the year.
C. There were numerous fixed asset purchases during the year.
D. A reserve for possible loss on retirement has been recorded.

Difficulty: Medium
non-current assets
62. To establish the existence and ownership of a long-term investment in the shares of a publicly traded
company,
an auditor ordinarily performs a security count or:
A. confirms the number of shares owned with the issuing company.
B. determines the market price per share at the balance sheet date from published quotations.
C. confirms the number of shares owned that are held by an independent custodian.
D. relies on the client's internal control if the auditor has reasonable assurance that the control activities
are being applied as prescribed.

Difficulty: Medium
non-current assets
63. In violation of company policy, Warren Ltd erroneously capitalised the cost of painting its warehouse. The
auditor
examining Warren's financial report would most likely detect this when:
A. examining maintenance expense accounts.
B. observing during the physical inventory observation that the warehouse had been painted.
C. examining the construction work orders supporting items capitalised during the year.
D. discussing the capitalisation policies with Warren's financial controller.

Difficulty: Medium
non-current assets

64. An auditor would be least likely to use external confirmation procedures in connection with the
examination of:
A. long-term debt.
B. property, plant and equipment.
C. inventories.
D. issued share capital.

Difficulty: Medium
non-current assets
65. In the audit of a medium-sized manufacturing concern, which one of the following areas would be
expected to require
the least amount of audit time?
A. Revenue.
B. Owners' equity.
C. Liabilities.
D. Assets.

Difficulty: Easy
Est time: < 1 min
non-current liabilities and owners’ equity.
Section: Non-current liabilities and owners equity
66. One of the primary reasons for preparing a reconciliation between interest-bearing obligations outstanding
during
the year and interest expense presented in the financial report is to:
A. ascertain the reasonableness of accrued interest.
B. detect unrecorded liabilities.
C. determine the validity of prepaid interest expense.
D. assess control risk for securities.

Difficulty: Easy

67. When a client company does not maintain its own share records, the auditor should obtain written
confirmation
from the transfer agent and registrar concerning:
A. the number of shares subject to agreements to repurchase.
B. guarantees of preferred share liquidation value.
C. restrictions on the payment of dividends.
D. the number of shares issued and outstanding.

Difficulty: Easy
68. Reviewing interest expense to identify payments to debt-holders not listed on the debt analysis schedule is
a procedure
that can be used to provide evidence for which audit assertion for loans payable:
A. occurrence.
B. completeness.
C. cut-off.
D. accuracy.

Difficulty: Easy
Est time: < 1 min
69. Substantive testing is typically used to audit shareholders' equity because:

A. the number of transactions is small.
B. controls over shareholders' equity transactions are typically weak.
C. a reliance strategy is most efficient.
D. the control environment over shareholders equity transactions is usually strong.

Difficulty: Easy

70. Which of the following audit procedures is least likely to detect an unrecorded liability?
A. Analysis and re-computation of depreciation expense.
B. Analysis and re-computation of interest expense.
C. Reading of the minutes of meetings of the board of directors.
D. Analysis of response to a bank confirmation request.

Difficulty: Medium
71. Which of the following analytical procedures should be applied to the income statement?
A. Ascertain that the net income amount in the statement of cash flow agrees with the net income
amount in the income statement.
B. Select sales and expense items and trace amounts to related supporting documents.
C. Compare the actual revenues and expenses with the corresponding figures of the previous year
and investigate significant differences.
D. Obtain from the proper client representatives the beginning and ending inventory amounts that
were used to determine costs of sales.

Difficulty: Easy
Section: Income statement
72. An auditor would be least likely to use confirmation in connection with the examination of:
A. income tax expense.
B. inventories.
C. accounts receivable.
D. long-term debt.

Difficulty: Easy
Est time: < 1 min

73. Which of the following pairs of accounts would an auditor most likely analyse on the same working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.

Difficulty: Medium
74. Which of the following is true of generalised audit software?

A. They can be used on any computer without modification.
B. They can only be used in auditing on-line computer systems.
C. They enable the auditor to perform manual procedures related to tests of controls less expensively.
D. They each have their own characteristics which the auditor must carefully consider before using
in a given audit situation.

Difficulty: Easy
Learning Objective: 10.10 Describe and understand the use of computer-assisted audit techniques in substantive testing.
Section: Using CAATs to aid in the undertaking of substantive tests
75. A primary advantage of using generalised audit software in the audit of an advanced IT system is that it
enables the auditor to:
A. gather and store large quantities of supportive evidential matter in machine-readable form.
B. verify the performance of machine operations which leave visible evidence of occurrence.
C. utilise the speed and accuracy of the computer.
D. substantiate the accuracy of data through self-checking digits and hash totals.

Difficulty: Easy

76. Auditors often make use of computer programs that perform routine processing functions such as sorting
and merging.
These programs are made available by IT companies and others and are specifically referred to as:
A. user programs.
B. utility programs.
C. supervisory programs.
D. compiler programs.

Difficulty: Easy
77. Which of the following is an exception report that the auditor would generate using generalised audit
software in
order to test the valuation and allocation assertion for accounts receivable?
A. Adding the accounts receivable ledger, and checking the total to the accounts receivable balance
in the general ledger.
B. A sequence check looking for missing sales invoice numbers.
C. A report outlining those balances that are greater than three months overdue.
D. A sample of debtors to be confirmed by positive debtors' confirmation procedures.

Difficulty: Easy
78. The auditor is least likely to use generalised audit software to:
A. access information stored on the client's IT files.
B. perform analytical procedures on the client's data.
C. test the accuracy of the client's computations.
D. directly test weaknesses in the client's programmed controls.

Difficulty: Easy

79. Which of the following audit procedures would an auditor be least likely to perform using generalised audit
software?
A. Inputting test transactions to ensure that the check digit control is operating.
B. Searching records of accounts receivable balances for credit balances.
C. Listing unusually large inventory balances.
D. Selecting accounts receivable for positive and negative confirmation.

Difficulty: Medium
80. Which of the following tests would the auditor use generalised audit software for in order to test the
completeness
assertion of inventory?
A. Identification of inventory items which haven't been sold for three months.
B. A sequence check looking for missing purchase invoice numbers.
C. A sequence check looking for duplicate purchase invoice numbers.
D. Selecting items from the inventory records in order to trace back to physical inventory counts.

Difficulty: Medium
81. Which of the following is necessary to audit balances in an on-line IT system in an environment of
destructive updating?
A. Year-end utilisation of audit hooks.
B. Periodic dumping of transaction files.
C. A well-documented audit trail.
D. An integrated test facility.

Difficulty: Medium

82. The auditor is least likely to use generalised audit software to:
A. access information stored on the client's IT files.
B. perform analytical procedures on the client's data.
C. test the accuracy of the client's computations.
D. identify weaknesses in the client's IT controls.

Difficulty: Medium
83. An auditor using audit software would probably be least interested in which of the following fields in a
computerised
perpetual inventory file?
A. Quantity sold.
B. Date of last purchase.
C. Warehouse location.
D. Economic order quantity.

Difficulty: Medium
84.
While undertaking the audit of the debtors' balance, you use your audit software to extract from the accounts receivable
master file a report which shows those debtors with a positive balance owing that is overdue by more than 30 days. At
which of the following account balance assertions is this report aimed?
A. Completeness.
B. Valuation and allocation.
C. Occurrence.
D. Existence.

Difficulty: Medium
procedures.

Chapter 11 Key
1. Audit sampling is the application of an audit procedure:

A. using statistical methods to evaluate the propriety of the account balance or class of transactions.
B. to less than 100 per cent of the items within an account balance or class of transactions for the purpose
of evaluating some characteristics of the balance or class.
C. applied to items selected randomly.
D. on a test basis.
Difficulty: Easy
Est time: < 1 min
Learning Objective: 11.1 Define audit sampling and its objective and describe the requirements that apply to all audit samples—statistical and non-statistical.
Section: Definitions and features
2. Which of the following best illustrates the concept of sampling risk?

A. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
B. A randomly chosen sample may not be representative of the population as a whole on the characteristic of
interest.
C. The documents related to the chosen sample may not be available for inspection.
D. An auditor may fail to recognise errors in the documents examined for the chosen sample.
Difficulty: Easy
3. Which of the following best describes the distinguishing feature of statistical sampling compared with
non-statistical sampling?
A. It provides a means for measuring mathematically the degree of uncertainty that results from examining
only
part of a population.
B. It requires the examination of a smaller number of supporting documents.
C. It is evaluated in terms of two parameters: statistical mean and random selection.
D. It reduces the problems associated with the auditor's judgment concerning materiality.
Difficulty: Easy
Learning Objective: 11.2 Identify the various means of gathering audit evidence.

4. An advantage of using statistical sampling techniques is that such techniques:

A. have been held in the courts to be superior to judgmental sampling.
B. define the values of precision and reliability required to provide audit satisfaction.
C. eliminate the need for judgmental decisions.
D. mathematically measure risk.
Difficulty: Easy
5. Which of the following is a distinguishing feature between statistical sampling and non-statistical
sampling?
A. Stratification.
B. The use of probability theory to evaluate sample results.
C. Allowing every item in the population a chance of selection.
D. Definition of the population.
Difficulty: Medium
6. Which of the following best illustrates the concept of sampling risk?

A. The documents related to the chosen sample may not be available for inspection.
B. An auditor may fail to recognise deviations in the documents examined for the chosen sample.
C. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
D. A randomly chosen sample may not be representative of the population as a whole for the characteristic of
interest.
Difficulty: Medium

7. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate
to the:
A. effectiveness of the audit.
B. efficiency of the audit.
C. audit quality controls.
D. selection of the sample.
Difficulty: Hard
Section: Various means of gathering audit evidence
8. When selecting items for testing, the auditor concentrates their selection on high dollar value items. This
approach is:
A. never appropriate in performing audit procedures under Australian auditing standards.
B. not an audit sampling technique but is often an appropriate evidence collection technique.
C. appropriate only if the auditor is undertaking statistical sampling.
D. generally a useful and efficient method for all audit tests.
Difficulty: Easy
9. Maria Lee, an auditor, uses statistical sampling to test control procedures. Why does Lee use this statistical
sampling technique?
A. It reduces the use of judgment required by Lee because there are established numerical criteria for this type
of testing.
B. It provides a means of measuring the sampling risk that results from examining only a part of the data.
C. It is specified by auditing standards.
D. It increases Lees' knowledge of the client's prescribed procedures and their limitations.
Difficulty: Easy

10. Auditors who prefer statistical to non-statistical sampling believe that the principal advantage of statistical
sampling flows
from its ability to:
A. provide a mathematical measurement of uncertainty.
B. define the precision required to provide audit satisfaction.
C. promote a more legally defensible procedural approach.
D. establish conclusive audit evidence with decreased audit effort.

Difficulty: Easy
11. An advantage of using statistical over non-statistical sampling methods in tests of controls is that the
statistical methods:
A. provide an objective basis for quantitatively evaluating sampling risk.
B. afford greater assurance than a non-statistical sample of equal size.
C. eliminate the need to use judgment in determining appropriate sample sizes.
D. can more easily convert the sample into a dual-purpose test useful for substantive testing.

Difficulty: Easy
12. Which of the following is an audit sampling approach?

A. The auditor identifies all items greater than $10 000 from the cash receipts journals and tests 50 per cent
of these items.
B. The auditor randomly selects 10 per cent of the items from a cash receipts journal, for vouching back to
supporting documents.
C. The auditor identifies all cash receipts from a particular customer and tests 50 per cent of these items.
D. All of the above.

Difficulty: Medium

13.
Sam Shoe, an auditor, is planning substantive tests of additions to property. There are 75 additions and he plans to vouch all those over $10 000,
of which there are 15 and apply analytical tests to the remaining balance. The audit approach may be described most precisely as:
A. Non-statistical sampling.
B. Audit sampling.
C. Statistical sampling.
D. None of the given answers.

Difficulty: Medium
14.
Joe Costa, an auditor, is planning tests of controls over cash receipts. There are 7000 receipts and he plans to vouch 30 picked haphazardly from
the cash receipts journal for the period 1 January to 30 September 20X0. This audit approach may be described most precisely as:
A. statistical sampling.
B. non-statistical sampling.
C. a non-sampling technique called selective examination.

Difficulty: Medium
Learning Objective: 11.5 Understand the appropriate methods of selecting sample items.
15.
Alicia Wong, an auditor, is planning confirmation of accounts receivable. There are 500 customer balances and based on the condition of the
accounting records and her past experience with the client, she plans to send 50 confirmation requests to customers she selected from the aged
trial balance of accounts receivable. Alicia plans to evaluate confirmation responses qualitatively and by multiplying the average error in the 50
responses by 500. This audit approach may be described most precisely as:
A. statistical sampling.
B. exception reporting.
C. non-statistical sampling.

Difficulty: Medium

16. In dollar-unit sampling, population size is:

A. the number of items in an account.
B. the dollar balance of an account.
C. included in the denominator of the formula to determine sample size.
D. unrelated to sample size.

Difficulty: Easy
Est time: < 1 min
Learning Objective: 11.8 Consider sampling approaches to substantive tests, in particular, dollar-unit sampling.
Section: Planning and designing the sample
17. Which of the following factors does an auditor generally most need to consider in planning a particular
audit sample
for a test of controls?
A. Total dollar amount of the items to be sampled.
B. Number of items in the population.
C. Risk of assessing control risk too high.
D. Risk of assessing control risk too low.

Difficulty: Medium
18. If the size of the sample to be used in a particular test of controls has not been determined by utilising
statistical concepts,
but the sample has been chosen in accordance with random selection procedures:
A. the auditor has committed a non-sampling error.
B. no inferences can be drawn from the sample.
C. the auditor will have to evaluate the results by reference to the principles of discovery sampling.
D. the auditor may or may not achieve desired precision at the planned level of assessing control risk too low.

Difficulty: Medium

19. Stratified sampling is a statistical technique that may be more efficient than unstratified sampling because
it usually:
A. yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the
population.
B. increases the variability among items in a stratum by grouping sampling units with similar characteristics.
C. produces an estimate having a desired level of precision with a smaller sample size.
D. is applied to populations where many monetary errors are expected to occur.

Difficulty: Medium
20. How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a
substantive test of details?
A. An increase in tolerable misstatement would increase sample size, but an increase in assessed level of
control risk
would decrease sample size.
B. Both an increase in tolerable misstatement and an increase in assessed level of control risk would increase
sample size.
C. Both an increase in tolerable misstatement and an increase in assessed level of control risk would decrease
sample size.
D. An increase in tolerable misstatement would decrease sample size, but an increase in assessed level of
control risk would
increase sample size

Difficulty: Hard

21. How would decreases in tolerable misstatement and assessed level of control risk affect the sample size in
a substantive test of details?
A. A decrease in tolerable misstatement would decrease sample size, while a decrease in assessed level of
control risk
would increase sample size.
B. Decreases in both tolerable misstatement and assessed level of control risk would decrease sample size.
C. Decreases in both tolerable misstatement and assessed level of control risk would increase sample size.
D. A decrease in tolerable misstatement would increase sample size, while a decrease in assessed level of
control risk
would decrease sample size.

Difficulty: Hard
22. In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations,
desired
confidence level and the:
A. tolerable deviation rate.
B. risk of incorrect acceptance.
C. nature and cause of deviations.
D. population size.

Difficulty: Easy
Learning Objective: 11.4 Identify factors influencing the determination of sample size.
Section: Determining the sample size
23. In audit sampling for substantive testing, a 10 per cent change in which of the following factors normally
will have the least
effect on the size of a statistical sample?
A. Population size.
B. Tolerable deviation rate.
C. Expected population deviation rate.
D. Standard deviation.

Difficulty: Easy
Est time: < 1 min

24. The tolerable deviation rate for tests of controls necessary to justify assessing control risk at less than
maximum depends
primarily on which of the following?
A. The assessed level of control risk.
B. The cause of deviations.
C. The tolerable deviation rate used in audits of similar clients.
D. The amount of any identified substantive misstatements.

Difficulty: Easy
Section: Determining sample size
25. When using a statistical sampling plan for a test of controls, the auditor would probably require a smaller
sample if the:
A. tolerable deviation rate decreases.
B. population increases.
C. expected deviation rate increases.
D. allowable risk of over-reliance increases.

Difficulty: Medium

26.
An auditor uses sampling tables to determine planned sample size for a test of controls. If they specify a risk of assessing control risk too low of
five per cent and a tolerable deviation rate of six per cent and expects no deviations, the planned sample size should be:
(Use the following table to determine your answer.)
Number of factors for sampling risks of:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 60.
B. 50.
C. 18.
D. Some other amount.

Difficulty: Medium
Learning Objective: 11.7 Consider sampling approaches to tests of controls, in particular, attribute sampling.

27.
An auditor planning tests of controls specifies a risk of assessing control risk too low of five per cent and a tolerable deviation rate of six per cent
and expects one deviation. For these specifications, the planned sample size should be:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 60.
B. 50.
C. 80.

Difficulty: Medium

28.
An auditor planning tests of controls specifies a risk of assessing control risk too low of 10 per cent and a tolerable deviation rate of six per cent
and expects no deviations. For these specifications, the planned sample size should be:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 60.
B. 50.
C. 40.

Difficulty: Medium

29.
An auditor planning tests of controls specifies a risk of assessing control risk too low of 10 per cent and a tolerable deviation rate of eight per cent
and expects one deviation. For these specifications, the planned sample size should be in which range:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 30–40.
B. 40–50.
C. 50–60.
D. More than 60.

Difficulty: Medium
30. The tolerable deviation rate for a test of controls is generally:

A. unrelated to the expected deviation rate in the related accounting records.
B. identical to the expected deviation rate in the related accounting records.
C. higher than the expected deviation rate in the related accounting records.
D. lower than the expected deviation rate in the related accounting records.

Difficulty: Medium

31. When planning a sample for a substantive test of balances, an auditor should consider tolerable
misstatement for the sample.
This consideration should:
A. not be changed during the audit.
B. be related to preliminary judgments about materiality levels.
C. not be adjusted for qualitative factors.
D. be related to the auditor's business risk assessment.

Difficulty: Medium
32. Which of the following is appropriate in the selection of a statistical sample?

A. Random selection.
B. Block selection.
C. Stratified selection.

Difficulty: Easy
Est time: < 1 min
Section: Selecting the sample
33. An underlying feature of random selection of items is that each:

A. item in the accounting population be randomly ordered.
B. stratum of the accounting population be given equal representation in the sample.
C. item must be systematically selected using replacement.
D. item in the accounting population should have an opportunity to be selected.

Difficulty: Easy

34. An auditor selecting a sample may use any of the following methods except:
A. haphazard selection.
B. stratified selection.
C. simple random selection.
D. block selection.

Difficulty: Easy
Est time: < 1 min
35.
The auditor has decided to use systematic selection of cash payments when testing the control that cheque payments are supported by a supplier's
invoice, a purchase requisition and a goods received note. Each cheque comprises a sampling unit. There are 5000 cheques drawn (numbered
1–5000) and the total amount of cash payments is $10 million. The sample size is 20 and the random start is 127. Given this information, the
sample interval is:
A. 500 000.
B. 250.
C. 127.

Difficulty: Easy
36.
The auditor has decided to use systematic selection of cash payments when testing the control that cheque payments are supported by a supplier's
invoice, a purchase requisition and a goods received note. Each cheque comprises a sampling unit. There are 5000 cheques drawn (numbered
1–5000) and the total amount of cash payments is $10 million. The sample size is 20 and the random start is 127. Given this information, the
second item selected will be item no:
A. Cheque number 5127.

B. Cheque number 627.
C. Cheque number 377.
D. Some other item number.

Difficulty: Easy

37.
When performing a test of controls with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at
any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:
A. may systematically occur more than once in the sample.

B. must be systematically replaced in the population after sampling.
C. may occur in a systematic pattern, thus destroying the sample randomness.
D. must be recorded in a systematic pattern before the sample can be drawn.

Difficulty: Medium
38.
An auditor plans to examine the supporting documentation for a sample of 20 payments as prescribed by the client's internal control procedures.
For one of the payments in the chosen sample of 20, the supporting documentation cannot be found. The auditor should:
A. treat the missing supporting documentation as a deviation for the purpose of evaluating the sample.
B. evaluate the results as if the sample size had been 19.
C. choose another payment to replace the payment with the missing supporting documentation in the sample.
D. treat the missing supporting documentation in the same manner as the majority of the other supporting
documentation (i.e. whether it supported the payments or not).

Difficulty: Medium
39. An auditor is selecting a random sample of cash disbursements. One of the corresponding source
documents for a selected
random number is a voided cheque. The auditor should:
A. treat the cheque as a deviation.
B. reduce the sample size by one.
C. select the cheque immediately before or after the one that corresponds to the random number.

Difficulty: Medium

40.
When performing a test of controls with respect to control over cash disbursements, an auditor may use a systematic sampling technique with a
start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:
A. must be systematically replaced in the population after sampling.

B. may systematically occur more than once in the sample.
C. may be ordered in a systematic pattern, thus destroying the sample randomness.
D. must be recorded in a systematic pattern before the sample can be drawn.

Difficulty: Easy
41. A sample selection procedure that is beneficial for helping ensure that items are continuously sampled over
the period of interest is:
A. haphazard sampling.
B. random sampling.
C. block sampling.
D. systematic sampling.

Difficulty: Easy
Est time: < 1 min
42. Projection of sample results is required in evaluation of:

A. all audit samples, both statistical and non-statistical.
B. all statistical samples.
C. all audit tests, whether sampling is being performed or not.
D. non-statistical audit samples only.

Difficulty: Easy
Est time: < 1 min
Learning Objective: 11.6 Appreciate the application of audit procedures to a selected sample, and the evaluation of sample results.
Section: Performing the audit procedures and evaluating sample results

43.
If an auditor is evaluating a sample for a test of controls of 50 items and specifies a risk of assessing control risk too low of 10 per cent and finds
two deviations, the approximate maximum deviation rate (rounded to the nearest one per cent) is:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 10 per cent.
B. six per cent.
C. 11 per cent.
D. four per cent.

Difficulty: Medium

44.
If an auditor is evaluating a sample for a test of controls of 50 items and specifies a risk of assessing control risk too low of five per cent and finds
one deviation, the approximate achieved maximum deviation rate, (rounded to the nearest one per cent) is:
Deviations 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
A. 10 per cent.
B. six per cent.
C. 11 per cent.
D. four per cent.

Difficulty: Medium
45.
An auditor selects a sample of 50 for a test of controls and finds two transactions are not processed in accordance with the controls. The tolerable
deviation rate was specified as six per cent. Using the extrapolation approach specified in the auditing standards, the sample results:
A. do not support the planned assessed level of control risk.

B. support the planned assessed level of control risk.
C. are indeterminate without more data.

Difficulty: Medium

46.
The auditor selects all items above $10 000, which comprise 10 per cent of the items in the population and tests 100 per cent of these items. The
auditor does not test items below $10 000. The misstatements found in audit testing total $20 000. Which of the following statements is false?
A. The auditor cannot extrapolate the results of the audit testing to the population.
B. The auditor has not used an audit sampling approach.
C. The audit testing approach undertaken is not in breach of auditing standards.
D. The auditor's best estimate of error in the population is $200 000.

Difficulty: Medium
47. Which of the following would be an improper technique when using statistical sampling in an audit of
accounts receivable?
A. Using a sampling technique in which the same account balance could be selected more than once.
B. Combining negative and positive dollar misstatements in the evaluation of a sample.
C. Defining the sampling unit in the population as an individual dollar and not as an individual account
balance.
D. Selecting a random starting point and then sampling every Nth dollar.

Difficulty: Hard
48. Based on a five per cent risk of assessing control risk too low, how would an auditor interpret a computed
upper deviation rate
of seven per cent?
A. There is a five per cent chance that the deviation rate in the population is less than seven per cent.
B. The auditor is willing to tolerate a deviation rate of seven per cent before deciding not to rely on the control.
C. There is a 95 per cent chance that the deviation rate in the population equals seven per cent.
D. There is a five per cent chance that the deviation rate in the population exceeds seven per cent.

Difficulty: Hard

49.
Sarah Jones, an auditor, believes the industry-wide occurrence rate of client billing errors is three per cent and has established a tolerable
deviation rate of five per cent. In the review of client invoices to test that the invoice is properly checked and authorised, Jones should use:
A. attribute sampling.
B. discovery sampling.
C. variable sampling.
D. stratified sampling.

Difficulty: Easy
Section: Sampling for tests of controls: In particular, attribute sampling
50. If auditors conducting attribute sampling found that the client deviated from a prescribed control in six of
the first 10 items
examined, the auditor is most likely to:
A. increase the computed upper deviation rate.
B. increase sample size.
C. stop the test and increase control risk.
D. decrease the tolerable deviation rate.

Difficulty: Easy
Est time: < 1 min
Section: Sampling for tests of controls: In particular, attribute sampling
51. As a result of tests of controls, an auditor found that they had assessed control risk as too low (their
planned reliance on
internal control was too high). This assessment occurred because the deviation rate in the sample was:
A. more than the risk of assessing control risk too low based on the auditor's sample.
B. more than the auditor's planned deviation rate.
C. less than the risk of assessing control risk too low based on the auditor's sample.
D. less than the auditor's planned deviation rate.

Difficulty: Hard
Section: Sampling for tests of controls: In particular, attributes sampling

52. An auditor is using the probability proportional to size selection method. Using this method, the chance of
selecting
a $100 account balance compared to selecting a $500 account balance is:
A. 50 per cent.
B. 20 per cent.
C. less but not determinable without knowing the dollar amount of the population.
D. greater but not determinable without knowing the dollar amount of the population.

Difficulty: Easy
Section: Sampling for substantive tests: In particular, dollar-unit sampling
53.
An auditor is preparing to sample a client's customer receivables for overstatement. A statistical sampling method that automatically provides
stratification when using systematic selection (in that all items greater than the sample interval will be selected) is:
A. ratio-estimation sampling.
B. attribute sampling.
C. mean-per-unit sampling.
D. dollar-unit sampling.

Difficulty: Easy
54. For dollar-unit sampling, the number of individual accounts tested is:
A. always greater than the sample size.
B. always equal to the sample size.
C. always less than or equal to the sample size.
D. always greater than or equal to the sample size.

Difficulty: Easy

55. Dollar-unit sampling is said to eliminate the need to stratify the sample because:
A. the risk of incorrect acceptance is inversely related to sample size.
B. sample items are selected in proportion to their dollar amount.
C. the upper limit on misstatements can be computed based on statistical principles.
D. tolerable misstatement is considered when determining sample size.

Difficulty: Easy
56.
An account balance is $300 000 and there are 80 items in the account, six of which have balances that equal or exceed $15 000. The auditor plans
to use a dollar-unit sampling plan with systematic sample selection. To ensure that all accounts with balances of at least $15 000 are selected, the
sampling interval should be:
A. 80.
B. 6.
C. 15 000.
D. 12 000.

Difficulty: Easy

57.
An auditor is planning the confirmation of accounts receivable. The total of debit balances in the aged trial balance of receivables is $2 million.
The auditor has decided that the tolerable misstatement (basic precision) for this sampling application is $50 000, the risk of incorrect acceptance
is five per cent and zero error is expected. There are 2500 customer balances. The auditor has the following statistical tables available. The auditor
decides to use dollar-unit sampling.
Number of risk of incorrect acceptance:
Occurrences 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
Assume a sample size of 100. The sampling interval for dollar-unit sampling using the systematic selection method
is approximately:
A. 25.
B. 500.
C. 100.
D. 20 000.

Difficulty: Medium
58. All of the following are true for dollar-unit sampling except:
A. it is not necessary to estimate the standard deviation of the population.
B. large items have a higher probability of selection.
C. several account balances can be combined and treated as one sampling unit.
D. understated items have a lower probability of selection than they would otherwise.

Difficulty: Medium

59.
is five per cent and zero error is expected. There are 2500 customer balances. The auditor decides to use dollar-unit sampling and determines a
sample size of 100. The sampling interval for dollar-unit sampling using the systematic selection method is approximately:
A. 50.
B. 200.
C. 1 000.
D. 40 000.

Difficulty: Medium
60.
is five per cent and zero error is expected. There are 2500 customer balances. The auditor has the following statistical tables available. The auditor
decides to use dollar-unit sampling.
Number of risk of incorrect acceptance:
Occurrences 10% 5%
0 2.4 3.0
1 3.9 4.8
2 5.4 6.3
3 6.7 7.8
The auditor's estimated sample size is approximately:

A. 120.
B. 80.
C. 200.
D. 160.

Difficulty: Hard

61. Which of the following sampling methods would be used to estimate a numerical measurement of a
population,
such as a dollar value?
A. Stop-or-go sampling.
B. Attribute sampling.
C. Random-number sampling.
D. Variables sampling.

Difficulty: Easy
Learning Objective: 11.9 Consider other statistical sampling approaches to substantive tests.
Section: Other statistical sampling approaches
62. In applying variables sampling, an auditor attempts to:

A. determine various rates of occurrence for specified attributes.
B. estimate a qualitative characteristic of interest.
C. predict a monetary population value within a range of precision.
D. discover at least one instance of a critical deviation.

Difficulty: Easy
63.
The accounting department reports that the balance of accounts receivable is $210 000. You are willing to accept that balance if it is within $15
000 of the actual balance. Using a variables sampling plan, you compute a 95 per cent confidence interval of $208 000 to $225 000. You would
therefore:
A. not be able to determine the acceptability of the receivable balance.

B. accept the balance but with a lower level of confidence.
C. take a larger sample before totally rejecting the balance and requiring adjustments.
D. accept the $210 000 balance because the confidence interval is within the materiality limits.

Difficulty: Easy

64. Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has
accumulated
the following data:
No. of accounts Book Balance

Balance determined by the auditor
Population 4100 $5 000 000 ?

Sample 200 $250 000 $300 000
Using the ratio estimation technique, the auditor's estimate of the year-end accounts payable balance would be:
A. $6 000 000.
B. $6 150 000.
C. $5 050 000.
D. $5 125 000.

Difficulty: Medium
65. Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has
accumulated
the following data:
No. of accounts Book Balance

Balance determined by the auditor
Population 240 $2 000 000 ?

Sample 30 $250 000 $275 000
Using the ratio estimation technique, the auditor's estimate of the year-end accounts payable balance would be:
A. $2 000 000.
B. $2 025 000.
C. $2 200 000.
D. $2 250 000.

Difficulty: Medium

Chapter 12 Key
1. Analytical procedures used in the overall review stage of an audit generally include:
A. testing transactions to corroborate management's financial report assertions.
B. considering unusual or unexpected amount balances that were not previously identified.
C. retesting control procedures that appeared to be ineffective during the assessment of control risk.
D. gathering evidence concerning account balances that have not changed from the prior year.
Difficulty: Medium
Learning Objective: 12.1 Explain the significance of the date of the auditor’s report and of the audit engagement.
Section: The date of the auditors report
2. An auditor should obtain evidential matter relevant to all the following factors concerning third-party
litigation against a client except the:
A. period in which the underlying cause for legal action occurred.
B. probability of an unfavourable outcome.
C. jurisdiction in which the matter will be resolved.
D. existence of a situation indicating an uncertainty as to the possible loss.
Difficulty: Easy
Learning Objective: 12.2 Define subsequent events of audit interest, and describe the audit procedures applied specifically to identify such events.
Section: Subsequent events and related review procedures
3. An auditor is concerned with completing various phases of the examination after the balance date. This
'subsequent period'
for audit testing extends to the date of the:
A. final review of the audit working papers.
B. auditor's report.
C. delivery of the auditor's report to the client.
D. public issuance of the financial report.
Difficulty: Easy

4. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit
client
believes that this event could have a significant direct effect on the financial report. The auditor should:
A. advise management to disclose the event in notes to the financial report.
B. disclose the event in the auditor's report.
C. withhold submission of the auditor's report until the extent of the direct effect on the financial report is
known.
D. advise management to adjust the financial report.
Difficulty: Medium
5. Which of the following procedures would an auditor most likely perform to obtain evidence about the
occurrence
of subsequent events?
A. Investigate changes in shareholders' equity occurring after year-end.
B. Recalculate a sample of large-dollar transactions occurring after year-end for arithmetic accuracy.
C. Confirm bank accounts established after year-end.
D. Inquire of the entity's solicitor concerning litigation, claims and assessments arising after year-end.
Difficulty: Medium
6. Which of the following procedures would an auditor most likely perform to obtain evidence about the
occurrence
of subsequent events?
A. Comparing the financial report being reported on with those of previous period.
B. Confirming a sample of material accounts receivable established after year-end.
C. Inquiring as to whether any unusual adjustments were made after year-end.
D. Investigating personnel changes in the accounting department occurring after year-end.
Difficulty: Easy

7. After an auditor has issued an auditor's report on the financial report of a non-public entity, there is no
obligation
to make any further audit tests or inquiries with respect to the audited financial report covered by that report
unless:
A. new information comes to the auditor's attention concerning an event that occurred prior to the date
of the auditor's report that may have affected the auditor's report.
B. material adverse events occur after the date of the auditor's report.
C. final determination or resolution was made on matters that had resulted in a modification of the auditor's
report.
D. final determination or resolution was made of a contingency that had been disclosed in the financial report.
Difficulty: Medium
8. Which of the following auditing procedures is ordinarily performed last?

A. Reading the mins of the directors' meetings.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing the purchasing function.
Difficulty: Easy
9. After an auditor has issued an auditor's report on the financial report of an entity, there is no obligation to
make
any further audit tests or inquiries with respect to the audited financial report covered by that report unless:
A. new information comes to the auditor's attention concerning an event that occurred prior to the
date of the auditor's report that may have affected the auditor's report
B. material adverse events occur after the date of the auditor's report
C. final determination or resolution was made on matters that had resulted in a modification of the auditor's
report
D. final determination or resolution was made of a contingency that had been disclosed in the financial report.
Difficulty: Medium

10.
Lisa Tan has audited the financial report of Basalt Ltd for the year ended 30 June 2012. Although Lisa's audit fieldwork
was completed on 25 August 2012, her auditor's report was signed on 28 August 2012 and sent to management that
day. The management of Basalt Ltd advised Lisa that their annual report, which will be mailed to shareholders on
8 October 2012, will also include an unaudited financial report for the first quarter ended 30 September 2012. Under
the circumstances, Lisa is responsible for undertaking subsequent events audit procedures through to:
A. 25 August 2012.
B. 28 August 2012.
C. 30 September 2012.
D. 8 October 2012.

Difficulty: Medium
11.
Promotion Ltd's directors voted immediately after the year-end of 30 June 2010 to double its advertising budget
for the coming year and authorised a change in advertising agencies. What is the effect of this event on the
30 June 2010 financial report?
A. Disclosure by means of supplemental, pro-forma financial information.

B. Adjustment of the financial report.
C. Disclosure in a footnote to the financial report.
D. No disclosure or adjustment necessary.

Difficulty: Medium
12. The date of the management representation letter should coincide with the:
A. date of the auditor's report.
B. balance date.
C. date of the latest subsequent event referred to in the notes to the financial report.
D. date of the engagement letter.

Difficulty: Easy
Learning Objective: 12.3 Describe the nature and purpose of written representations obtained from the entity’s management and solicitors.
Section: Representation letters

13. Which of the following procedures would an auditor ordinarily perform during the review of subsequent
events?
A. An analysis of related-party transactions for the discovery of possible irregularities.
B. A review of the cut-off bank statements for the period after the year-end.
C. An inquiry of the client's solicitor concerning litigation.
D. An investigation of material weaknesses in internal accounting control previously communicated to the
client.

Difficulty: Medium
14.
The property portfolio of Utopia Pty Ltd is stated at a value of $1 million in excess of its current market value. Utopia
Pty Ltd is a non-reporting entity and does not apply the provisions of AASB 1010 in the preparation of its financial
report. The directors believe that it would be inappropriate to write the properties down to market value as it is their
intention to hold the properties as a long-term investment and the properties will eventually recover their value. The
independent valuer agrees that the property will eventually recover its full value. Sufficient appropriate audit evidence
to support the value of the property would include obtaining a letter of representation from management confirming:
A. the directors' intention to hold the property on a long-term basis, that the value of the buildings is
likely to increase in the long term and that the company is indeed a non-reporting entity.
B. the directors' intention to hold the property on a long-term basis and that the company is indeed
a non-reporting entity.
C. the intention to hold the property on a long-term basis.
D. the company is indeed a non-reporting entity.

Difficulty: Hard
15. Management's refusal to furnish a written representation on a matter that the auditor considers essential
constitutes:
A. prima facie evidence that the financial report is not presented fairly.
B. a violation of the Corporations Act 2001.
C. an uncertainty sufficient to preclude an unmodified opinion.
D. a scope limitation sufficient to preclude an unmodified opinion.

Difficulty: Easy

16. A solicitor's response to an auditor's request for information concerning litigation, claims and assessments
will
ordinarily contain which of the following?
A. An explanation regarding limitations on the scope of the response.
B. A statement of concurrence with the client's determination of which unasserted possible claims
warrant specification.
C. Confidential information that would be prejudicial to the client's defence if publicised.
D. An assertion that the list of unasserted possible claims identified by the client represents all such
claims of which the solicitor may be aware.

Difficulty: Easy
17. When obtaining evidence regarding litigation against a client, the auditor would be least interested in
determining:
A. an estimate of when the matter will be resolved.
B. the period in which the underlying cause of the litigation occurred.
C. the probability of an unfavourable outcome.
D. an estimate of the potential loss.

Difficulty: Medium
18. When an audit is made in accordance with the auditing standards, the independent auditor must:
A. utilise statistical sampling.
B. confirm receivables at year-end.
C. obtain certain written representations from management.
D. observe the taking of physical inventory on the balance date.

Difficulty: Medium

19. The audit inquiry letter to the client's solicitor should be mailed only by the:
A. client after the auditor has reviewed it for appropriate content.
B. auditor after preparation by the client and review by the auditor.
C. auditor's solicitor after preparation by the client and review by the auditor.
D. client after review by the auditor's solicitor.

Difficulty: Easy
20. If a solicitor refuses to furnish corroborating information regarding litigation, claims and assessments, the
auditor should:
A. honour the confidentiality of the client-solicitor relationship.
B. consider the refusal to be a scope limitation.
C. seek to obtain the corroborating information from management.
D. disclose this fact in a footnote to the financial report.

Difficulty: Easy
21. A written representation from a client's management which, among other matters, acknowledges
responsibility
for the fair presentation of the financial report, should be signed by the:
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chairman of the board of directors.
C. chairman of the audit committee of the board of directors.
D. chief executive officer, the chairman of the board of directors, and the client's solicitor.

Difficulty: Easy

22. A representation letter issued by a client:

A. is essential for the preparation of the audit program.
B. is a substitute for testing.
C. does not reduce the auditor's responsibility.
D. reduces the auditor's responsibility only to the extent that it is relied upon.

Difficulty: Easy
23. An auditor will ordinarily examine invoices from solicitors primarily in order to:
A. substantiate accruals.
B. assess the legal ramifications of litigation in progress.
C. estimate the dollar amount of contingent liabilities.
D. identify possible unasserted litigation, claims and assessments.

Difficulty: Medium
24. Auditors often request that the audit client send a letter of inquiry to those solicitors who have been
consulted with
respect to litigation, claims or assessments. The primary reason for this request is to provide the auditor with:
A. an estimate of the dollar amount of the probable loss.
B. an expert opinion as to whether a loss is possible, probable or remote.
C. information concerning the progress of cases to date.
D. corroborating evidence.

Difficulty: Medium

25.
An auditor has received a solicitor's letter in which no significant disagreements with the client's assessments of
contingent liabilities were noted. The resignation of the client's solicitor shortly after receipt of the letter should
alert the auditor that:
A. undisclosed unasserted claims may have arisen.

B. the solicitor was unable to form a conclusion with respect to the significance of litigation, claims and
assessments.
C. the auditor must begin a new examination of contingent liabilities.
D. an adverse opinion will be necessary.

Difficulty: Medium
26. As a result of analytical procedures, the independent auditor determines that the gross profit percentage has
declined
from 30% in the preceding year to 20% in the current year. The auditor should:
A. express an opinion that is modified due to the inability of the client company to continue as a going
concern.
B. evaluate management's performance in causing this decline.
C. require footnote disclosure.
D. consider the possibility of an error in the financial report.

Difficulty: Medium
Learning Objective: 12.4 Explain the purpose and steps involved in reviewing the audit working papers and the financial report, including the final assessment of
materiality and audit risk.
Section: Review of working papers and financial report
27. Which set of assertions are tested when, during completion of the audit, the audit partner conducts a final
review
of the format of the entity's financial report?
A. Assertions about classes of transactions and events.
B. Assertions about account balances at the period end.
C. Assertions about presentation and disclosure.
D. None of the given answers are correct.

Difficulty: Medium
Section: Review of audit working papers and financial report

28. Which of the following statements is not correct?

A. The auditor is required to read other information accompanying the financial report to ensure that
there are no inconsistencies.
B. The auditor may provide advice on accounting matters but the financial report and related disclosures
are the entity's responsibility.
C. Towards the end of the audit the auditor should examine all related-party transactions.
D. Second-partner reviews are only required of the financial reports of public companies.

Difficulty: Medium
Section: Review of audit working papers and financial report
29. Which of the following audit procedures is most likely to assist an auditor in identifying conditions and
events
that may indicate substantial doubt about an entity's ability to continue as a going concern?
A. Review compliance with the terms of debt agreements.
B. Confirm accounts receivable from principal customers.
C. Reconcile interest expense with outstanding debt.
D. Confirm bank balances.

Difficulty: Medium
Learning Objective: 12.5 Understand the auditor’s responsibilities in consideration of the entity’s ability to continue as a going concern.
Section: Appropriateness of the going concern basis

Chapter 13 Key
1. For a Corporations Act 2001 audit, the auditor has reporting obligations to:
A. management and the board of directors.
B. the governing body and members.
C. Australian Securities and Investments Commission (ASIC).
Difficulty: Easy
Est time: < 1 min
Section: Obligations to report
2. How are the governing body's and auditor's responsibilities stated in the auditor's report?
Governing body's responsibility Auditor's responsibility
A.
Implicitly Implicitly
B.
Explicitly Explicitly
C.
Explicitly Implicitly
D.
Implicitly Explicitly
Difficulty: Easy
Learning Objective: 13.2 Understand the structure and qualitative characteristics of the auditor’s report.
Section: Structure and qualitative characteristics of the auditors report

3. When an auditor expresses an adverse opinion, the opinion paragraph should include:
A. a direct reference to a separate paragraph in the auditor's report disclosing the basis for the opinion.
B. the principal effects of the departure from generally accepted accounting principles.
C. a description of the uncertainty or scope limitation that prevents an unmodified opinion.
D. the substantive reasons for the financial statements being misleading.
Difficulty: Easy
Est time: < 1 min
4. The basic elements of the auditor's standard report for a Corporations Act 2001 audit include all of the
following except:
A. a title that includes the word 'independent'.
B. a statement that the financial report is the responsibility of the company's directors.
C. a statement that accounting estimates are reasonable, but that there will normally be differences
between estimated and actual results.
D. a statement that an audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial report.
Difficulty: Medium
5. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:
A. the paragraph outlining the auditor's responsibility, which discusses the basis for the opinion rendered.
B. a footnote to the financial report that discusses the basis for the opinion.
C. the consistency or lack of consistency in the application of accounting principles.
D. a separate qualification paragraph that discusses the basis for the opinion rendered.
Difficulty: Medium

6. 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'?
A. The phase 'true and fair view' is used for fair presentation frameworks while the phrase 'presents
fairly, in all material respects' is used for compliance frameworks.
B. The two phrases are equivalent.
C. The phase 'true and fair view' is used for general-purpose financial reporting frameworks while the phrase
'presents fairly, in all material respects' is used for special purpose financial reporting frameworks.
D. The phase 'true and fair view' is used for reasonable assurance reports while the phrase 'presents fairly,
in all material respects' is used for limited assurance reports.
Difficulty: Easy
Learning Objective: 13.3 Explain the differences between the concepts of ‘true and fair’ and ‘presents fairly in accordance with’, and between a fair presentation
framework and a compliance framework.
Section: Fair presentation and compliance frameworks
7.
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?
A. An unmodified opinion with an Emphasis of Matter.

B. A disclaimer of opinion.
C. An unmodified opinion.
D. A qualified opinion or adverse opinion.
Difficulty: Medium
Learning Objective: 13.4 Identify the different types of auditor’s reports—unmodified auditor’s reports; modifications to the auditor’s opinion (resulting in a qualified
opinion, adverse opinion or disclaimer of opinion); and auditor’s reports containing additional communications (Emphasis of Matter or Other Matter
paragraphs)—and describe the circumstances under which an auditor would issue each type of report.
Learning Objective: 13.5 Identify the reasons for departures from a standard unmodified auditor’s report, material misstatement and limitations imposed on the scope
of the audit, and understand the factors giving rise to these reasons.

8. Which of the following statements are true for fair presentation frameworks? A fair presentation
framework:
A. allows for circumstances where additional note disclosures beyond the reporting framework may be
necessary.
B. allows for circumstances where it may be necessary to depart from a requirement of a reporting framework
to
achieve fair presentation.
C.
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.
D. requires strict conformance to a reporting framework to achieve fair presentation.
Difficulty: Medium
9. 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:
A. the entity is financially sound and the financial report is accurate.
B. the external auditor found no irregularities.
C. all material disagreements between the entity and the external auditor about the application of
accounting principles were resolved to the satisfaction of the auditor.
D. the internal control structure is effective.
Difficulty: Easy
Est time: < 1 min
Section: Circumstances giving rise to a modified opinion

10. 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:
A. there is significant uncertainty about the entity's ability to continue as a going concern.
B. the entity is facing significant litigation.
C. there is early application of a new accounting standard that has a pervasive effect on the financial
report before its effective date.
D. there is a matter involving a significant uncertainty that is not adequately disclosed.

Difficulty: Easy
11. An auditor would issue an adverse opinion if:

A. a qualified opinion cannot be given because the auditor lacks independence.
B. the audit was begun by other independent auditors who withdrew from the engagement.
C. the financial report taken as a whole does not fairly present the financial condition and results of
operations of the entity.
D. the restriction on the scope of the audit was significant.

Difficulty: Easy
Est time: < 1 min

12. When a financial report is presented that is not in conformity with accounting standards, an auditor may
issue a:
Qualified opinion Disclaimer of opinion
A.
Yes Yes
B.
Yes No
C.
No No
D.
No Yes

Difficulty: Easy
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):
A. adverse opinion.
B. qualified opinion.
C. disclaimer of opinion.
D. unmodified opinion.

Difficulty: Easy
Est time: < 1 min

14.
A solicitor limits a response concerning a litigation claim because the solicitor is unable to determine the likelihood
of an unfavourable 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?
A. Qualified.
B. Unmodified with an Other Matter paragraph.
C. Unmodified with an Emphasis of Matter paragraph.
D. Unmodified.

Difficulty: Easy
15. Huggins 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:
A. an adverse opinion stating that the financial report, taken as whole, is not fairly presented because
of the omission of the required statement.
B. an unmodified opinion with a statement of cash flows prepared by the auditor included as part of the
auditor's report.
C. an unmodified opinion with an Emphasis of Matter section explaining that the company declined to
present the required statement.
D. a disclaimer of opinion with a separate explanatory paragraph stating why the company declined to
present the required statement.

Difficulty: Easy

16. When restrictions are imposed by the client, which 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?
A. Unmodified with an Emphasis of Matter.
B. Qualified.
C. Disclaimer.
D. Adverse.

Difficulty: Easy
Est time: < 1 min
17.
Your client, Blunt Ltd, is being sued by one of its competitors for $20 million for an alleged patent infringement.
Your client has assets of $40 million and a reported profit of $10 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 Blunt Ltd?


Difficulty: Easy

18.
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?
A. Qualified and disclaimer.

B. Qualified and adverse.
C. Disclaimer and unmodified with an Emphasis of Matter.
D. Adverse and unmodified with an Emphasis of Matter.

Difficulty: Easy
Est time: < 1 min
19.
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?


Difficulty: Easy
Est time: < 1 min

20.
Taylor Ltd has disclosed the fact that they are being sued for $1 million. Taylor Ltd reported a profit for the year
of $10 million and has total assets of $15 million. You conclude that disclosure of the litigation is adequate. What
type of opinion should you express on the financial report of Taylor Ltd?
A. Disclaimer of opinion.
B. Unmodified opinion with an Emphasis of Matter.
C. Unmodified opinion.
D. Qualified opinion or adverse opinion.

Difficulty: Easy
21. The auditor is unable to reach a conclusion as to the reasonableness of management's representations. The
auditor
will have to consider issuing a(n):
A. qualified opinion because of inadequate disclosure.
B. qualified opinion because of uncertainty.
C. qualified opinion or a disclaimer of opinion.
D. adverse opinion.

Difficulty: Easy
Est time: < 1 min

22. When a client declines to include a statement of cash flows in its financial report, the auditor's report will
usually:
A. include a separate paragraph that summarises the company's financing and investing activities.
B. contain either a qualified or adverse opinion because of inadequate disclosure.
C. refer to the scope limitation.
D. contain either a qualified opinion or a disclaimer of opinion on the basis of the uncertainty caused
by this disagreement with those charged with governance.

Difficulty: Easy
Est time: < 1 min
23. In which of the following circumstances would an adverse opinion be appropriate?

A. An uncertainty prevents the issuance of an unmodified report.
B. The auditor is not independent with respect to the enterprise being audited.
C. A client-imposed scope limitation prevents the auditor from complying with the auditing standards.
D. The financial report is prepared on the going concern basis when it is not appropriate.

Difficulty: Easy
Est time: < 1 min
24. 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:
A. an unmodified opinion on the consolidated accounts but a qualified opinion on the parent company's
accounts.
B. an unmodified opinion with an Emphasis of Matter paragraph.
C. a qualified opinion or a disclaimer of opinion.
D. a qualified opinion or an adverse opinion.

Difficulty: Easy
Est time: < 1 min

25.
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 15 per cent and net profit before income tax by
11 per cent. What type of auditor's report should you issue?
A. An unmodified opinion with an Emphasis of Matter paragraph.

C. An adverse opinion.
D. A qualified opinion.

Difficulty: Easy
26. 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:
A. a qualified opinion.
B. an unmodified opinion with an Other Matter paragraph.
C. an adverse opinion.
D. an unmodified opinion with an Emphasis of Matter paragraph.

Difficulty: Easy
Est time: < 1 min
Section: Types of auditors reports and circumstances giving rise to a modified auditors report.

27. When a contingency is resolved immediately subsequent to the issuance of a report that was modified with
respect
to the contingency, the auditor should:
A. inform the audit committee that the report cannot be relied upon.
B. insist that the client issue a revised financial report.
C. inform the appropriate authorities that the report cannot be relied upon.
D. take no action regarding the event.

Difficulty: Easy
28. When a client will not make essential corporate mins available to the auditor, the auditor's report will
probably contain a(n):
A. disclaimer of opinion.
B. unmodified opinion.
C. unmodified opinion with an Emphasis of Matter.
D. qualified opinion.

Difficulty: Easy
Est time: < 1 min
29. When the audited financial report of the prior year is presented together with those of the current year, the
continuing
auditor's report covers:
A. only the current year.
B. both years.
C. only the current year, but the prior year's report should be referred to.
D. only the current year, but the prior year's report should be presented.

Difficulty: Easy

30. When audited financial statements are presented in a document containing other information, the auditor:
A. has an obligation to perform auditing procedures to corroborate the other information.
B. is required to issue a qualified opinion if the other information has a material misstatement of fact.
C. should read the other information to consider whether it is inconsistent with the audited financial
statements.
D. has no responsibility for the other information because is not part of the basic financial statements.

Difficulty: Easy
Est time: < 1 min
31. An auditor's report on comparative financial reports should be dated as of the date of the:
A. last subsequent event disclosed in the financial report.
B. latest financial report being reported on.
C. completion of the auditor's recent evidence collection procedures.
D. issuance of the report.

Difficulty: Easy
Est time: < 1 min
32.
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders
containing audited financial statements. If the auditor concludes that the financial statements do 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:
A. issue a qualified opinion after discussing the matter with the client's board of directors.
B. consider the matter closed since the other information is not in the audited financial statements.
C. revise the auditor's report to include an Emphasis of Matter paragraph describing the material inconsistency.
D. revise the auditor's report to include an Other Matter paragraph describing the material inconsistency.

Difficulty: Medium

33.
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:
A. an unmodified opinion with an Other Matter paragraph.

B. a qualified opinion.
C. an unmodified opinion.
D. an unmodified opinion with an Emphasis of Matter paragraph.

Difficulty: Medium
34. Jodie 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):
A. adverse opinion.
B. qualified opinion.
C. unmodified opinion with an Emphasis of Matter.
D. unmodified opinion.

Difficulty: Medium

35. Under which of the following set of circumstances might an auditor disclaim an opinion?
A. There are significant uncertainties affecting the financial report.
B. There has been a material change between periods in the method of the application of accounting principles
C.
The principal auditor decides to make reference to the report of another auditor who disclaimed an opinion on
the audit of a subsidiary. The subsidiary contributed six per cent of operating revenue and profit but very little
in other aspects.
D. The financial report contains a departure from generally accepted accounting principles, the effect of which
is material.

Difficulty: Medium
36.
Morris 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
Morris Ltd has decided to repay the debenture when it matures and provide sufficient funding to cover any additional
losses that Morris Ltd might incur. Morris 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 Morris Ltd?
B. Unmodified opinion with an Emphasis of Matter.
C. Unmodified opinion.
D. Qualified opinion or adverse opinion.

Difficulty: Medium

37.
Morris 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 statements but is reasonably
certain to have a substantial effect in later years. If the change is adequately disclosed in the notes to the financial
statements, the auditor should issue a report with a(n):
A. consistency modification.
C. explanatory paragraph.

Difficulty: Medium
38. 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:
Disclaimer of opinion Qualified opinion
A.
Yes No
B.
No Yes
C.
No No
D.
Yes Yes

Difficulty: Medium

39.
On 2 July 20X0 Pretty Paint Ltd received a notice from its primary suppliers that all wholesale prices would be
increased by 10%, to be effective immediately. On the basis of the notice Pretty 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:
A. an unmodified opinion with an Emphasis of Matter of disclosure.

B. a disclaimer of opinion.
C. a qualified opinion.
D. an unmodified opinion.

Difficulty: Medium
40.
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% of total assets. Alternative procedures were applied
satisfactorily. The auditor should issue:
A. an unmodified opinion.
B. an unmodified opinion with an Emphasis of Matter.
C. a disclaimer of opinion.
D. a qualified opinion.

Difficulty: Medium

41.
The financial report of Super Electrix 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?
B. Qualified opinion.
C. Adverse opinion.
D. Unmodified opinion with an Emphasis of Matter paragraph.

Difficulty: Medium
42.
The auditor of Shakey 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?
A. Unmodified opinion with an Other Matter paragraph.

B. Qualified opinion.
C. Adverse opinion.
D. Unmodified opinion with an Emphasis of Matter paragraph.

Difficulty: Medium

43.
An entity is being sued for substantial damages for producing a faulty product. However, while the result of the litigation will not be known for
some time, it believes that the claim is unjustified and that it will be successful in defending the action. It has included appropriate reference to the
lawsuit in the financial report. What type of audit opinion should be issued?
A. A qualified opinion.
B. An adverse opinion.
C. A disclaimer of opinion.
D. An unmodified opinion with an Emphasis of Matter section.

Difficulty: Medium
44.
Chris Yerkes, an independent auditor, was engaged to perform an audit of the financial report of Apex Ltd one month
after its financial year had ended. Although the inventory count was not observed by Yerkes and accounts receivable
were not confirmed by direct communication with debtors, Yerkes was able to gain satisfaction by applying alternative
auditing procedures. Yerkes' auditor's report will probably contain:
A. an unmodified opinion and an Emphasis of Matter paragraph.

B. a qualified opinion.
C. an unmodified opinion.
D. either a qualified opinion or a disclaimer of opinion.

Difficulty: Medium

45.
The financial report of Quick Buck 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?
B. Unmodified opinion.
C. Qualified or adverse opinion.
D. Unmodified opinion with an Other Matter paragraph.

Difficulty: Medium
46. The directors of a listed company refuse to disclose directors' remuneration of $100 000 on the basis that it
is
not material. Net profit after tax is $20 million and net assets are $50 million. The appropriate auditor's report
is:
A. unmodified with an Emphasis of Matter paragraph.
C. a qualified opinion.
D. a disclaimer of opinion.

Difficulty: Medium

47.
Abbot, as principal auditor for the consolidated financial report, finds that the audit of a major subsidiary is qualified by another auditor. Abbot
does not consider the qualification to be material relative to the consolidated financial report. What recognition, if any, must Abbot make in his
auditor's report to the qualified report of the auditor of the subsidiary?
A. He must refer to the qualification of the other auditor and qualify his report likewise.
B. He need make no reference.
C. He must include the other auditor's report with his report and give an explanation of its significance.
D. He must include the other auditor's report with his report but need not qualify his report.

Difficulty: Medium
48. Which of the following situations will not result in modification of the auditor's report because of a scope
limitation?
A. Restriction imposed by the client.
B. Reliance placed on the report of another auditor.
C. Inability to obtain sufficient competent evidential matter.
D. Inadequacy in the accounting records.

Difficulty: Medium

49.
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?
A. Qualified opinion with an Emphasis of Matter.

B. Unmodified opinion.
C. Qualified opinion.
D. Unmodified opinion with an Emphasis of Matter.

Difficulty: Hard
50.
Shaun 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 Shaun 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:
A. a disclaimer of opinion.
B. an unmodified opinion with an Emphasis of Matter.
C. an adverse opinion.
D. a qualified opinion.

Difficulty: Hard

51.
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?
A. An adverse opinion.
B. A qualified opinion.
C. An unmodified opinion with regards the special legislation and a qualified opinion with regards the
departure from Australian Accounting Standards.
D. An unmodified opinion with an Emphasis of Matter paragraph.

Difficulty: Hard
52. When an audited financial report is presented in a client's annual report containing other information, the
auditor should:
A. add an explanatory paragraph to the auditor's report without changing the opinion on the financial report.
B. perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
C. read the other information to determine whether it is consistent with the audited financial report.
D. perform the appropriate substantive auditing procedures to corroborate the other information.

Difficulty: Easy
Est time: < 1 min
Learning Objective: 13.6 Describe the auditor’s responsibility for reporting on comparative information, and understand the auditor’s responsibility with respect to
other information in an annual report.
Section: Comparative information and other information in the annual report
53. 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:
A. consider whether the 'other financial information' is accurate by performing a review engagement.
B. indicate in the auditor's report that the 'other financial information' is unaudited.
C. read and consider the manner of presentation of the 'other financial information'.
D. obtain written representations from management as to the material accuracy of the 'other financial
information'.

Difficulty: Easy
Est time: < 1 min

54. 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:
A. the auditor must consider whether the other information is consistent with the information contained
in the audited financial statements.
B. the auditor is under no obligation to perform audit procedures on this other information.
C. the auditor must perform audit procedures on this other information.
D. the auditor must request that material inconsistencies be corrected.

Difficulty: Medium
55.
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:
A. consider the matter closed since the other information is not covered by the audited financial report.
B. issue a qualified opinion after discussing the matter with the client's board of directors.
C. revise the auditor's report to include an Emphasis of Matter paragraph describing the material inconsistency.
D. disclaim an opinion on the financial report after explaining the material inconsistency in a separate
explanatory paragraph.

Difficulty: Medium
56.
King, CPA, was engaged to audit the financial report of Newton Company after its fiscal year had ended. King
neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was
satisfied concerning both after applying alternative procedures. King's auditor's report most likely contained a(n):
A. unmodified opinion with an explanatory paragraph.

C. disclaimer of opinion.

Difficulty: Medium

57. 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:
A. may be oral or written and may be made before or after issuing the auditor's report.
B. should be written and occur before issuing the auditor's report.
C. should be written and may be incorporated in the auditor's report or issued separately as of the auditor's
report date.
D. should be reported, preferably in writing, during the course of the audit.

Difficulty: Medium
Learning Objective: 13.7 Describe communications other than the auditor’s report between the auditor and shareholders, those charged with governance, and
management.
Section: Communications between the auditor and other parties
58. Which of the following statements is not true with regards the auditor's responsibility where a client entity
decides
to publish its audited financial report on its website.
A. The auditor should review the website to make sure the auditor's report cannot be attached to or
be seen as covering any information that the auditor's report was not intended to cover.
B. The auditor may decide to provide a separate auditor's report for electronic dissemination.
C.
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.
D. The auditor should consider the risks of whether the financial report on the website is in accordance
with the published financial report.

Difficulty: Medium
Learning Objective: 13.7 Describe communications other than the auditor’s report between the auditor and shareholders, those charged with governance, and
management.
Section: Communications between the auditor and other parties
59. The information gap is:

A. the difference between what information the auditor's know and what they should know when they
complete the audit.
B. is the same as the expectations gap.
C. the difference between what users believe is needed to make informed investment decisions and
what is currently available to them.
D. the difference between what auditors need to issue a limited assurance report and what they need
to issue a reasonable assurance report.

Difficulty: Medium
Learning Objective: 13.8 Consider how the communications effectiveness of the auditor’s report may be further enhanced.
Section: Suggestions for improving the communication effectiveness of the auditors report

60. Below are three possibilities for improving the communication effectiveness of the 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:
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: addressing the lack of common meaning of technical terms used in the auditor's report.
Which combination of these do many users consider will cause this improvement?
A. I and II only.
B. I and III only.
C. II and III only.
D. All of I, II and III.

Difficulty: Medium
Learning Objective: 13.8 Consider how the communications effectiveness of the auditor’s report may be further enhanced.
Section: Suggestions for improving the communication effectiveness of the auditors report

Chapter 14 Key
1. Which of the following statements best describes internal auditing?

A. An activity located within an entity, primarily to detect fraud.
B. An accounting function located within an entity.
C. An activity located within an entity that determines the fiscal integrity of a financial report.
D. An independent and objective assurance activity within an entity.
Difficulty: Easy
Est time: < 1 min
Learning Objective: 14.1 Understand the evolving nature of internal auditing.
Section: The evolving nature of internal auditing
2. According to the recent definition of internal audit provided by the Institute of Internal Auditors, the
principal benefit to
management of there being an internal audit function is that:
A. it aids management in the areas of risk management, control and governance processes.
B. management is provided with assurance that the organisation is complying with legal requirements.
C. management is provided with assurance that fraudulent activities will be detected.
D. external audit costs are reduced.
Difficulty: Easy
Est time: < 1 min
3. According to the Institute if Internal Auditors, the best description of internal auditing is that it:
A. certifies the reliability and integrity of financial and operating information.
B. furnishes management with information needed to effectively discharge its responsibilities.
C. appraises the economy and efficiency with which resources are used.
D. reviews the means of safeguarding assets and verifies the existence of those assets.
Difficulty: Easy
Est time: < 1 min

4. Which of the following is not a main goal of internal auditing?

A. Add value to an organisation's operations.
B. Help an organisation accomplish its objectives.
C. Provide reliable information to external users.
D. Improve the effectiveness of risk management of an organisation.
Difficulty: Easy
Est time: < 1 min
5. Which of the following is not explicitly a part of the definition of internal auditing contained on the IIA's
website?
A. Internal auditing is an objective assurance activity.
B. Internal auditors should help external auditors complete the annual financial statement audit.
C. Internal auditing should help an organisation accomplish its objectives.
D. Internal auditing is designed to add value and improve an organisation's operations.
Difficulty: Medium
6. Which of the following best describes internal auditors' responsibilities regarding their entity's policies,
plans, procedures
and applicable laws and regulations? Internal auditors:
A. have a responsibility to develop appropriate policies, plans and procedures, and they are responsible
for monitoring compliance with all applicable laws and regulations.
B. have no responsibility regarding these matters because becoming involved with them would make
internal auditors members of management.
C. are responsible for evaluating whether the systems are adequate and effective and whether the activities
that are audited comply with appropriate requirements.
D. are only responsible for compliance with policies, plans, procedures, laws and regulations that apply
to internal audit.
Difficulty: Hard

7. According to the IIA Standards, the authority of the internal auditing department is limited to that granted
by:
A. senior management and the Internal Auditing Standards.
B. the board of directors and the financial controller.
C. the audit committee and the chief financial officer.
D. management and the board of directors.
Difficulty: Easy
Learning Objective: 14.2 Appreciate the professional standards developed for internal auditing.
Section: Current standards for internal auditing
8. Which of the following will best promote the independence of the internal auditing function?
A. Direct lines of communication between the audit committee and the director of internal auditing.
B. A quality control system within the internal auditing function designed to ensure that departmental objectives
are met.
C. Direct reporting responsibilities to the entity's chief financial officer.
D. A review of the internal audit function by the external auditor.
Difficulty: Easy
9. The expectation that an internal auditor does not accept bribes or gifts that may impair judgment is based on
the principle of:
A. integrity.
B. objectivity.
C. confidentiality.
D. competency.
Difficulty: Easy
Est time: < 1 min

10. Which of the following aspects does not help ensure organisational independence of internal audit?
A. The board of directors or audit committee being required to approve the removal of the head of Internal
Audit.
B. Reporting to the board of directors or audit committee.
C. External audit coordinating their work more closely with internal audit.
D. Management being kept informed of internal audit work schedules and budget requirements.

Difficulty: Medium
11. Which of the following is not a mandatory component of the IIAs International Professional Practices
Framework?
A. Definition.
B. International Standards for the Professional Practice of Internal Auditing.
C. Code of Ethics.
D. International Auditing Standards.

Difficulty: Medium
12. Which of the following statements is true to ensure individual objectivity of internal auditors as per IIA
Standards?
A. Internal audit should be involved in the design of internal control systems, because of the knowledge of
controls,
but should not operate such systems.
B. It is not appropriate for internal auditors to design, install or operate systems or write procedures manuals
for systems.
C. It is permissible for the internal auditor to be involved in designing and installing internal control systems
(but not be
involved in their operation) providing the head of internal audit reports to the board of directors or audit
committee.
D. The internal auditor should prepare procedures manuals for systems, but should not be involved in their
design,
installation or operation.

Difficulty: Medium

13. Standards relevant to operational auditing have been promulgated by all of the following except the:
A. Institute of Internal Auditors.
B. Australian Auditing and Assurance Standards Board.
C. Australian National Audit Office.
D. Australian Securities and Investments Commission.

Difficulty: Easy
Est time: < 1 min
Est time: <1 minute
Learning Objective: 14.3 Understand what internal auditors do in practice.
Section: Current standards for and understanding the practice of internal auditing
14. The specific performance criteria to be used in an operational audit are:

A. selected from existing relevant policy statements, manuals, laws, or regulations, or are defined by the
auditor for
each operational audit.
B. defined in Australian Accounting Standards.
C. the same as the criteria used in evaluating the internal control structure in an engagement to report on the
internal
control structure over financial reporting.
D. defined in Australian Auditing Standards.

Difficulty: Easy
Est time: < 1 min
15. The internal auditing department provides information about control and quality of performance to:
A. a level in the entity sufficient to ensure acceptance of all recommendations.
B. management and the board.
C. any member of the entity upon request.
D. outside agencies for regulatory and financial compliance.

Difficulty: Easy
Est time: < 1 min

16. The purpose of an internal auditor's review for effectiveness of the internal control structure is to ascertain
if:
A. the system is functioning efficiently and economically.
B. the system is functioning as intended.
C. financial and operating data are reliable.
D. the entity's goals and objectives have been achieved.

Difficulty: Easy
Est time: < 1 min
17. The types of operational audit reports given by an internal auditor are:
A. examination report, review report, or compilation report.
B. unqualified, qualified, adverse, or a disclaimer of opinion.
C. financial report or compliance report.
D. varied and are based on auditor judgment of how best to present the findings.

Difficulty: Medium
18. Wendy Jones, CIA, works for a large department store. She is performing an audit of her company's cash
function. Which of the
following is an action in which due professional care is lacking?
A. Jones flowcharts the work of the cash function but tests only a sample of the transactions.
B. Jones was extremely pleased with the internal controls and the operation of the cash function and in her
report
she states that she is sure no irregularities are currently present.
C. Jones reviews company records to ascertain that all employees who handle cash receipts and disbursements
are covered by workers compensation.
D. Jones knows that the work of the cash function can be done effectively with one less employee. She
includes
this finding in her report even though she knows it will adversely affect employee morale in the cash function.

Difficulty: Medium

19.
A company has outgrown its current computer system and the capabilities of its computer personnel. Management has asked the internal audit
department to use its expertise to design and install a new computer system and help in hiring a new computer centre director. The internal audit
department should:
A. reject the assignment because making decisions concerning the design and installation of the system would
impair the internal audit department's independence.
B. accept the assignment because this would be very efficient and economical for the company.
C. accept the assignment, but not participate in the hiring of the director because this would cause a loss of
independence.
D. reject the assignment because it would interfere with the completion of other internal audit work.

Difficulty: Medium
20. An internal auditor who had been supervisor of the accounts payable section should not audit that section:
A. until enough time has elapsed to allow the new supervisor to influence the system of controls over accounts
payable.
B. because there is no way to measure a reasonable period of time in which to establish independence.
C. until it is clear that the new supervisor has assumed the responsibilities.
D. until after the next annual review of the external auditors.

Difficulty: Hard
21. Factors currently driving change in internal audit include all of the following, except for:
A. the ability of internal audit to demonstrate its value-adding nature to an organisation.
B. the provision of a broader range of assurance services by the external auditor.
C. increased emphasis on corporate governance and business risk management.
D. the increased ability to benchmark against internal audit best practice.

Difficulty: Medium
Learning Objective: 14.4 Gain an appreciation of the issues that may face the internal audit profession in the future.
Section: The future of internal audit

22. In a recent study in the US, which types of risks were found to be the fastest growing area of internal audit
focus?
A. Social and environmental risks.
B. Corporate governance risks.
C. Business risks.
D. Systems risks.

Difficulty: Medium
23. Major issues confronting internal audit include the following, except for:
A. the difficulties of changing the profile of internal audit with regards to image and status.
B. the outsourcing of internal audit.
C. an increase in the expectation gap between what internal auditors believe they should do and what financial
report
users believe internal auditors should do.
D. the advent of specialised audit groups.

Difficulty: Hard
24. When evaluating risks in accordance with the Australian Risk Management Standard AS/NZS ISO 31000,
what is the order
of steps that it is recommended be undertaken?
A. Identify risks, analyse risks, evaluate risks, treat risks.
B. Identify risks, analyse risks, treat risks, evaluate risks.
C. Identify risks, evaluate risks, treat risks, analyse risks.
D. Identify risks, evaluate risks, analyse risks, treat risks.

Difficulty: Medium
Learning Objective: 14.5 Appreciate the approaches to assessing risk management, control and governance processes.
Section: Approaches to assessing risk management, control and governance processes

25. Which of the following components is not an element of the Australian Risk Management Standard,
AS/NZS ISO 31000?
A. Establish the context.
B. Identify Risks.
C. Analyse risks.
D. Separate risks.

Difficulty: Medium
Learning Objective: 14.5 Appreciate the approaches to assessing risk management, control and governance processes.
Section: Approaches to assessing risk management, control and governance processes

Chapter 15 Key
1. Government activities may be carried out through:

A. government departments.
B. statutory authorities.
C. companies.
Difficulty: Easy
Learning Objective: 15.1 Describe the responsibilities of the different levels of government in Australia, and explain the concept of accountability.
Section: System of government and accountability
2. The proposed annual expenditures of the Commonwealth Government are authorised by:
A. the Auditor-General.
B. the Treasurer.
C. the Department of Finance.
D. the Parliament.
Difficulty: Easy
Learning Objective: 15.1 Describe the responsibilities of the different levels of government in Australia, and explain the concept of accountability.
Section: System of government and accountability
3. Governmental auditing often extends beyond examinations leading to the expression of an opinion on the
fairness of financial
presentation and includes audits of efficiency and effectiveness, and:
A. internal control.
B. evaluation.
C. accuracy.
D. compliance.
Difficulty: Easy
Learning Objective: 15.2 Outline the different bases of accounting used in the public sector.
Section: Government accounting

4. Public sector entities are required to prepare financial reports based on:
A. cash accounting.
B. accrual accounting.
C. fund accounting.
Difficulty: Easy
Learning Objective: 15.2 Outline the different bases of accounting used in the public sector.
Section: Government accounting
5. The Auditor-General is appointed by:

A. the Governor-General.
B. the Parliament.
C. the Public Service Board.
D. the Minister of Finance
Difficulty: Easy
Learning Objective: 15.3 Explain public sector audit requirements.
Section: Public sector audit requirements
6. Peer reviews of public sector audit offices are normally directed by:
A. the Prime Minister/Premier.
B. the Treasurer/Minister for Finance.
C. public accounts committees.
D. specific legislative requirements.
Difficulty: Medium
7. Governmental auditing includes:

A. financial report auditing.
B. performance auditing.
C. compliance auditing.
Difficulty: Easy

8. A determination of cost savings is most likely to be an objective of a:

A. regularity audit.
B. compliance audit.
C. performance audit.
D. financial audit.
Difficulty: Easy
Learning Objective: 15.4 Explain the nature of performance auditing.
Section: Performance audits
9. Why is it important to establish performance audit criteria?

A. They are a basis for communication with management.
B. They indicate the scope of the performance audit.
C. They are a basis for developing audit programs and questionnaires.
Difficulty: Easy
10. In reporting performance audit findings, why does an auditor evaluate evidence against criteria?
A. To ensure reasonable criteria have been established.
B. To develop conclusions relative to the audit objectives.
C. To develop the audit scope.
D. To determine risk.

Difficulty: Medium
11. Which of the following statements best describes the term 'outcomes' in a performance audit?
A. Number of units produced.
B. Service provided by a particular government program.
C. Consequences for the community of the government program.
D. Economy and efficiency of resources used in achieving outputs.

Difficulty: Medium

12. Which of the following statements best describes the term 'efficiency'?
A. A reduction in costs through better contracting.
B. Clarifying objectives and policies.
C. Greater outputs from the inputs.
D. Rationalisation of facilities.

Difficulty: Easy
13. Which of the following can be considered an example of a performance indicator for effectiveness?
A. A reduction in the number and severity of injuries, resulting from a road safety program.
B. The number of patients treated in a health clinic.
C. A decline in caseloads for social workers.
D. The costs of a job training program for long-term unemployed, per person placed in permanent employment.

Difficulty: Hard
14. What is the main concern of performance auditing?

A. Compliance with relevant laws and regulations.
B. Probity.
C. Financial report attest auditing.
D. Efficiency, economy and effectiveness.

Difficulty: Easy
15. It is not a primary purpose of a performance audit to provide:

A. a means of assurance that internal controls are functioning as planned.
B. a measure of management performance in meeting organisation goals.
C. the results of internal examinations of financial and accounting matters to a company's top-level
management.
D. an aid to the external auditor who is conducting the examination of the financial report.

Difficulty: Easy

16. A typical objective of a performance audit is for the auditor to:

A. determine whether the financial report presents the entity's operations fairly.
B. evaluate the feasibility of attaining the entity's operational objectives.
C. make recommendations for improving performance.
D. report on the entity's relative success in attaining profit maximisation.

Difficulty: Medium
17. What problem arises if the relationship between cause and effect is not determined in a performance audit?
A. The impact on the financial report cannot be determined.
B. The audit cannot proceed.
C. The criteria cannot be established.
D. A recommendation cannot be made to address the cause of the problem.

Difficulty: Hard
18. Which of the following is an example of improved effectiveness?

A. Greater outputs from the same inputs.
B. Rationalisation of facilities.
C. Introduction of charges where none previously existed.
D. An increase in the percentage of streets rated as having a satisfactory level of cleanliness and appearance
in terms of a city's street maintenance program.

Difficulty: Hard

19. Why should the public sector performance auditor be concerned with avoiding commenting on government
policy?
A. Any comment will undermine the public's confidence in the government of the day.
B. Government policy does not affect the performance of the entity.
C. The merits of government policy are matters for political debate and for decision by the executive
government.
D. A risk may arise in that the official opposition may use the audit report to criticise the government.

Difficulty: Easy
20. In a compliance audit, which of the following matters is the auditor primarily concerned about?
A. Whether the financial report is fairly presented in accordance with the identified financial reporting
framework.
B. Whether the entity has achieved its stated objectives.
C. Whether the entity has followed the relevant requirements applicable to it.
D. Whether the entity has operated in the most economic and efficient manner.

Difficulty: Easy
Learning Objective: 15.5 Explain the nature of regularity audits.
Section: Regularity audits
21. Which of the following examples is a compliance audit in relation to a government department?
A. Reporting to the minister on the tendering process for the construction of the department's new office block.
B. Reporting on the department's financial report to be presented to Parliament.
C. Reporting to the minister as to whether the department has met the objectives set out in its mission statement.
D. Reporting to the minister as to whether members of the department have followed the government travel
guidelines.

Difficulty: Medium
Learning Objective: 15.5 Explain the nature of regularity audits.
Section: Regularity audits

Chapter 16 Key
1. Which of the following is not an assurance engagement?

A. A review of historical financial information.
B. An audit of the effectiveness of internal control.
C. A performance audit.
D. A consulting engagement to help an organisation meet its tax obligations.
Difficulty: Easy
Est time: < 1 min
Section: The current framework for assurance services
2. Reasonable assurance is provided by:

A. a review engagement.
B. an audit engagement.
C. an assurance engagement.
D. an agreed-upon procedures engagement.
Difficulty: Easy
Est time: < 1 min
3. A review engagement provides:

A. reasonable assurance.
B. high but not absolute assurance.
C. low assurance.
D. limited assurance.
Difficulty: Easy
Est time: < 1 min

4. In performing an assurance service, an auditor typically:

A. assesses control risk at a low level.
B. supplies litigation support services.
C. provides management consulting advice.
D. expresses a conclusion about an assertion.
Difficulty: Easy
Est time: < 1 min
5. The objective of assurance services is best described as:

A. improving the firm's outcomes.
B. comparing internal information and policies with those of other firms.
C. enhancing decision making.
D. providing reliable information.
Difficulty: Easy
Est time: < 1 min
6. Assurance services are best described as:

A. the expression of an opinion on the truth and fairness of a general purpose financial report.
B. the preparation of a financial report based on the assumptions of a responsible party.
C. independent professional services that improve the quality of information or its context, for decision
makers.
D. services designed for the improvement of operations, resulting in better outcomes.
Difficulty: Medium

7. Which of the following best describes an auditor's report on a supplementary financial report prepared in
accordance with
a price-level basis of accounting that has substantial support?
A. An unaudited report on a supplementary report.
B. An assurance report on a supplementary report.
C. A special purpose report on a supplementary report.
D. A limited assurance report on a supplementary report.
Difficulty: Easy
Learning Objective: 16.2 Understand the assurance provider’s obligations in relation to audits of financial information other than general-purpose reports, including
special-purpose reports, components of financial reports and summary financial reports.
Section: Special-purpose audit engagements
8. Which of the following statements, with respect to the auditor's report providing an opinion on a specific
item on a financial
report is correct?
A. Such a report can only be provided if the auditor is also engaged to audit the entire financial report.
B. Materiality must be related to the specified item rather than to the financial report taken as a whole.
C. The auditor who has issued an adverse opinion on the financial report taken as a whole can never express
an opinion on a specified item in that financial report.
D. The attention devoted to the specific item is usually less than it would be if the financial report taken as
a whole were being audited.
Difficulty: Medium
9. Which of the following must accompany an unaudited financial report which is prepared by an auditor?
A. Either a disclaimer of opinion or adverse opinion.
B. Only a disclaimer of opinion.
C. Either a disclaimer of opinion or a qualified opinion.
Difficulty: Medium

10. A compiled financial report should be accompanied by a report stating all of the following except:
A. a compilation has been performed.
B. the accountant does not express an opinion or any other form of assurance on the report.
C. a compilation consists principally of inquiries of company personnel and analytical procedures applied to
financial data.
D. a compilation is limited to presenting in the form of a financial report, information that is the representation
of management.

Difficulty: Hard
11. Whenever special reports, filed on a printed form designed by authorities, call upon the independent
auditor to make an assertion
that the auditor believes is not justified, the auditor should:
A. reword the form or attach a separate report.
B. submit a standard auditor's report with explanations in a separate paragraph of the report.
C. withdraw from the engagement.
D. submit the form with questionable items clearly omitted.

Difficulty: Hard
12. Negative assurance is permissible in:

A. reports relating to the results of agreed-upon procedures to one or more specified elements, accounts or
items
of a financial report.
B. reports based on a performance audit of a government department.
C. reports based upon an audit of the interim financial report of a closely held business entity.
D. reports based upon a review engagement.

Difficulty: Easy
Learning Objective: 16.3 Appreciate the procedures undertaken in a limited assurance (review) engagement and the level of assurance offered by these engagements.
Section: Limited assurance (review) engagements

13. Inquiry of the entity's personnel and analytical procedures are the primary bases for the issuance of a(n):
A. auditor's report on a financial report supplemented with price level information.
B. compilation report on a financial report for a non-public company in its first year of operations.
C. management advisory report prepared at the request of the client's audit committee.
D. half-yearly review report on a comparative financial report for a public company.

Difficulty: Easy
14. The report in a limited assurance engagement provides:

A. positive assurance.
B. negative assurance.
C. a summary of findings.
D. assurance in the form of an audit opinion.

Difficulty: Easy
Est time: < 1 min
15. The statement that 'nothing came to our attention which would indicate that these statements are not fairly
presented' expresses
which of the following?
A. Negative assurance.
B. Disclaimer of an opinion.
C. Piecemeal opinion.
D. Negative confirmation.

Difficulty: Easy
Est time: < 1 min

16. When an auditor performs a review of an interim financial report, which of the following steps would not be
part of the review?
A. Inquiry of management.
B. Testing of the computer controls.
C. Reading the minutes of the shareholders' meetings.
D. Review of ratios and trends.

Difficulty: Easy
17. An assurance provider who reviews the financial report of a non-reporting entity should issue a report
containing the statement that a review:
A. provides negative assurance that internal control is functioning as designed.
B. provides a level of assurance that is less than that given in an audit.
C. is substantially more in scope than a compilation.
D. provides a high level of assurance based on inquiry and analytical procedures.

Difficulty: Medium
18. Inquiry and analytical procedures ordinarily performed during a review of an entity's half-yearly financial
report include:
A. inquiries concerning actions taken at meetings of the board of directors.
B. analytical procedures designed to identify material weaknesses in internal accounting control.
C. inquiries of knowledgeable outside parties such as the client's attorneys and bankers.
D. analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.

Difficulty: Medium

19. Which of the following procedures is usually included in a limited assurance engagement?
A. Inquiries concerning the entity's accounting policies.
B. Tests of controls over the sales-accounts receivable-cash cycle.
C. The confirmation of accounts receivable.
D. Attendance at the inventory stocktake.

Difficulty: Medium
20.
During a review of the financial report of a non-reporting entity an assurance provider becomes aware of a lack of adequate disclosure that is
material and pervasive to the financial report and results in it being misleading. If management refuses to correct the financial report
presentations, the assurance provider should:
A. express only limited assurance on the financial report presentations.

B. disclose this departure from accounting standards in a separate paragraph of the report.
C. issue an adverse opinion.
D. issue an 'except for' opinion.

Difficulty: Medium
21. Following is a list of engagements that an assurance provider may undertake:
I. compiling financial reports

II. agreed-upon procedures
III. review of interim financial information.
For which of these engagements is assurance not provided?

A. I only.
B. II only.
C. III only.
D. I and II only.

Difficulty: Easy
Learning Objective: 16.4 Understand the assurance provider’s obligations in undertaking agreed-upon procedures engagements, and appreciate the level of assurance
offered by such engagements.
Section: Agreed-upon procedures engagements

22. Which one of the following is generally more important in a review than in an agreed upon procedures
engagement?
A. Obtaining a signed representation letter.
B. Obtaining a signed engagement letter.
C. Gaining familiarity with industry accounting principles.
D. Determining the accounting bases on which the financial report is to be presented.

Difficulty: Hard
Learning Objective: 16.4 Understand the assurance provider’s obligations in undertaking agreed-upon procedures engagements, and appreciate the level of assurance
offered by such engagements.
Section: Agreed-upon procedures engagements
23. The responsible party for assumptions identified in the preparation of prospective financial statements is
usually:
A. a third-party lending institution.
B. the client's management.
C. the reporting accountant.
D. the client's independent auditor.

Difficulty: Easy
Learning Objective: 16.5 Understand the characteristics of engagements involving the assurance of prospective financial information, and appreciate the assurance
Section: Assurance of prospective financial information
24. Responding to a question such as 'what would happen if...' is an attribute of which of the following types of
engagements?
A. Financial projection.
B. Financial forecast.
C. Financial forecast and financial projection.
D. Review.

Difficulty: Easy

25. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge
and belief, an entity's
expected financial position, results of operations and changes in cash flows. Such prospective financial
statements are known as:
A. financial projections.
B. pro-forma financial statements.
C. financial forecasts.
D. partial presentations.

Difficulty: Easy
26. When an auditor is associated with the preparation of forecasts, all of the following should be disclosed
except the:
A. character of the work performed by the auditor.
B. sources of information.
C. probability of achieving estimates.
D. major assumptions in the preparation of the forecasts.

Difficulty: Medium
27. Which of the following are suitable criteria for providing assurance on a report of the effectiveness of
internal controls?
A. Australian Accounting Standards.
B. AUS 810 'Special Purpose Reports on the Effectiveness of Control Procedures'.
C. ASAE/ISAE 3000 'Assurance Engagements other than Reports or Reviews of Historical Financial
Information'.
D. The revised COSO framework.

Difficulty: Easy
Section: Assurance of reports on the effectiveness of internal controls

28. An auditor's study and evaluation of the internal accounting control system made in connection with an
annual audit is usually
not sufficient to express an opinion on an entity's system because:
A. the audit cost-benefit relationship permits an auditor to express only reasonable assurance that the system
operates as designed.
B. the evaluation of weaknesses is subjective enough that an auditor should not express an opinion on the
internal
accounting controls alone.
C. only those controls on which an auditor intends to rely are reviewed, tested and evaluated.
D. management may change the internal accounting controls to correct weaknesses.

Difficulty: Easy
29. An assurance report on internal control structures is least likely to be issued as a result of a:
A. review of the annual financial report of a large company.
B. performance audit of a government agency.
C. special study of related party transactions.
D. special study of a proposed system involving the internal control structure.

Difficulty: Easy
30. An engagement to express an opinion on a system of internal accounting control will generally:
A. increase the reliability of the financial report that has already been audited.
B. require procedures that duplicate those already applied in assessing control risk during a financial report
audit.
C. be more limited in scope than the assessment of control risk made during a financial report audit.
D. be more extensive in scope than the assessment of control risk made during a financial report audit.

Difficulty: Easy

31. Which of the following would be suitable criteria for undertaking an assurance engagement on an
environmental and sustainability report?
A. Australian Auditing Standards/International Auditing Standards.
B. The revised COSO framework.
C. ASAE 3000/ISAE 3000.
D. Global reporting initiative framework.

Difficulty: Easy
Learning Objective: 16.7 Understand the characteristics of engagements involving the assurance of environmental and sustainability and integrated reports, and
appreciate the assurance provider’s responsibilities in such engagements.
Section: Assurance of environmental and sustainability reports and of integrated reports
32. Which of the following is not a major difference between integrated reporting and existing reporting
frameworks?
A. The variety of financial and non-financial metrics covered.
B. The emphasis on internal control.
C. The emphasis on forward-looking information.
D. The reflection of company strategy.

Difficulty: Medium
Learning Objective: 16.7 Understand the characteristics of engagements involving the assurance of environmental and sustainability and integrated reports, and
appreciate the assurance provider’s responsibilities in such engagements.
Section: Assurance of environmental and sustainability reports and of integrated reports
33. ISAE 3410 'Assurance of Greenhouse Gas Statements' is based on which approach to assurance?
A. Risk based approach.
B. Systems based approach.
C. Agreed upon procedures approach.
D. Limited assurance approach.

Difficulty: Easy
Learning Objective: 16.8 Understand the demand for assurance of greenhouse gas statements, and appreciate the assurance provider’s responsibilities in such
engagements.
Section: Assurance of greenhouse gas statements

34. An emission that is associated with the consumption, rather than the production, of electricity by an
assurance client should
be classed as a(n):
A. scope 1 emission.
B. scope 2 emission.
C. scope 3 emission.
D. emission deduction.

Difficulty: Easy
Learning Objective: 16.8 Understand the demand for assurance of greenhouse gas statements, and appreciate the assurance provider’s responsibilities in such
engagements.
Section: Assurance of greenhouse gas statements
35. Which of the following statements is true regarding the performance of an assurance service on an
information system's reliability
by an auditor?
A. The service will require the auditor to apply all of the auditing standards.
B. The performing of this service does not require suitable criteria to be available.
C. Performing the service must be undertaken in accordance with approved accounting standards.
D. The service may be performed even though there are no standards currently issued by the Australian
Auditing
and Assurance Standards Board (AUASB).

Difficulty: Easy
Learning Objective: 16.9 Understand assurance services provided in e-commerce environments.
Section: Providing assurance services in electronic commerce environments

36. Which of the following statements is true with regards the auditor's likelihood of relying on controls in
electronic commerce environments?
A. The auditor is more likely to identify controls they can rely upon in a B2B electronic commerce
environment than
they are in a B2C electronic commerce environment.
B. The auditor is more likely to identify controls they can rely upon in a B2C electronic commerce
environment than
they are in a B2B electronic commerce environment.
C. The auditor equally likely to identify controls they can rely upon in a B2B electronic commerce
environment as they
are in a B2C electronic commerce environment.
D. The auditor is not likely to identify controls they can rely upon in either a B2B electronic commerce
environment
or a B2C electronic commerce environment.

Difficulty: Medium
Learning Objective: 16.9 Understand assurance services provided in e-commerce environments.
Section: Providing assurance services in electronic commerce environments
37. In which of the following scenarios is it more likely that the information provided will be continuously
assured?
A. An entity decides to assure its environmental and sustainability report.
B. An entity has to provide a compliance report with regards whether there has been a breach of the rules with
regards
how confidential credit card details for electronic commerce transactions are stored.
C. An identity identifies that there is a risk that financial investments are not being written down to market
value in the
financial statements, as is required by accounting standards.
D. Financial information where a client determines to assure the quarterly financial reports as well as the
half-yearly
financial reports.

Difficulty: Easy
Learning Objective: 16.10 Appreciate the concepts of continuous assurance and XBRL.
Section: Continuous assurance and XBRL

38.
Using XBRL, an audit client decides to make their general purpose financial reports continuously available and up-to-date and to have continuous
assurance from the auditor. What would be the suitable criteria by which the auditor would judge whether or not there had been a material
misstatement?
A. ASAE/ISAE 3000 'Assurance Engagements other than Reports or Reviews of Historical Financial
Information'.
B. Extensible mark-up language (XML).
C. There are no generally available suitable criteria for such engagements. The suitable criteria would have to
be
agreed between and the audit client and the auditor, and these would have to be publicly disclosed.
D. Approved accounting standards.

Difficulty: Medium
Learning Objective: 16.10 Appreciate the concepts of continuous assurance and XBRL.
Section: Continuous assurance and XBRL
39. What is the general character of the work conducted in performing a forensic audit?
A. Detecting or deterring fraudulent activity.
B. Determining whether internal control is operating efficiently and effectively
C. Identifying the causes of an entity's financial difficulties.
D. Offering an opinion on the reliability of the specific assertions made by management.

Difficulty: Easy
Learning Objective: 16.11 Understand the types of services offered by forensic auditors.
Section: Forensic auditing
40. Forensic audits include all of the following except:

A. employee fraud.
B. criminal investigations.
C. matrimonial disputes.
D. manufacturers' claims about product quality.

Difficulty: Easy
Learning Objective: 16.11 Understand the types of services offered by forensic auditors.
Section: Forensic auditing

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lOMoAR cPSD|9 854524

1. Which of the following is not an element of an assurance engagement?

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5. Independent auditors are referred to as 'independent' because:

6. The highest level of assurance is provided by:

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Chapter - Chapter 01 #10

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Chapter - Chapter 01 #13

14. The essence of a financial report audit is to:

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Chapter - Chapter 01 #15

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16. Financial report auditing can best be described as:

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Chapter - Chapter 01 #17

18. Which of the following is not an attribute of an external auditor?

Chapter - Chapter 01 #18

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26. The value of an assurance service lies in its ability to:

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I. recommendations to improve the efficiency of operations.

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

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I. compliance with laws and regulations.

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

Chapter - Chapter 01 #38

39. Who establishes Australian auditing standards?

Chapter - Chapter 01 #39

40. Assurance services would include which of the following?

Chapter - Chapter 01 #40

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Chapter - Chapter 01 #41

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