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.
Which of the following statements regarding the phrase ‘true and fair’ is true for a
Corporations Act 2001audit?
A.The literal interpretation is emphasised over the technical interpretation by the
requirement that any additional information necessary for a true and fair view be
disclosed in the notes to the accounts.
B.The literal interpretation is emphasised over the technical interpretation by the
requirement that any additional information necessary for a true and fair view be
disclosed in the statements of financial position and financial performance.
C.The technical interpretation is emphasised over the literal interpretation by the
requirement that any additional information necessary for a true and fair view be
disclosed in the notes to the accounts.
D.The technical interpretation is emphasised over the literal interpretation by the
requirement that any additional information necessary for a true and fair view be
disclosed in the statements of financial position and financial performance.
When using a statistical sampling plan for a test of controls, the auditor would probably
require a smaller sample if the:
A.desired tolerable error decreases.
B.population increases.
C.expected deviation rate increases.
D.allowable risk of over-reliance increases.
Which of the following factors most likely would 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.
When considering internal control, an auditor must be aware of the concept of
reasonable assurance which recognises that the:
A.employment of competent personnel provides assurance that the objectives of
internal control will be achieved.
B.establishment and maintenance of an internal control is an important responsibility of
management and not of the auditor.
C.cost of internal control should not exceed the benefits expected to be derived from
internal control.
D.segregation of duties is necessary to ascertain that the internal control elements are
effective.
Which assertion for ending inventory is most likely violated if the gross profit
percentage is much greater than last year?
A.Existence.
B.Completeness.
C.Rights and obligations.
D.Accuracy.
In attribute sampling, 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.Tolerable rate.
B.Population size.
C.Expected rate.
D.Risk of assessing control risk too low.
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.
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.board of directors.
D.corporate shareholders.
When an auditor tests a computerised accounting application, which of the following is
true of the test data approach?
A.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.Several transactions of each type must be tested.
D.Testing a program at year-end provides assurance that the client’s processing was
accurate for the full year.
For dollar-unit sampling with systematic selection, a sampling interval of 400 means
that:
A.the average size of items in the account is 400.
B.every 400th item in the population will be selected in the sample.
C.the average misstatement in sample items is $400.
D.every 400th dollar in the population will be included in the sample.
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.
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 AUASB.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an
opinion?
A.The audit program
B.The auditor’s judgment
C.Generally accepted auditing standards
D.The auditor’s working papers
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.
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 given answers are correct.
Which of the following parties is responsible for the truth and fairness of the
representations made in the financial report?
A.Independent auditor.
B.Client’s directors.
C.Internal auditor.
D.Audit committee.
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.
Which of the following bodies helps resolve disputes between companies and ASIC
over interpretation of accounting standards?
A.Auditing and Assurance Standards Board.
B.Financial Reporting Panel.
C.Australian Accounting Standards Board.
D.Financial Reporting Council.
Audit standards require auditors to:
A.perform procedures designed to detect all instances of fraud that might affect the
financial report.
B.provide reasonable assurance that the financial report is not materially misstated
because of fraud.
C.issue an unqualified opinion only when the auditor is satisfied that no instances of
fraud have occurred.
D.design the audit program to meet financial report users’ expectations concerning
fraud.
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.
If an entity’s external auditor expresses an unqualified opinion as a result of the audit of
the entity’s financial report, readers of the audit 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 external
auditor.
D.the internal control structure is effective.
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.