AUDI TI N G
MI LLI CHAMP & TAYLOR
AN SW ERS TO PRACTI CE QUESTI ON S CHAPTERS 1 1 –2 0
1 The external auditor may seek to place reliance on internal controls in order to restrict
substantive testing.
In each of the following circumstances, select whether the external auditor is likely to place
reliance or place no reliance on internal controls.
A company with an independent internal audit department Reliance
A family company where the financial director is related to the chief executive No reliance
A company where a fraud committed by the purchasing manager has been uncovered
No reliance
2 List the main characteristics of good audit evidence.
State the main ways in which auditors can gather the evidence they need and provide an example
of each method
Answer
3.Accounting systems have control objectives and control procedures to mitigate the risks that the
control objective is not met.
4. You are auditing Twinkles Ltd which runs a chain of jewellery shops and you are responsible for
the audit of inventory. Counting and indentifying the items of jewellery is not a difficulty but
verifying the value of the inventory is a major planning issue. How would you gather sufficient
appropriate evidence to validate the value of inventories in this case?
Answer
5 As part of verification techniques in respect of revenues an auditor will inspect sales invoices.
The auditor will gain assurance about different assertions depending on the information on the
invoice.
6 Auditors use samples in their audit testing. In which of the following situations is the use of
sampling not appropriate
a) When the population is homogenous
b) When all items in the population have an equal chance of being selected
c) When the population is very small and all the items are material
d) When the population consists of a large number of transactions
7 You are the auditor of an engineering firm called Thumpit & Hope Ltd. You are planning for a
physical inventory count at the company’s warehouse on 31 August 2X11. The company
assembles domestic appliances, and inventory of finished appliances, unassembled parts and
sundry inventories are stored in the warehouse which is adjacent to the company’s assembly
plant. The plant will continue to produce goods during the stock count until 5 pm on 31 August
2X11. On 30 August 2X11, the warehouse staff will deliver the estimated quantities of
unassembled parts and sundry inventories which will be required for production for 31 May 2X111;
however emergency requisitions by the factory will be filled on 31 August. During the inventory
count, the warehouse staff will continue to receive parts and sundry inventories, and to despatch
finished appliances. Appliances which are completed on 31 August 2X11 will remain in the
assembly plant until after the physical inventory count has been completed.
Describe the procedures which Camry Products Ltd should establish in order to ensure that all
inventory items are counted and that no item is counted twice.
Answer
8. Which of the following is not a test using sampling?
Answer C
9. Glub
(a) Identify four controls which should be in place to control the purchase of tangible fixed assets
and explain why they are necessary and the consequences to the company if they are not in place
(b) Identify weaknesses in the system described above and, for each weakness, explain the
consequences that could result from it.
(c) In respect of the new packing line what evidence will the auditors need in order to confirm that
the expenditure has been correctly include in the financial statements. Comment particularly on the
inclusion of overheads and financing costs
Answer
10.Two types of computer–assisted audit techniques (CAAT) are test data and audit software.
For each of the procedures listed below, select the type of CAAT which would be used to perform
that procedure.
11 ISA 230 ‘Audit documentation states:
‘The objective of the auditor is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with ISAs (UK and Ireland)
and applicable legal and regulatory requirements.’
Briefly indicate what should be included as part of audit documentation and outline the implications
for the audit team as to what to include and what to exclude
What is unnecessary:
12 State whether the following are true or false in relation to computer assisted audit techniques
13. In relation to selecting customers in a circularisation of receivables:
(i) explain how you would use monetary unit sampling to select the customers to
circularise
(ii) consider the criteria you would use to select individual customers for circularisation
using judgement
(iii) discuss the advantages and disadvantages of using monetary unit sampling (in (i)
above) as compared with judgement (in (ii) above) to select the customers to circularise. Your
answer should consider the reasons why it is undesirable only to use judgement to select the
customers for circularisation.
Answer
14 State whether the following are true or false in relation to the auditor and fraud
It is the auditor’s responsibility to follow up possible indicators of fraud uncovered during the
Management can rely on auditors to detect fraud as this is one of the auditor’s duties under ISA
15 The figures below are a summary of an analytical review of the draft financial statements of
Howdo Ltd. The review was carried out at the planning stage and the comparison was made
against the original budget for the financial year.
Based on the results of this review indicate whether or not you would investigate or accept the
reason for any differences
16 The external auditor should undertake analytical procedures as part of the planning process in
order to identify the risk of a possible misstatement of figures in the financial statements. The
results of the analytical procedures conducted on the financial statements of an audit client are
listed below.
17 The audit work requires the verification of cut –off procedures to ensure that all transactions
are recorded in the correct accounting period.
During the year end inventory count on 31 March 201X the audit team recorded the following
transactions.
The last Goods Received Note number was 10672.
Which invoices should be recorded in purchases for the year?
Invoice
no
Invoice
date
GRN
number
Amount
95493
28 March
10674
£ 3,098.45
95494
31 March
10671
£12,274.20
94495
29 March
10673
£1,567.90
94496
30 March
10672
£12,786.42
94497
1 April
10670
£ 456.48
94498
31 March
10675
£ 998.46
18. The audit junior is in the process of performing a reconciliation of the balances on the purchase
ledger as at 31 December of Tweetypie Ltd with a selection of statements from suppliers.
19. You are auditing Megabuild plc a company which builds large projects mostly overseas. At
present it is building a dam in the Philippines, a motorway in South Africa and a holiday village in
Egypt.
The audit team has been asked to devise audit procedures for the verification of work in
progress balances as part of inventories. From the test below select whether you would
include them as valid tests or exclude them as invalid.
20. Describe the advantages and disadvantages of the external auditors providing an internal audit
service to their clients.