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.
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.
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.
Procedures related to the purchase cutoff 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 balance sheet was carried at lower of cost or market.
C.on the year-end balance sheet was paid for by the company.
D.owned by the company is in the possession of the company.
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.
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.
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 unqualified
opinion is issued.
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 lawyer to identify illegal acts that should be disclosed.
A substantive strategy 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.a substantive strategy was likely used in prior years.
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 completely new examination of contingent liabilities.
D.an adverse opinion will be necessary.
Audit firms may practise as:
A.partnerships.
B.authorised audit companies.
C.sole traders.
D.all of the given answers are correct.
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.
If, after completing their audit work, the auditor finds a total of $10 000 misstatement
while sampling 20 per cent of the population, their unbiased projection of this to the
population results in a best estimate of error in the population of:
A.$50 000.
B.$2000.
C.$10 000.
D.Some other amount.
All of the following are substantive tests except:
A.analytical procedures.
B.tests of controls.
C.direct tests of balances.
D.confirmation of bank balances at year-end.
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:
A.Cheque number 500 127.
B.Cheque number 627.
C.Cheque number 377.
D.Some other item number.
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.
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.
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.
A customer inadvertently ordered part number 12368 rather than part number 12638. In
processing this order, the error would be detected by the vendor with which of the
following controls?
A.Batch total.
B.Key verifying.
C.Self-checking digit.
D.An internal consistency check.
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.
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.
Which of the following is not a characteristic of whistleblowing?
A.Disclosure is made in good faith.
B.Disclosure is made in the public interest.
C.Disclosure is made to earn a reward.
D.A reasonable belief that disclosure will allow stakeholders to determine that there has
been misconduct.
Which of the following, if material, would be fraud as defined in 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.
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.
Testing depreciation calculations for a sample of property, plant and equipment tests the
assertion of:
A.existence.
B.completeness.
C.valuation and allocation.
D.rights and obligations.
Which of the following statements is correct?
A.CPA Australia has a larger membership than The Institute of Chartered Accountants
in Australia.
B.Membership of The Institute of Chartered Accountants in Australia may be obtained
on graduating with a prescribed university degree.
C.CPA Australia was originally established under Royal Charter.
D.All of the given answers are correct.
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
independent 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.
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.
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.
An auditor who is approached by the ICAA or CPA Australia 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.
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.
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.