Robert Judd has audited the financial report of Hurricane Pty Ltd for several years and
had always been paid promptly for services rendered. Last year’s audit invoices have
not been paid because Hurricane 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, Robert Judd should:
A.Perform the scheduled audit and allow Hurricane 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 Hurricane Pty Ltd.
C.Inform Hurricane Pty Ltd’s management that the past due audit fees may be
considered an impairment of auditor independence.
D.Inform Hurricane Pty Ltd’s management that the past due audit fees may be
considered a loan on which interest must be imputed for financial statement purposes.
Cathy Stone has audited the financial report of Basalt Ltd for the year ended 31
December 20X0. Although Cathy Stone’s fieldwork was completed on 27 February
20X1, her audit report was dated 28 February 20X1, and was received by the
management of Basalt Ltd on 6 March 20X1. On 4 April 20X1, the management of
Basalt Ltd asked that Cathy Stone approve inclusions of this report in their annual
report to shareholders which will include an unaudited financial report for the first
quarter ended 31 March 20X1. Cathy Stone approved the inclusion of this audit report
in the annual report to shareholders. Under the circumstances Cathy Stone is
responsible for inquiring as to subsequent events occurring through to:
A.27 February 20X1.
B.28 February 20X1.
C.31 March 20X1.
D.4 April 20X1.
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 audit report with explanations in a separate paragraph of the report.
C.withdraw from the engagement.
D.submit the form with questionable items clearly omitted.
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.
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.
An auditor selected items 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.
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.
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.
Which of the following characteristics most likely would heighten an auditor’s concern
about the risk of intentional manipulation of the financial report?
A.Turnover of senior accounting personnel is low.
B.Insiders recently purchased additional shares of the entity.
C.Management places substantial emphasis on meeting earnings projections.
D.The rate of change in the entity’s industry is slow.
Which of the following best describes the operational audit by an internal auditor?
A.It concentrates on implementing financial and accounting control in a newly
organised company.
B.It requires the constant review by internal auditors of the administrative controls as
they relate to the operations of the company.
C.It concentrates on seeking out aspects of operations in which waste would be reduced
by the introduction of controls.
D.It attempts and is designed to verify the fair presentation of a company’s results of
operations.
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.
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.crossfooting tests.
C.limit checks.
D.external labels.
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.
Obtaining an understanding of the internal control and assessing control risk:
A.may be performed concurrently in an audit.
B.need to be documented only if the assessed level is below the maximum.
C.are possible but not necessary in performing an audit.
D.are necessarily sequential audit steps.
It would NOT be appropriate to use dollar-unit sampling as a selection method as the
primary source of evidence for:
A.accounts payable.
B.plant and machinery.
C.accounts receivable.
D.inventory.
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 audit report cannot be
attached to or be seen as covering any information that the audit report was not intended
to cover.
B.The auditor may decide to provide a separate audit 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.
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 (3) 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.
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.
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.
Vouching is used primarily to test which of the following assertions about classes of
transaction?
A.Occurrence.
B.Completeness.
C.Authorisation.
D.Classification.
Which is not a key segregation of duties for the revenue process? Different parties
should:
A.prepare shipping orders and prepare bills of lading.
B.perform the credit and billing functions.
C.perform the shipping and billing function.
D.receive cash and adjust accounts receivable.
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.corroborative evidential matter.
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.
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’ audit report will probably contain:
A.An unqualified opinion and an emphasis of matter paragraph.
B.A qualified opinion.
C.An unqualified opinion.
D.Either a qualified opinion or a disclaimer of opinion.
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.
Which of the following is not a qualitative factor that may affect an auditor’s
establishment of materiality?
A.Potential for fraud.
B.The company is close to violating loan covenants.
C.Firm policy sets materiality at 4 per cent of pre-tax income.
D.A small misstatement would interrupt an earnings trend.
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.
The tolerable error 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 error rate used in audits of similar clients.
D.The amount of any identified substantive misstatements.
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 unqualified opinion with an emphasis of matter section.
The WebTrust(TM) Seal of Assurance signifies to an e-commerce customer that the:
A.entity with whom the customer is dealing follows the best business practices.
B.privacy of the customer is assured.
C.integrity of transactions is assured.
D.business practices of the entity are disclosed, and effective controls are maintained
over transaction integrity and information protection.
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.
During a review of a financial report, the auditor would be least likely to:
A.perform analytical procedures designed to identify relationships that appear to be
unusual.
B.obtain written confirmation from management regarding loans to officers.
C.obtain reports from other accountants who reviewed a portion of the total entity.
D.read the financial report and consider conformance with generally accepted
accounting principles.
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.