Auditing and Assurance Services
Final Exam Questions
Course Introduction
Auditing and Assurance Services introduces students to the fundamental concepts, principles, and procedures of auditing within the framework of professional standards and ethical guidelines. The course explores the role of the independent auditor in the context of financial reporting, emphasizing risk assessment, audit planning, evidence gathering, and the formulation of audit opinions. Students learn about various types of assurance services, internal controls, and the use of technology in auditing. The course also addresses contemporary issues, such as audit quality, fraud detection, and evolving regulatory requirements, preparing students for professional practice in public accounting and corporate environments.
Recommended Textbook
Auditing Assurance Services and Ethics in Australia 10th Edition by Alvin Arens
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Chapter 1: Demand for audit and assurance services
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Sample Questions
Q1) In 'auditing' accounting data, the primary concern is with:
A) determining if fraud has occurred.
B) determining whether recorded information properly reflects the economic events that occurred during the accounting period.
C) analysing the nonfinancial information to be sure that it complies with government requirements.
D) determining if taxable income has been calculated correctly.
Answer: B
Q2) Which one of the following is NOT a means of reducing information risk?
A) providing audited financial statements
B) independent verification by the user
C) implementing a system of quality control
D) sharing the risk with management
Answer: C
Q3) Firms providing audit services can be incorporated provided:
A) all partners are listed as directors.
B) they are not large partnerships.
C) they obtain appropriate and adequate professional indemnity insurance.
D) the total income of the audit firm is above $2M.
Answer: C
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Chapter 2: Auditors legal environment
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Sample Questions
Q1) What is the role of the Financial Reporting Council (FRC)in monitoring the audit profession?
Answer: The FRC can require a professional body to provide information regarding its code of professional conduct (and any proposed changes), its planning and performance of quality assurance reviews, and its investigation and disciplinary procedures (s.225A).Note that the FRC doesn't monitor individual auditors or engagements.
Q2) Discuss the purpose of a privity letter and how the auditor should respond to such a request.
Answer: A privity letter is a letter from a third party requesting that the auditor acknowledge the third party's reliance on the audited financial report for decision making.
AGS 1014 advises auditors to do one of the following:
.Provide an unequivocal statement that the audit report is intended for use only by the body of shareholders.
.If the auditor acknowledges responsibility to the specific third party, the auditor should obtain written representation from the third party identifying the scope and nature of the audit and acknowledging the potential inadequacy of the audit report for the third party's purposes.
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Page 4
Chapter 3: Audit quality and ethics
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Sample Questions
Q1) If a public accounting firm is requested by a client of another audit firm to provide an opinion on the application of an accounting principle, the public accounting firm should:
A) inform ASIC.
B) advise the existing auditor.
C) refuse to give an opinion.
D) all of the above
Answer: B
Q2) The auditor's ultimate defence where conflicts are sufficiently great so as to compromise objectivity is:
A) APES 110.
B) the working papers.
C) resignation.
D) whistle blowing.
Answer: C
Q3) The professional bodies' ethical rules have the force of law applicable to auditing standards.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Audit responsibilities and objectives
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Q1) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:
A) equally on discovering either one.
B) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
C) more on discovering errors than employee fraud.
D) more on discovering employee fraud than errors.
Q2) An auditor should recognise that the application of auditing procedures may produce evidential matter indicating the possibility of errors or fraud; therefore, an auditor should:
A) extend the work to audit most recorded transactions and records of an entity.
B) design audit tests to detect unrecorded transactions.
C) not depend on internal accounting control features that are designed to prevent or detect errors or irregularities.
D) plan and perform the engagement with an attitude of professional scepticism.
Q3) ASA 240 describes auditors' responsibilities to detect fraud during an audit.In assessing the risk of fraud, identify two typical characteristics of fraudulent activity, and provide an example of each.
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Chapter 5: Audit evidence
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Q1) There are four important purposes of analytical procedures.Identify each of these four purposes and, for each purpose, give a specific example of an analytical procedure that an auditor might perform.
Q2) What audit procedures are used to evaluate the client's going concern assumption?
Q3) Evidence obtained directly by the auditor is more competent than information obtained indirectly.Which of the following is NOT an example of the auditor's direct knowledge?
A) physical examination
B) inquiry
C) computation
D) observation
Q4) Comparing the client's data with industry averages provides:
A) an indication of the likelihood of financial failure.
B) a benchmark to be used in evaluating client's budgets.
C) an indication where errors exist in the statements.
D) a comparison of 'what is' with 'what should be'.
Q5) When an analytical procedure reveals no unusual fluctuations, discuss what this means for the audit.
Q6) What are the benefits to auditors of using computer software?
Page 7
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Chapter 6: Audit planning and documentation
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Q1) Identify the three factors an auditor should evaluate before relying on the work of an outside specialist.
Q2) One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.
A)True
B)False
Q3) An auditor who accepts an audit engagement must gain an understanding of the client's industry and business.This includes knowledge of the:
A) industry and external environment.
B) business operations and processes.
C) management and governance.
D) all of the above
Q4) A common example of a related-party transaction is any transaction between a parent company and its subsidiary.
A)True
B)False
Q5) Discuss the purposes of audit working papers.
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Chapter7: Materiality and risk
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Q1) Inherent risk and control risk normally vary for different accounts in the same audit, whereas acceptable audit risk is ordinarily held constant for each account in the same audit.
A)True
B)False
Q2) Auditors have difficulty applying the concept of materiality in practice because they often do not know who the users of the financial statements are or what economic decisions will be made.
A)True
B)False
Q3) Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus.
A)True
B)False
Q4) Distinguish between tolerable misstatement and preliminary assessment of materiality.How are they related to each other?
Q5) Discuss how auditors use the audit risk model when planning an audit.
Q6) Describe the audit risk model and each of its components.
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Chapter 8: Internal control and control risk
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Sample Questions
Q1) When controls leave no documentary evidence or trail:
A) it is impossible to audit that area of client's system.
B) it is impossible to verify them, so the auditor will have to rely on substantive tests.
C) the only thing available as verification of their effectiveness is inquiry of management.
D) the auditor generally observes them being applied.
Q2) The reason to prevent those who authorise transactions from having control over the related asset is to protect the company primarily against:
A) defalcation.
B) error.
C) non-compliance with accounting standards.
D) unbiased information.
Q3) For efficiency, if internal controls are ignored, then control risk is assumed to be maximum.
A)True
B)False
Q4) Describe five common procedures an auditor can use to obtain an understanding of internal control design.
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10
Chapter 9: Fraud auditing
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Sample Questions
Q1) To reduce fraud incidence, management should build a positive culture and work environment by implementing programs and initiatives to increase employee morale.Which of the following is NOT an example of the above? Employees should be encouraged
A) to obtain advice internally when matters of conflict arise.
B) by linking their remuneration to the final profit figure.
C) to support the entity's values and code of conduct.
D) to contribute to their work environment.
Q2) An intentional misstatement or omission of amounts or disclosures with the intent to deceive users is known as:
A) erroneous financial reporting.
B) fraudulent financial reporting.
C) negligent auditing practice.
D) fraudulent audit practice.
Q3) The key contents of an effective code of conduct in a company should include comments on:
A) privacy and confidentiality.
B) conflicts of interest.
C) general employee conduct.
D) all of the above
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Chapter 10: The impact of information technology on the audit process
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Q1) Auditing through the computer is justified when general controls are acceptable.
A)True
B)False
Q2) When auditing a client whose information is processed by an outside computer service company, it is acceptable for the auditor to rely on the audit report of another independent auditor who has previously tested the internal controls of the computer service centre rather than testing the service centre's controls himself or herself.
A)True
B)False
Q3) Encryption techniques protect the security of electronic communication during transmission.
A)True
B)False
Q4) The day-to-day operations of the computer are the responsibility of management. A)True
B)False
Q5) Describe four common audit tasks that can be simplified by the use of microcomputers in practice.
Q6) Provide five examples of different IT environments the auditor may encounter.
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Chapter 11: Overall audit plan and audit program
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Q1) Analytical procedures are relatively inexpensive, so many auditors perform them on all audits.
A)True
B)False
Q2) Auditors follow a four-step approach to reduce assessed control risk.Identify and describe these steps.
Q3) If an auditor performs substantive tests of final balances before the year end, he or she must check activities in the period between the date of this work and the year-end.This period is known as the:
A) roll forward.
B) pre-balance date period.
C) interim period.
D) continuous period.
Q4) Which one of the following steps is NOT performed at the completion phase of an audit?
A) final review of the auditor's working papers
B) review for contingent liabilities
C) final adjustments to the audit program
D) review for subsequent events
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Chapter 12: Audit of the sales and collection cycle: Tests of controls
and substantive tests of transactions
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Q1) Which of the following is the document used as the basis for recording sales transactions and updating the accounts receivable master file?
A) bill of lading
B) sales order
C) sales transaction file
D) sales journal
Q2) The cashier diverted cash received over the counter from a customer to his own use and wrote off the receivable as a bad debt.Select the control that should have prevented the error.
A) Journal entries are approved by a responsible official.
B) Receipts are given directly to the cashier by the person who opens the mail.
C) Remittance advices, letters, and envelopes that accompany receipts are separated and given directly to the accounting department.
D) Aging schedules of accounts receivable are prepared periodically and reviewed by a responsible official.
Q3) State the six specific transaction-related audit objectives for cash receipts and describe one common substantive test of transactions for each objective.
Q4) Explain what a sales return and allowance means.
Page 14
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Chapter 13: Completing tests in the sales and collection
cycle: Accounts receivable
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Q1) It is easy to test for a cash receipts cutoff error by:
A) performing a four-column proof of cash.
B) reconciling the bank statement.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to bank deposits on the bank statement of a subsequent period.
Q2) Design and perform analytical procedures for accounts receivable balance is part of which phase of the audit?
A) Phase I
B) Phase II
C) Phase III
D) Phase IV
Q3) When the client's rights to accounts receivable are limited, detection can be accomplished by:
A) reviewing minutes of directors meetings.
B) inquiries of the financial controller.
C) confirmation with banks.
D) all of the above
Q4) Describe the differences between positive and negative confirmation.Which type is more reliable?
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Chapter 14: Audit sampling
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Q1) What is an auditor's evaluation of a statistical sample for attributes when a test of 100 documents results in 4 deviations, assuming the tolerable deviation rate is 5%, the expected population deviation rate is 3% and the allowance for sampling risk is 2%?
A) Modify planned reliance on the control because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate.
B) Accept the sample results as support for planned reliance on the control because the tolerable rate less the allowance or sampling risk equals the expected population deviation rate.
C) Modify planned reliance on the control because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
D) Accept the sample results as support for planned reliance on the control because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
Q2) Monetary-unit sampling is the most commonly used statistical method of sampling for tests of details of balances.
A)True
B)False
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Chapter 15: Audit of transaction cycles and financial statement balances I
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Q1) Which function should the purchasing department NOT be responsible for?
A) finding the lowest cost vendor
B) reviewing vendors' catalogue descriptions and prices for standardised items
C) authorising the acquisition of goods
D) designing the purchase order form
Q2) When perpetual inventory master files are accurate, the physical inventory can be tested before the balance sheet date.
A)True
B)False
Q3) Internal controls over the 'ship finished goods' function in the inventory and warehousing cycle are normally tested by the auditor as a part of performing tests of controls and substantive tests of transactions in the sales and collection cycle.
A)True
B)False
Q4) From an audit perspective, transactions are far more significant than related balance sheet accounts in the payroll and personnel cycle.
A)True
B)False
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Q1) The general cash account is considered insignificant in the audit when the ending balance is immaterial.
A)True
B)False
Q2) The starting point for the verification of current-year acquisitions of property, plant, and equipment is normally a client-prepared schedule of all acquisitions recorded in the general ledger during the year.
A)True
B)False
Q3) The two most important audit procedures for prepayments are:
A) tests of controls and tests of details of balances.
B) tests for reasonableness or plausible relationships using analytical procedures and recalculation.
C) consistency and accounting standards.
D) tests of controls and substantive tests of transactions.
Q4) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q5) Discuss the internal controls related to loan liabilities that are of concern to the auditor.
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Chapter 17: Completing the audit
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Q1) How many presentation and disclosure objectives are there?
A) two
B) four
C) one
D) three
Q2) If the auditor concludes that it is highly improbable that the client will continue as a going concern, the auditor should, in accordance with ASA 700:
A) issue a disclaimer of opinion.
B) issue an unqualified report but explain the concerns in the opinion paragraph.
C) include an emphasis of matter section in the audit report.
D) express an adverse opinion.
Q3) A letter of representation written by the client's management to the auditor formalises resolutions of disagreements about different matters throughout the audit.
A)True
B)False
Q4) Discuss three audit procedures commonly used to search for contingent liabilities.
Q5) Discuss the circumstances in which an auditor would dual-date the audit report.
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Chapter 18: Audit reporting
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Q1) Explain the four circumstances under which an 'emphasis of matter section' should be included in the audit report.
Q2) The need to issue a disclaimer of opinion arises when there is a:
A) material scope limitation.
B) material and pervasive scope limitation.
C) conflict between reporting frameworks.
D) conflict with management.
Q3) Auditing standards require that an audit report be issued whenever a public accounting firm:
A) is associated with financial reports.
B) does ASIC-regulated work.
C) performs an audit.
D) is engaged to perform any services of any nature.
Q4) Auditors sometimes encounter situations in which the outcome of a matter cannot be reasonably estimated at the time the financial report is issued.These matters are referred to as:
A) significant uncertainties.
B) non sequiturs.
C) in suspense matters.
D) inestimable matters.
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Chapter 19: Other auditing and assurance engagements
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Q1) An assurance report in a prospectus is traditionally called:
A) a statutory review report.
B) a special purpose report.
C) an independent accountant's report.
D) an investigating accountant's report.
Q2) The Institute of Internal Auditors Practice Standards regarding attributes include four categories of guidance that encompass both financial and operational auditing.List these categories of the Attribute Standards.
Q3) Compliance audits ordered by the regulator under the National Greenhouse and Energy Reporting Act 2007 would be at the cost of:
A) the government.
B) the entity.
C) both A and B
D) none of the above
Q4) In a bicameral parliament, the Auditor-General reports directly to both chambers simultaneously.
A)True
B)False
Q5) Discuss each of the three phases of a performance audit.
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