Financial Statement Auditing
Exam Preparation Guide
Course Introduction
Financial Statement Auditing provides an in-depth exploration of the concepts, principles, and procedures underlying the independent examination of financial statements. This course covers the auditors role in ensuring the accuracy, reliability, and fairness of financial information presented by organizations. Topics include the auditing process, risk assessment, internal controls, evidence gathering, audit planning, sampling techniques, and preparation of audit reports, as well as ethical responsibilities and the regulatory environment governing audit practices. Students will engage in practical exercises and case studies to develop the analytical and critical thinking skills necessary for effective audit decision-making.
Recommended Textbook
Auditing and Assurance Services 5th edtion by Grant Gay
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16 Chapters
732 Verified Questions
732 Flashcards
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Chapter 1: Assurance and Auditing: An Overview
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47 Verified Questions
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Sample Questions
Q1) The primary responsibility for the adequacy of disclosures in the financial report of a publicly held company rests with the:
A) management of the company.
B) partner assigned to the audit engagement.
C) Securities and Exchange Commission.
D) auditor in charge of the fieldwork.
Answer: A
Q2) Which of the following can be the subject matter of the audit?
A) The financial report of a company.
B) The Australian accounting standards.
C) The Australian auditing standards.
D) The auditor's report.
Answer: A
Q3) Which of the following is not an element of an assurance engagement?
A) Three-party relationship.
B) Approved assurance standards.
C) Suitable criteria.
D) A written assurance report.
Answer: B
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Page 3
Chapter 2: The Structure of the Profession
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Sample Questions
Q1) Which of the following bodies monitors the operation of the Australian Accounting Standards Board?
A) Australian Securities Exchange.
B) Financial Reporting Council.
C) Australian Securities and Investments Commission.
D) Auditing and Assurance Standards Board.
Answer: B
Q2) Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly?
A) Financial Reporting Council.
B) Companies Auditors and Liquidators Disciplinary Board.
C) Auditing and Assurance Standards Board.
D) All of the options listed here are correct.
Answer: B
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4
Chapter 3: Ethics, Independence and Corporate Governance
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Sample Questions
Q1) Independence implies that the auditor:
A) be impartial with respect to the client.
B) must adopt the attitude of a detective during the audit.
C) has an obligation solely to third parties.
D) cannot provide any other professional services to an audit client.
Answer: A
Q2) With respect to records in an auditor's possession:
A) copies of client records incorporated into audit work papers must be returned to the client upon request.
B) work sheets, in lieu of a general ledger, belong to the auditor and need not be furnished to the client upon request.
C) an extensive analysis of inventory prepared by the client at the auditor's request are work papers which belong to the auditor and need not be furnished to the client upon request.
D) the auditor who retains copies of client records must return the original records upon request.
Answer: D
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5
Chapter 4: The Legal Liability of Auditors Part Two: Planning
and Risk
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Sample Questions
Q1) The AWA case established that:
A) reasonable care and skill means following the auditing standards.
B) auditors have a duty to closely supervise and review the work of inexperienced audit staff.
C) auditors are only liable for the proportion of damages attributable to their actions.
D) auditors have a duty of care only to the shareholders as a group.
Q2) If an audit firm is being sued by a third party for common-law fraud based upon a materially false financial report, which of the following is the best defence which the auditors could assert?
A) Lack of a contractual relationship.
B) Contributory negligence on the part of the client.
C) Disclaimer contained in the engagement letter.
D) Lack of causation.
Q3) In the Caparo case, the court held that the auditor owes a duty of care to:
A) all users of the published financial report.
B) only those parties specified in the engagement letter.
C) the shareholders as a body but not individual shareholders or third parties.
D) all shareholders but not third parties.
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Chapter 5: Overview of Elements of the Financial Report
Audit Process
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Sample Questions
Q1) As the acceptable level of detection risk increases, an auditor may change the:
A) assessed level of control risk from less than high to high.
B) assurance provided by tests of controls by using a larger sample size than planned.
C) timing of substantive tests from year-end to an interim date.
D) nature of substantive tests from less effective to more effective procedures.
Q2) In the context of an audit of a financial report, substantive tests are audit procedures that:
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) may be either tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures.
D) will increase proportionately with the auditor's reliance on internal control.
Q3) All of the following are typically in the current file except:
A) adjusting journal entries.
B) copies of the auditor's report.
C) chart of accounts.
D) copies of mins of important committee meetings.
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Page 7
Chapter 6: Planning, Understanding the Entity and Evaluating Business Risk
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Sample Questions
Q1) Analytical procedures used in planning an audit should focus on identifying:
A) the predictability of financial data from individual transactions.
B) the various assertions that are embodied in the financial report.
C) areas that may represent specific risk relevant to the audit.
D) material weaknesses in internal control.
Q2) An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:
A) engage financial experts familiar with the nature of the business entity.
B) obtain knowledge of matters that relate to the nature of the entity's business.
C) refer a substantial portion of the audit to another auditor, who will act as the principal auditor.
D) first inform management that an unmodified auditor's opinion cannot be issued.
Q3) Analytical procedures are:
A) never required.
B) required for planning, substantive testing and overall review of the financial report.
C) required for planning and overall review of the financial report.
D) required during planning only.
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Page 8
Chapter 7: Assessing Specific Business Risk
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Sample Questions
Q1) Which of the following statements is true?
A) The risk that material misstatement will not be prevented or detected on a timely basis by the internal control can be reduced to zero by effective control activities.
B) Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
C) Detection risk is a function of the efficiency of an auditing procedure.
D) The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the auditor.
Q2) Which of the following relatively small misstatements would most likely have a material effect on an entity's financial report?
A) An illegal payment to a foreign official that was not recorded.
B) A piece of obsolete office equipment that was not retired.
C) A petty cash fund disbursement that was not properly authorised.
D) An uncollectible account receivable that was not written off.
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Chapter 8: Understanding and Assessing Internal Control
Part Three: Tests of Control and Tests of Details
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Sample Questions
Q1) Which of the following is likely to be least important to an auditor who is reviewing the internal control of the data processing function?
A) Ancillary program functions.
B) Disposition of source documents.
C) Operator competence.
D) Bit storage capacity.
Q2) When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. The error report should most probably be reviewed and followed up by the:
A) IT control group.
B) system analyst.
C) supervisor of computer operations.
D) computer programmer.
Q3) The auditor's understanding of the client's internal control is documented to substantiate:
A) conformity of the accounting records with the accounting standards.
B) representation as to adherence to requirements of management.
C) compliance with the auditing standards.
D) the fairness of the financial report presentation.
Page 10
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Chapter 9: Tests of Controls
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Sample Questions
Q1) To determine whether internal control structure policies and procedures operated effectively to minimise errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:
A) bill of lading file.
B) customer order file.
C) sales invoice file.
D) subsidiary customer accounts ledger.
Q2) Purchase cut-off procedures should be designed to test whether or not all inventory:
A) on the statement of financial position was carried at lower of cost or market.
B) purchased and received before the year-end was recorded at year-end.
C) owned by the company is in the possession of the company.
D) on the year-end statement of financial position was paid for by the company.
Q3) Which of the following is a primary function of the purchasing department?
A) Reducing expenditures for goods acquired.
B) Verifying the propriety of goods acquired.
C) Ensuring the acquisition of goods of a specified quality.
D) Authorising the acquisition of goods.
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11
Chapter 10: Substantive Tests of Transactions and Balances
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Sample Questions
Q1) To determine whether accounts payable are complete, an auditor commonly performs sampling procedures to test whether all merchandise received is recorded. The population of documents for this test consists of all:
A) payment vouchers.
B) receiving reports.
C) purchase requisitions.
D) vendor's invoices.
Q2) A normal audit procedure is to analyse the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that:
A) expenditures for fixed assets have been recorded in the proper period.
B) capital expenditures have been properly authorised.
C) non-capitalisable expenditures have been properly expensed.
D) the listing of fixed assets is complete.
Q3) In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to:
A) compare cut-off reports with purchase orders.
B) coordinate cut-off tests with physical inventory observation.
C) coordinate mailing of confirmations with cut-off tests.
D) compare vendors' invoices with vendors' statements.
Page 12
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Chapter 11: Audit Sampling Part Four: Completion and Communication
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Sample Questions
Q1) The tolerable deviation rate for a test of controls is generally:
A) unrelated to the expected deviation rate in the related accounting records.
B) identical to the expected deviation rate in the related accounting records.
C) higher than the expected deviation rate in the related accounting records.
D) lower than the expected deviation rate in the related accounting records.
Q2) Maria Lee, an auditor, uses statistical sampling to test control procedures. Why does Lee use this statistical sampling technique?
A) It reduces the use of judgment required by Lee because there are established numerical criteria for this type of testing.
B) It provides a means of measuring the sampling risk that results from examining only a part of the data.
C) It is specified by auditing standards.
D) It increases Lees' knowledge of the client's prescribed procedures and their limitations.
Q3) Projection of sample results is required in evaluation of:
A) all audit samples, both statistical and non-statistical.
B) all statistical samples.
C) all audit tests, whether sampling is being performed or not.
D) non-statistical audit samples only.
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Chapter 12: Completion and Review
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Sample Questions
Q1) An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against a client except the:
A) period in which the underlying cause for legal action occurred.
B) probability of an unfavourable outcome.
C) jurisdiction in which the matter will be resolved.
D) existence of a situation indicating an uncertainty as to the possible loss.
Q2) Promotion Ltd's directors voted immediately after the year-end of 30 June 2010 to double its advertising budget for the coming year and authorised a change in advertising agencies. What is the effect of this event on the 30 June 2010 financial report?
A) Disclosure by means of supplemental, pro-forma financial information.
B) Adjustment of the financial report.
C) Disclosure in a footnote to the financial report.
D) No disclosure or adjustment necessary.
Q3) Which of the following auditing procedures is ordinarily performed last?
A) Reading the mins of the directors' meetings.
B) Confirming accounts payable.
C) Obtaining a management representation letter.
D) Testing the purchasing function.
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Page 14
Chapter 13: The Auditors Reporting Obligations Part Five:
Other Assurance Services
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Sample Questions
Q1) Morris Ltd changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably Certain to have a substantial effect in later years. If the change is adequately disclosed in the notes to the financial Statements, the auditor should issue a report with a(n):
A) consistency modification.
B) unmodified opinion.
C) explanatory paragraph.
D) qualified opinion.
Q2) Which of the following situations will not result in modification of the auditor's report because of a scope limitation?
A) Restriction imposed by the client.
B) Reliance placed on the report of another auditor.
C) Inability to obtain sufficient competent evidential matter.
D) Inadequacy in the accounting records.
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15
Chapter 14: Internal Auditing
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Sample Questions
Q1) When evaluating risks in accordance with the Australian Risk Management Standard AS/NZS ISO 31000, what is the order of steps that it is recommended be undertaken?
A) Identify risks, analyse risks, evaluate risks, treat risks.
B) Identify risks, analyse risks, treat risks, evaluate risks.
C) Identify risks, evaluate risks, treat risks, analyse risks.
D) Identify risks, evaluate risks, analyse risks, treat risks.
Q2) Which of the following will best promote the independence of the internal auditing function?
A) Direct lines of communication between the audit committee and the director of internal auditing.
B) A quality control system within the internal auditing function designed to ensure that departmental objectives are met.
C) Direct reporting responsibilities to the entity's chief financial officer.
D) A review of the internal audit function by the external auditor.
Q3) Which of the following is not a main goal of internal auditing?
A) Add value to an organisation's operations.
B) Help an organisation accomplish its objectives.
C) Provide reliable information to external users.
D) Improve the effectiveness of risk management of an organisation.
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Page 16
Chapter 15: Auditing and Assurance Services in the Public Sector
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Sample Questions
Q1) In reporting performance audit findings, why does an auditor evaluate evidence against criteria?
A) To ensure reasonable criteria have been established.
B) To develop conclusions relative to the audit objectives.
C) To develop the audit scope.
D) To determine risk.
Q2) Public sector entities are required to prepare financial reports based on:
A) cash accounting.
B) accrual accounting.
C) fund accounting.
D) All of the given answers are correct.
Q3) The proposed annual expenditures of the Commonwealth Government are authorised by:
A) the Auditor-General.
B) the Treasurer.
C) the Department of Finance.
D) the Parliament.
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Page 17
Chapter 16: Other Assurance Services and Advanced Topics
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Sample Questions
Q1) Forensic audits include all of the following except:
A) employee fraud.
B) criminal investigations.
C) matrimonial disputes.
D) manufacturers' claims about product quality.
Q2) In performing an assurance service, an auditor typically:
A) assesses control risk at a low level.
B) supplies litigation support services.
C) provides management consulting advice.
D) expresses a conclusion about an assertion.
Q3) Inquiry and analytical procedures ordinarily performed during a review of an entity's half-yearly financial report include:
A) inquiries concerning actions taken at meetings of the board of directors.
B) analytical procedures designed to identify material weaknesses in internal accounting control.
C) inquiries of knowledgeable outside parties such as the client's attorneys and bankers.
D) analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.
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