Knowledge Assurance QB(ICAEW) PDF

The Institute of Chartered Chartered Accountants Accountants of Bangladesh Bangladesh

ASSURANCE Professional Stage Knowledge Level

For exams in 2009 and 2010

Question Bank www.icab.org.bd www.ic ab.org.bd

Assurance Assurance Question Bank The Institute of Chartered Chartered Accountants Accountants of Bangladesh Bangladesh Professional Stage These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales ISBN: 978-1-84152-813-7 First edition 2009 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, or transmitted in, any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher.

ii

© The Institute Institute of Chartered Chartered Accountant Accountantss in England England and Wales, March March 2009

Contents

Page Title

Question

Answe wer r

1.

Concept of and need for assurance

3

79

2.

Process of assurance: obtaining an engagement

7

81

3.

Process of assurance: planning the assignment

11

83

4.

Process of assurance: evidence and reporting

17

85

5.

Introduction to internal control

23

87

6.

Revenue system

29

89

7.

Purchases system

33

91

8.

Employee costs

37

93

9.

Internal audit

41

95

10.

Documentation

45

97

11.

Evidence and sampling

47

99

12.

Management Managem ent repres representations entations

55

101

13.

Substantive procedures – key financial statement figures

59

103

14.

Codes of professional ethics

67

107

15.

Integrity, objectivity and independence

69

109

16.

Confidentiality

75

111

© The Institute Institute of Chartered Accountants in in England and Wales, Wales, March 2009

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iv

© The Institute Institute of Chartered Chartered Accountants Accountants in England and Wales, Wales, March 2009

Question Bank

Contents

© The Institute Institute of Chartered Accountants Accountants in England and Wales, March 2009

1

2

© The Institute of of Chartered Accountants in England England and Wales, March 2009

QUESTION BANK

Chapter 1: Concept of and need for assurance 1

2

3

4

Which Which THREE of the follo following wing const constitute itute possi possible ble subject subject matter matter which which may be evalua evaluated ted for for the purposes of an assurance engagement? A

Data

B

Syst Systems ems or proc proces esse sess

C

Corpo Corporat rate e gover governa nance nce

D

BAS

Which Which TWO of of the followi following ng describe describe the the roles of the respon responsible sible party party in any assuran assurance ce engagement? A

Setting Setting the criteria criteria of the assurance assurance engagement engagement

B

Gather Gathering ing evidenc evidence e on on the the subjec subjectt matt matter er

C

Issuing Issuing an opinion opinion on the subject subject matter matter against against the the criteria criteria set set

D

Prepa Preparin ringg the subjec subjectt matter matter

In a 'reason 'reasonable able assura assurance nce engagemen engagement' t' how are are the assura assurance nce provided provided and and the conclusio conclusion n given given best described? A

Absol Absolute ute and negati negative ve

B

High High and and nega negati tive ve

C

High High and and posi positi tive ve

D

Low Low and and posi positi tive ve

Which Which THREE of the the following following statem statements ents form form part of the the generally generally accepted accepted definit definition ion of 'fair', 'fair', in the context context of 'a true and fair fair view'? A

The informati information on is free free from from discrimin discriminatio ation n and and bias bias

B

The account accountss have have been correctly correctly extracted extracted from the the company’ company’ss books books and records records

C

The informa information tion complies complies with with generally generally accepted accepted account accounting ing practice practice

D

The accounts accounts reflect reflect the commercia commerciall substance substance of the the company’s company’s underly underlying ing transac transaction tionss

© The Institute of Chartered Accountants Accountants in England and Wales, Wales, March 2009

3


6

Which Which TWO of of the followi following ng statement statementss are true true with with regards regards to Recogn Recognised ised Supervi Supervisory sory Bodies Bodies (RSBs)? A

RSBs RSBs offer professiona professionall qualificat qualifications ions

B

RSBs RSBs are approv approved ed by Bangla Banglades desh h Bank Bank

C

The Compan Companies ies Act Act 1994 requires requires that that accountan accountants ts are members members of RSBs RSBs

D

RSBs RSBs are are respo responsibl nsible e for for monitoring monitoring their members members

With With respect respect to the benefits benefits of assura assurance nce engageme engagements, nts, for for each each of the follow following ing statem statements ents select select whether whether they are true or false. Assurance is an independent and professional activity that users value A

True

B

False

The principal objective of assurance is to detect and correct fraud C

True

D

False

Assurance assignments may take many forms

7

E

True

F

False

The follow following ing stateme statements nts describ describe e ways in in which the the assuran assurance ce provider provider might be be able to “close” “close” the the expectations gap. For each statement select whether it is true or false. By issuing an engagement letter setting out the work to be carried out and its limitations A

True

B

False

By reducing the audit fee C

True

D

False

By including a caveat in the assurance report

8

4

E

True

F

False

Which Which TWO of the the follo following wing stat statements ements best describe describe the the statutor statutoryy audit? audit? A

It leads leads to to a certifica certification tion of the correctn correctness ess of of the finan financial cial stateme statements nts

B

It is an indepe independe ndent nt examina examinatio tion n

C

It is an an opinion opinion on on the truth truth and fairness fairness of the the financial financial statements statements

D

It may may be carried out by both external external and internal internal audito auditors rs

© The Institute of Chartered Chartered Accountants in England and Wales, March March 2009

QUESTION BANK

9

The follow following ing statement statementss describe describe possibl possible e limitation limitationss of the provisio provision n of assurance. assurance. For each statement select whether it is a limitation or is not a limitation. Sampling is part of the audit process A

Is a limi limita tati tion on

B

Is not not a limi limita tati tion on

The provision of assurance in itself can be a subjective process C


D


The auditors may be auditing that particular client for the first time

10

E


F


Ilford Ilford Ltd is a large large audit client client of Smith & Co. Ilfor Ilford d Ltd has approached approached Smith Smith & Co to request that that they carry out a review review of the inventory inventory system in operation at the Brent branch and the extent to which it operates in line with company policy. With reference to the above review engagement, select which part of the review description constitutes the subject matter, which part the suitable criteria and which party is the responsible party. The subject matter A

The Brent Brent branch branch’s ’s invent inventory ory system system

B

Ilford Ilford Ltd’s Ltd’s inventory inventory system system policies policies

The suitable criteria C

The Brent Brent branch branch’s ’s invento inventory ry sys system tem

D

Ilford Ilford Ltd’s Ltd’s inventory inventory system system polici policies es

The responsible party

11

E

Ilfo Ilforrd Ltd Ltd

F

Smith & Co

The followi following ng is an extract extract from an independe independent nt auditor’ auditor’ss unmodified unmodified report. report. 'In our opinion, the financial statements prepared in accordance with Bangladesh Accounting Standards (BAS) (BAS) give a true and fair view of the state of the company’s company’s affairs affairs as of 31 March 20X7, and of the results of its operations and its cash flows for the year then ended and comply with applicable sections of the companies act 1994 and other applicable laws and regulations.' Which of the following describes the type of assurance provided by this statement? A

Absolute Absolute assurance assurance expressed expressed positively positively

B

High level of assurance assurance expressed expressed positively positively

C

Limited Limited level of assurance assurance expressed expressed positively positively

D

Limited Limited level of assurance assurance expressed expressed negatively negatively


5

Chapter 1: Concept of and need for assurance

6


QUESTION BANK

Chapter 2: Process of assurance: obtaining an engagement 1

2

Which Which THREE of the follo following wing might might indica indicate te that an assurance assurance client client would would be high risk? risk? A

Strong Strong interna internall control controlss

B

Like Likely ly lack lack of finan finance ce

C

Few unusua unusuall transa transacti ctions ons

D

Lack Lack of of exper experien ienced ced finance finance direc director tor

E

Poor Poor foreca forecast st perfor performan mance ce

Marnie Marnie & Co, an an audit audit firm, have have been been asked by by Opportunity Opportunity Ltd Ltd to accept appointment appointment as as auditor. auditor. Opportunity Ltd’s previous auditors were Kim & Co. What action should Marnie & Co take if Opportunity Ltd refuse to give them permission to contact Kim & Co?

3

4

A

Contact Contact Kim Kim & Co Co in writing writing in any case and then then accept accept the the appointmen appointmentt

B

Telephone Telephone Kim Kim & Co in in order order to obtain obtain the inform information ation sought sought and then then accept accept the the appointment appointment

C

Contact Contact Kim Kim & Co’s Co’s other other clients clients to try and gain gain access access to Kim Kim & Co, and and then then accept the appointment

D

Make no communic communicatio ation n with Kim Kim & Co or their their other clients clients and and decline decline the appointm appointment ent

Under Under which THREE of of the follow following ing circumst circumstances ances MUST a firm decline decline an an appointme appointment nt as audit auditor or to a company? A

The prospectiv prospective e client client refuses to to grant grant the firm permiss permission ion to contact contact the the previous previous auditor auditor

B

The prospect prospective ive client client refuses refuses to grant grant permiss permission ion to the previous previous auditor auditor to to communica communicate te with the firm

C

The prospec prospective tive client still still owes owes audit audit fees to the the previous previous aaudito uditorr

D

The client client is one for for which which your firm firm is ethically ethically barred barred from from acting acting

In order order to comply comply with the the Compani Companies es Act 1994, for how how many many years years should should a compan companyy keep records of its accounting transactions? A

For For a minim minimum um of six six yea years rs

B

For For a mini minimu mum m of nine nine yea years rs

C

For For a minimu minimum m of twelv twelve e year yearss

D

There There is no specif specific ic requir requireme ement nt


7


For each each of the follow following ing statemen statements ts about about engagemen engagementt letters letters select select whether whether they they are true true or false. false. The engagement letter provides an opportunity for management to set out in writing their opinion on subjective areas in the financial statements A

True

B

False

The engagement letter clarifies the role and responsibilities of auditors and directors C

True

D

False

The engagement letter contains documentation on the preliminary client risk assessment E

True

F

False

The engagement letter contains the auditor’s opinion on the financial statements

6

7

G

True

H

False

Which Which of the the followin followingg is not a right that that an auditor auditor has under the the Companies Companies Act Act 1994? 1994? A

The right right of access access to the compan company’s y’s accoun accounting ting records records

B

The right to receive receive all necessary necessary informatio information n and and explana explanations tions

C

The right right to to see all all minutes minutes of managem management ent and and sharehol shareholders’ ders’ meetings meetings

D

The right right to disclose disclose confidentia confidentiall information information in every every circumstanc circumstance e without without the permission permission of the client

The followi following ng sentence sentence is is taken taken from an engagement engagement letter. letter. 'The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud, error and non-compliance rests with yourselves.' Which THREE of the following are reasons for the inclusion of the above sentence?

8

A

It clearly clearly sets out out the directors directors’’ responsibi responsibiliti lities es in order order to avoid any any misunderst misunderstandi andings ngs

B

It goes goes some some way way to closi closing ng the the expec expectat tatio ions ns gap gap

C

It clarifies clarifies the directo directors’ rs’ legal responsibi responsibiliti lities es

D

It absolves absolves the the auditor auditor from from all respo responsibil nsibilities ities relati relating ng to the the audit audit

© The Institute of of Chartered Accountants Accountants in England and Wales, Wales, March 2009

QUESTION BANK

8

For each each of the followin followingg factors factors at separate separate prospec prospective tive clients, clients, select select whether whether that that factor factor indicates indicates that inherent risk is likely to be high or low. The client is experiencing financial difficulties A

High ris risk

B

Low risk

Three firms of auditors have resigned from the client in the past five years C

High High ris risk

D

Low risk isk

The company carries out very few unusual transactions E

High ris risk

F

Low risk


9

Chapter 2: Process of assurance: obtaining an engagement

10

© The Institute of of Chartered Accountants Accountants in England and Wales, Wales, March 2009

QUESTION BANK

Chapter 3: Process of assurance: planning the assignment 1

2

3

4

Which Which THREE of the following following would would be found found in the overall overall audit strategy strategy document document?? A

Detai Detailed led plan plan of audit audit procedu procedures res

B

Calculat Calculation ion of preliminar preliminaryy materiality materiality thresholds thresholds

C

Budg Budget et and fee fee

D

Timet imetab able le

According According to BSA BSA 315, 315, which THREE THREE of the the following following are reasons reasons why why the auditor auditor shoul should d obtain obtain an understanding of the entity and its environment? A

To identif identifyy and and assess assess the risks of material material misstatemen misstatements ts

B

To be in a posi positio tion n to desi design gn and and perform perform audit audit proced procedures ures

C

To be be better better able able to asse assess ss the the risk riskss of frau fraud d

D

To obtain obtain informa information tion for other other future assignmen assignments ts with the same same client client

Which Which THREE of the following following describe describe analytica analyticall procedures procedures?? A

Comparin Comparingg a cash cash book balan balance ce with a bank bank balance balance and and identifying identifying reconcilin reconcilingg items

B

Comparin Comparingg actual actual results results with forecast forecast results results

C

Comparin Comparingg compa company ny ratios ratios with industry industry averages averages

D

Comparin Comparingg budgeted budgeted with actual actual results results

Seal Ltd has the follo following wing results results for 20X6 20X6 as as compared compared with the results results for 20X5. 20X5.

Revenue Cost of sales Salaries Distribution costs Insurance expenses Other expenses

20X5 CU’000 5,890 4,440 550 230 90 50

20X6 CU’000 6,050 4,200 560 650 180 54

Which Which THREE of the following following areas would you be MOST LIKELY to investiga investigate te as a result of carrying carrying out analytical procedures? A

Reven evenu ue

B

Cost Cost of sale saless

C

Salar laries ies

D

Distri Distribut bution ion costs costs

E

Insu Insura rance nce expen expense sess

© The Institute Institute of Chartered Accountants Accountants in England and Wales, Wales, March 2009

11


For each each of the followi following ng statements statements concerning concerning materi materiality ality,, select select whether whether they are are true or or false. false. Materiality should be determined at the beginning of an audit and should not be changed during the course of an audit A

True

B

False

Materiality always relates to monetary amounts C

True

D

False

Materiality is calculated using the same formula for all audit clients

6

7

8

9

12

E

True

F

False

Where Where both control control and inheren inherentt risks are are low, what are the implicat implications ions for for the audit audit strategy strategy?? A

Rely on controls controls,, limited limited substantiv substantive e procedures procedures necessary necessary

B

Rely on controls, controls, no substanti substantive ve procedur procedures es necessary necessary

C

Rely on controls controls,, extensiv extensive e substant substantive ive procedur procedures es necessary necessary

D

No relian reliance ce on contro controls, ls, extensi extensive ve substant substantive ive procedu procedures res necessa necessary ry

Which Which of the followi following ng is an an implicat implication ion of purchase purchase invoices invoices not not being being authori authorised? sed? A

Unaut Unauthor horis ised ed purcha purchase sess wil willl be made made

B

Purchases Purchases will be made from unauthoris unauthorised ed suppliers suppliers

C

Unaut Unauthor horis ised ed paymen payments ts will be made made

D

Purchases Purchases will not be made made at at the best possible possible price

When using directiona directionall testing testing,, what what does an audito auditorr normally normally test for? A

Assets Assets are overstated overstated and liabilities liabilities are understa understated ted

B

Assets Assets are understated understated and liabilitie liabilitiess are overstated overstated

C

Both assets assets and liabilitie liabilitiess are understated understated

D

Both assets assets and liabilitie liabilitiess are overstated overstated

Which Which of the followi following ng THREE THREE procedures procedures could be used used to identify identify audit audit risks? risks? A

Comp Comput utaation tion

B

Verif erifiicati cation on

C

Inquiry iry

D

Obse Observ rvat atio ion n

E

Analyti Analytical cal procedu procedures res


QUESTION BANK

10

Audit Audit risk can be split split into three compon components: ents: inherent inherent risk, risk, control control risk risk and detection detection risk. For each of the following examples select the type of risk illustrated. This is the first year of the audit A

Inhe Inhere rent nt risk risk

B

Cont Contro roll risk risk

C

Dete Detect ctio ion n risk risk

The client entity has an internal audit function D


E

Cont Contro roll ris risk

F

Detec etecti tion on risk risk

The client entity is intending to list on the stock exchange within two years

11

G


H


I

Detec etecti tion on risk isk

Audit Audit risk can be split split into three compon components: ents: inherent inherent risk, risk, control control risk risk and detection detection risk. For each of the following examples select the type of risk illustrated. The client entity operates in an industry where the auditor has no previous experience A


B


C

Dete Detect ctio ion n risk risk

Purchase invoices at the client entity are not authorised prior to payment D


E

Cont Contro roll ris risk

F

Detec etecti tion on risk risk

Management of the client entity is rewarded under a profit-related scheme

12

G


H


I

Detec etecti tion on risk isk

Which Which of the followi following ng describes describes control control risk? risk? A

The susceptib susceptibility ility of of an account account balance balance or class class of transacti transactions ons to material material missta misstatements tements,, assuming there are no related controls

B

The risk risk that that the the auditor’s auditor’s procedures procedures do not detect detect material material misstateme misstatements nts

C

The risk risk that a material material misstate misstatement ment would would not be be prevented, prevented, detected detected or corrected corrected by the accounting and internal control system

D

The risk risk that a material material missta misstatement tement is is caused caused by external external pressures pressures faced faced by the company company


13


14

Which Which of the following following best best describes describes an attitude attitude of profession professional al scepticism scepticism?? A

Disbelievi Disbelieving ng everything everything the client says

B

Asking Asking the client client a number number of times the the same same question question to see if the answer answer is the same

C

Making Making managem management ent sign sign off off all all evidence evidence provided provided to the the auditor auditor

D

Forming Forming a critical critical assessme assessment nt and bringing bringing into into questio question n the reliabili reliability ty of audit audit evidence

As part of his analytica analyticall procedures procedures on the financial financial statements statements of Nails Nails Ltd, Peter has identified identified that that the current ratio has decreased from 1.7 to 1.3. All purchases of inventory are currently made for cash and all sales are credit sales. Which TWO of the following could be a valid explanation for this decrease?

15

A

The compan companyy has increas increased ed its credit policy policy to custom customers ers from 30 to 50 50 days

B

The compan companyy has shifted shifted its its relian reliance ce from from long-te long-term rm debt debt to short-t short-term erm debt debt

C

The compan companyy has decided decided to adopt adopt a just just in time time inventor inventoryy system system (whereby (whereby the supplier supplier will will deliver direct to its stores, eliminating the need for a distribution centre)

D

The company company has recentl recentlyy offered specia speciall discounts discounts to custome customers rs to attract attract more more sales

As part of her analytical analytical procedures procedures on on the financial financial statements statements of PC Ltd, a manufacturin manufacturingg company, company, Amisha has identified that the gross margin has increased from 23% to 28%. Which TWO of the following could be a valid explanation for this decrease?

16

14

A

The compan companyy has conside considerably rably reduced reduced discount discountss for bulk bulk purchas purchases es given given to custome customers rs

B

The price price of raw raw materials materials has increased increased and and this increase increase has has been passed passed on to customer customerss through increased sales prices

C

The recent recent increase increase in in competition competition has has resulted resulted in in sales prices prices having having to be reduced

D

There has been a significa significant nt change change in in the sale saless mix

Which Which TWO of of the following following would would increase increase inherent inherent risk? risk? A

The company company operates operates in a fast-m fast-moving oving industry industry

B

The company company does does not provide provide IT training training to its employees employees

C

The compan companyy does not not authori authorise se sales sales orders orders prior prior to sales being made

D

The compan companyy has a number number of legal legal claims claims against against it which which threaten threaten its future


QUESTION BANK

17

For each each of the following following situati situations, ons, select select the MOST appropria appropriate te approach approach which should should be used by the assurance firm in the given circumstance. The audit of an existing client, with established internal controls A

Test Testss of cont control rol only only

B

Substa Substanti ntive ve proced procedures ures only only

C

A mix mix of tests of contro controll and and substant substantive ive procedures procedures

The review of a company’s balance sheet in a limited assurance engagement D

Test Testss of cont contro roll only only

E


F

A mix of tests of control control and and substanti substantive ve proced procedures ures


15

Chapter 3: Process of assurance: planning the assignment

16


QUESTION BANK

Chapter 4: Process of assurance: evidence and reporting 1

For each each of the follow following ing statemen statements ts in respect respect of audit audit evidence evidence select select whether whether they are are true or or false. false. Original documents are more reliable than photocopies A

True

B

False

Oral representations are more reliable than written forms of evidence C

True

D

False

External documents obtained from external sources are more reliable than external documents from client sources

2

3

E

True

F

False

To what what does 'sufficiency 'sufficiency'' of audit audit evidence evidence relate? relate? A

The quali quality ty of audit audit evidenc evidence e

B

The reliabi reliabilit lityy of audi auditt evidence evidence

C

The quanti quantity ty of audit audit eviden evidence ce

D

The relevan relevance ce of audi auditt evid evidenc ence e

For each each of the follow following ing forms forms of eviden evidence ce select select from 1 to to 3 in order order to rank rank them in terms terms of their their reliability (where 1 is the most reliable and 3 is the least reliable). Schedule of aged receivables obtained from the client A

1

B

2

C

3

Bank statement obtained from the client D

1

E

2

F

3

Bank statement obtained directly from the bank G

1

H

2

I

3


17


5

6

7

8

18

Which Which THREE of the follo following wing relat relate e to assertion assertionss about about account account balances balances at the the period period end? A

Occu Occurr rren encce

B

Comp Comple lete tene ness ss

C

Exis Existe tenc nce e

D

Valua aluati tion on

E

Accuracy

Which Which THREE of the the following following relate relate to assert assertions ions about about classes classes of transa transaction ctionss for the period period under under audit? A


B


C


D


E

Accuracy

Which Which of the follow following ing describ describes es the meaning meaning of of 'financial 'financial statement statement asserti assertions'? ons'? A

The asserti assertions ons made made by managem management ent that that are embodi embodied ed in the financi financial al statements statements

B

The asserti assertions ons made made by the audit auditor or on the the financial financial statements statements that that are embodied embodied in the audit audit report

C

The asserti assertions ons made made by the audit auditor or that that are embodi embodied ed in the financ financial ial stateme statements nts

D

The asserti assertions ons made made by managem management ent in the management management represent representation ation letter

Which Which TWO of of the followi following ng approach approaches es could could the auditor auditor use use when gather gathering ing audit audit evidenc evidence? e? A

Test Testss of cont contro roll only only

B


C

Both tests of control control and substanti substantive ve procedures procedures

D

Analyti Analytical cal proced procedure uress only only

In carrying carrying out out tests tests of control, control, which THREE THREE of the following following types of of procedures procedures can be used? used? A

Inquiry iry

B

Analyti Analytical cal proced procedure uress

C

Comp Comput utaation tion

D

Insp Inspec ecti tio on

E

Repe Reperf rfor orma manc nce e

© The Institute of Chartered Chartered Accountants in England and Wales, Wales, March 2009

QUESTION BANK

9

With With regards regards to substanti substantive ve procedures, procedures, select select whether whether the follo following wing state statements ments are are true or false. false. The auditor must always carry out substantive procedures on material items A

True

B

False

Substantive procedures are made up of tests of detail only C

True

D

False

Substantive procedures are carried out as part of the overall review of the financial statements

10

E

True

F

False

'In our opinion, opinion, the the financial financial statem statements ents do not not give a true and fair fair view of the financial financial positi position on of the company as of 31 December 20X4 and of the results of its operations and its cash flows for the year then ended in accordance with Bangladesh Accounting Standards (BAS)' Which of the following describes the type of opinion and assurance provided by the above?

11

12

A

Unqualifie Unqualified d opinion, opinion, negative negative assurance assurance

B

Unqualifie Unqualified d opinion, opinion, positive positive assurance assurance

C

Qualifi Qualified ed opinion, opinion, negative negative assurance assurance

D

Qualifi Qualified ed opinion, opinion, positive positive assurance assurance

Which Which THREE of the follow following ing are only reported reported on by exceptio exception n in an audit report? report? A

Prope Properr books books of acco account untss have have been been kept kept

B

Proper Proper returns returns adequat adequate e for the audit audit have have been been received received from from branches branches not not visite visited d

C

The informati information on given given in the directors directors’’ report is consi consistent stent with with the financia financiall statements statements

D

Details Details of directors’ directors’ remunerat remunerations ions have have been correctly correctly disclosed disclosed in the the financial financial statements statements

E

In respect respect of the the company’s company’s profit profit or or loss for for the period, period, the financial financial statements statements give a true and and fair view

Attending a period-end period-end inventory count provides provides assurance assurance primarily on which financial statement statement assertion? A


B


C

Rights Rights and obliga obligatio tions ns

D

Clas Classi sific ficat atio ion n


19


14

Sending Sending external external confirmatio confirmations ns to receivable receivabless is not helpful helpful for ascertaining ascertaining which of the following following?? A

The collectabi collectability lity of the receivables receivables balance balance

B

The existe existence nce of the receiv receivab ables les balanc balance e

C

Whether Whether the the receivabl receivables es balance balance belongs belongs to the clien clientt entity entity

D

The accuracy accuracy of the receivables receivables balance balance

For each each of the followin followingg statements statements select select whether whether they they are true or false. false. Reviewing supplier statement reconciliations selected on the basis of purchases turnover in the year helps to confirm the completeness of the accounts payable balance A

True

B

False

Recalculating the depreciation charge helps in verifying the rights and obligations assertion for noncurrent assets C

True

D

False

Reviewing post balance sheet inventory movements helps verify the valuation of inventory

15

E

True

F

False

The followi following ng are types of test test that might might be carried out out by an auditor. auditor. For each example example,, select the financial statement assertion that is being tested. A sample of purchases taken from throughout the year are checked against supplier invoices A

Cut-off

B


C


Insurance expenses are compared year on year

20

D


E


F

Accuracy


QUESTION BANK

16

Two types of procedur procedures es used in gathering gathering evidence evidence are tests of controls controls and substanti substantive ve procedures. procedures. Sometimes, a specific procedure can serve as both a test of control and substantive procedure. For each of the following examples, select the type of procedure(s) illustrated. The year end bank reconciliation is reviewed A

Test est of contr ontrol ol

B

Substa Substanti ntive ve proced procedure ure

C

Both a test test o off control control and a substan substantive tive procedure procedure

Sales for the year are compared to budget D

Test Test of cont contro roll

E


F

Both a test test of control control and and a substantiv substantive e proced procedure ure


21

Chapter 4: Process of assurance: evidence and reporting

22


QUESTION BANK

Chapter 5: Introduction to internal control 1

'To ensure that purchases purchases are made at the best best possible possible price.' price.' Which of the following best describes the above statement?

2

A

A risk

B

A cont contro roll obje object ctive ive

C

A cont contro roll proce procedu dure re

D

A test test of cont contro roll

The follo following wing state statements ments relate relate to small small companies companies and and their interna internall control control systems systems.. For each statement select whether it is true or false. Small companies have no need for internal control systems A

True

B

False

Small companies can use unsophisticated methods of control to compensate for the lack of formal controls C

True

D

False

Small companies have difficulty with implementing segregation of duties controls

3

E

True

F

False

With With regards regards to the follo following wing control control proced procedures, ures, select whether whether they they are PRIMARI PRIMARILY LY preventativ preventative e or detective controls. Bank reconciliations are prepared on a monthly basis A

Prev Preven enta tati tive ve

B

Detec etecti tive ve

Management accounts are compared on a monthly basis against budget. C

Preve Prevent ntat ative ive

D


Supplier statements are reconciled with trade payables balances E


F



23


5

Which Which THREE THREE of the follo following wing are likely likely roles roles of the the audit audit commi committee? ttee? A

To review review the workin workingg papers papers of the externa externall audi auditt firm firm

B

To monitor monitor the independenc independence e of the external external audit auditor or

C

To monitor monitor the effectiv effectiveness eness of the company’s company’s internal internal audit audit departm department ent

D

To make make recommenda recommendations tions to the board board in in relation relation to to the external external audito auditorr

The followi following ng are descriptio descriptions ns of internal internal control controlss in operation operation at at Lilly Lilly Ltd. For each each descriptio description n select select the type of control activity which it illustrates. Only authorised staff may access the inventories storeroom A

Perf Perfor orma manc nce e review review

B

Informa Informatio tion n proces processin singg

C

Phys Physic ical al cont contro roll

The despatch note signed by the customer is agreed to the authorised sales order

6

D

Perfor Performan mance ce review review

E

Inform Informati ation on proces processi sing ng

F


Controls Controls in in an IT system system are are classifie classified d as general general control controlss or applicat application ion control controls. s. For For each of of the following controls select whether they are general controls or application controls. Training of staff in use of computer programs A

Gener neral

B

Appl Applic icaatio tion

Password protection of computer programs C

Gener neral

D

Appl Applica icati tion on

One-for-one checking of processed output to source documents

7

E

General

F


Controls Controls in in an IT system system are classifi classified ed as general general controls controls or applica application tion contro controls. ls. For For each of the the following select whether they are general controls or application controls. Cyclical review of master files A

Gener neral

B


Back-up power sources

24

C

Gener neral

D

Appl Applica icati tion on


QUESTION BANK

Computer maintenance agreements and insurance

8

9

10

E

General

F


Which Which of the the followin followingg methods methods of of recording recording internal internal contro controls ls is genera generally lly regarded regarded as the most most effective? A

Flowc lowch harts arts

B

Famil amilyy tre trees

C

Narra Narrativ tive e note notess

D

Ques Qu esti tion onna nair ires es

Which Which THREE THREE of the the follow following ing are are components components of a system system of internal internal controls? controls? A

The contro controll enviro environme nment nt

B

The entity’s entity’s strategy-de strategy-devisi vising ng process process

C

The entity’s entity’s risk assessmen assessmentt process process

D

Contro Controll activi activities ties

BSA 315 states states that an internal internal control control system system in an organisa organisation tion consists consists of five components components:: the control environment, the entity’s risk assessment process, the information system, control activities and monitoring of controls. For each of the following examples, select the component which it illustrates. The preparation of a reconciliation between the payables ledger and the payables ledger control account A

Contro Controll enviro environme nment nt

B

Info Inform rmat atio ion n syst system em

C

Contro Controll activi activities ties

The authorising of all credit notes prior to being issued to customers for returns made D

Contro Controll enviro environme nment nt

E

Info Inform rmat atio ion n syst system em

F

Cont Contro roll acti activi viti ties es


25


The followi following ng statements statements refer to possible possible limitatio limitations ns of an internal internal control system. system. For each statement, select whether it is true or false. Internal controls are ineffective if staff collude to override them A

True

B

False

Internal controls are designed to deal with all types of transactions, both routine and non-routine C

True

D

False

Senior management staff may be in a position to ignore internal controls

12

E

True

F

False

The followi following ng are examples of of internal controls controls which which operate at Willow Willow Ltd. For each example, example, select select the type of control activity which it illustrates. The inventory inventory count is carried carried out by two teams – one team performs performs the count and the other team checks the counting A

Perf Perfor orma manc nce e review review

B


C

Segreg Segregati ation on of dutie dutiess

The aged inventory list is reviewed on a monthly basis in order to decide on the level of inventory provisions and write-offs

13

D

Perfor Performan mance ce review review

E


F

Segr Segreg egat atio ion n of duti duties es

For each each of the following following statement statementss select whether whether they are true true or false in respect respect of business business risk. risk. Inherent and control risks are components of audit risk A

True

B

False

Auditors should provide suggestions for companies to overcome business risks C

True

D

False

Identifying business risks is part of the company’s risk assessment processes

26

E

True

F

False


QUESTION BANK

14

Which Which TWO of the following following are reasons reasons why segregation segregation of duties duties is important important in an internal internal control control system? A

It impr improve ovess effic efficien iency cy

B

It help helpss to preve prevent nt fraud fraud

C

It impro improves ves the the rate rate of of detecti detection on of of errors errors

D

It is way of assigni assigning ng roles roles within within a large organisati organisation on


27

Chapter 5: Introduction to internal control

28


QUESTION BANK

Chapter 6: Revenue system 1

The followi following ng weakness weaknesses es have been identif identified ied at Cog Cog Ltd. For For each each weakness weakness select the the MOST MOST LIKELY consequence. Credit checks are not made for new customers A

Increa Increased sed risk risk of bad debts debts

B

Company Company may process process loss-maki loss-making ng sales sales orders

C

Entries Entries are not not recorded recorded correctly correctly in the the receivables receivables ledger leadin leadingg to errors errors in the the financial financial statements

Invoices are not matched to sales order and despatch note prior to being raised

2

D

Increa Increased sed risk risk of bad bad debts debts

E


F

Entries Entries are not not recorded recorded correctly correctly in the receivables receivables ledger ledger leadin leadingg to errors in the fina financial ncial statements

The followi following ng weaknesses weaknesses have have been identif identified ied at at Smart Ltd. For For each weaknes weaknesss select select the most most likely likely consequence. Sales discounts are not authorised prior to being given A

Increased Increased risk of client dissatisf dissatisfacti action on

B


C

Cash Cash receipts receipts are not recorded recorded correctly correctly in in the the cashboo cashbook k

Invoices are not checked for arithmetic accuracy prior to being issued to customers

3

D

Increased Increased risk of client dissatisf dissatisfacti action on

E


F

Cash Cash receipt receiptss are are not recorded correctly correctly in the cashbook cashbook

Which Which of the followi following ng does does not present present a risk at at the the sales sales order order stage? stage? A

Order Orderss cannot cannot be fulfil fulfilled led

B

Prices Prices authori authorised sed are not on the official official price list

C

Goods Goods despatch despatched ed are not of the quality quality and and quantity quantity ordered

D

The custom customer er is is not not in in a positi position on to to pay pay


29

Chapter Chapter 6: Revenue Revenue system 4

5

Which Which one of the following following control controlss is LEAST LEAST LIKELY LIKELY to address address the the risk that that money money received received is not not banked? A

Match Matching ing cash cash receip receipts ts with with invo invoices ices

B

Monthl Monthlyy bank bank reconci reconcilia liatio tions ns

C

Prom Prompt pt bank bank paym payment entss

D

Investiga Investigation tion of of shortages shortages and surplu surpluses ses of cash in the business business

The followi following ng describes describes process processes es which which form part part of of the sales sales system system at Blue Blue Ltd, Ltd, where all all sales sales are made on credit. For each process, select whether it represents a strength or a weakness in the system. Customers are not requested to sign as evidence of receipt of goods A

Stre trength ngth

B

Weak eakness ess

Sales orders are accepted by fax and are processed directly into the system without further action C

Stre trength ngth

D

Weak eaknes ness

All sales orders are sequentially numbered within the computer system

6

7

30

E

Stren rength

F

Weak eakness ess

Claret Claret Ltd operates operates a number number of control control procedur procedures es in its sales sales system. system. Assuming Assuming all controls controls operate operate effectively, which of the following procedures is most likely to ensure that only goods ordered are delivered? A

Despatch Despatch notes are matched matched with with sales sales orders orders

B

Invoic Invoices es are matched matched with with despa despatch tch notes notes

C

Invoic Invoices es are are matc matched hed with with sale saless order orderss

D

Payment Payment receipts receipts are matched matched with invoices invoices

Hammers Hammers Ltd opera operates tes a number number of control control procedures procedures in in its sales sales system. system. Assumi Assuming ng all control controlss operate effectively, which one of the following procedures will help to ensure that invoices are correctly and accurately prepared? A

Sales Sales orders are matched matched with despatch despatch notes notes

B

Invoic Invoices es are matched matched with with despa despatch tch notes notes

C

Invoic Invoices es are are matc matched hed with with sale saless order orderss

D

Payment Payment receipts receipts are matched matched with invoices invoices


QUESTION BANK

8

9

10

11

Which Which TWO of of the following following weaknes weaknesses ses could could result result in the the misstatem misstatement ent of trade trade receivabl receivables? es? A

Signed Signed despatch despatch notes notes are not agreed agreed to sales sales invoices invoices raised

B

Sales Sales discounts discounts are not always always authoris authorised ed

C

Customers Customers normally normally pay pay within within 40 days days instead instead of of the 30 30 day credit credit period period

D

The receivabl receivables es ledger ledger is not reconci reconciled led to the the receivables receivables ledger control control account account

Which Which TWO of the the follo following wing docume documents nts assist assist in testin testingg sales sales cut-off? cut-off? A

Sale Saless orde orders rs

B

Despa espatc tch h notes otes

C

Sales Sales invoi invoices ces

D

Remitt Remittanc ance e advice advicess

Which Which TWO of the following following would would assist assist in testing testing for the overstatem overstatement ent of revenue? revenue? A

Gros Grosss prof profit it margi margin n

B

Debt Debt/e /equ quit ityy rati ratio o

C

Trade Trade accou accounts nts receiva receivable ble days days

D

Inve Invent ntor oryy days days

The following following weaknes weaknesses ses have been identifi identified ed at Ring Ltd. Ltd. For each weakness weakness select select the most likely likely consequence. Suppliers are not approved prior to being added to the official suppliers listing A

Goods Goods ordered ordered are are of of an an inferi inferior or qual quality ity

B

Goods Goods received do not satisfy satisfy internal internal purchase purchase requirem requirements ents

Goods Goods received are not checked against the order made C

Goods Goods ordered ordered are of an infer inferior ior qualit qualityy

D

Goods Goods received received do do not not satisfy satisfy internal internal purchas purchase e requirement requirementss


31

Chapter Chapter 6: Revenue Revenue system

32


QUESTION BANK

Chapter 7: Purchases system 1

2

Why Why are are purch purchase ase order order form formss prenum prenumber bered? ed? A

To ensure ensure that all all orders orders author authorised ised are subsequ subsequently ently processed processed

B

To ensure ensure the completenes completenesss of the payables payables balance balance

C

To ensure ensure the correctnes correctnesss of of the amounts amounts paid paid to to supplier supplierss

D

To mainta maintain in suppl supplier ier relat relation ionss

The followi following ng weaknesses weaknesses have have been identif identified ied at at Till Ltd. Ltd. For each each weakness weakness select select the the most likely likely consequence which might arise as a result of that weakness. Purchase orders are not authorised prior to being placed A

Goods may be misappropria misappropriated ted for personal personal use

B

The company company may not purchas purchase e goods goods on the the most most advanta advantageous geous terms

C

There There are are errors errors in in the the finan financia ciall statem statement entss

Invoices are not always recorded

3

4

D

Goods may be misappropria misappropriated ted for personal personal use use

E

The company company may not purchase purchase goods goods on the the most most advant advantageous ageous terms

F

There There are errors errors in the financi financial al statem statement entss

On recording recording goods goods inwards inwards on goods goods received notes, notes, copies of the signed signed goods received received notes notes should then be sent to which TWO departments? A

Huma Human n resou resourc rces es

B

Sales

C

Buying

D

Accou ccount ntss

The directors directors of Park Ltd have have just discovered discovered a fraud fraud carried out by one of their their suppl suppliers. iers. The supplier supplier would deliver products that were not ordered to Park Ltd and then subsequently subsequently invoice Park Ltd for these goods. Which of the following controls would have prevented this fraud? A

All orders are authorised authorised by the the purchases purchases director director

B

All purchas purchase e orders are kept kept in a locked box box in the the purchases purchases department department office office

C

All goods received received are are agreed agreed to purcha purchase se orders

D

All invoices invoices received received are agreed agreed to goods goods received received notes notes


33


The followi following ng are descriptio descriptions ns of internal internal controls controls in operation operation at Flash Flash Ltd. For For each descript description ion select the type of control activity which it illustrates. All goods received are stored in a secure storeroom with limited access A

Perfor Performa manc nce e review review

B


C

Phys Physic ical al contr control ol

The payables ledger is reconciled to the payables ledger control account on a monthly basis

6

D


E


F


The following following describes describes processes processes which form form part part of the purchas purchases es system system in operati operation on at Green Green Ltd. For each process select whether it represents represents a strength strength or a weakness in the system. system. All orders are placed directly with suppliers by the production department A

Stre trength ngth

B

Weak eakness ess

All supplier invoices are matched against purchase orders and goods received notes prior to being entered into the accounting system

7

C

Stre trength ngth

D

Weak eaknes ness

Mary Mary prepares prepares the the reconciliat reconciliation ion between between suppli supplier er statemen statements ts and and payables payables ledger ledger accounts. accounts. Which TWO of the following functions should Mary not be involved with?

8

34

A

Deposi Depositi ting ng cash cash receip receipts ts

B

Prepa Preparin ringg the annua annuall budget budget

C

Makin Makingg purcha purchase se orders orders

D

Handling Handling cash payments payments to suppliers suppliers

Numerical Numerical sequence sequence shoul should d not necessa necessarily rily be applied applied to which which of the follow following ing types types of documentation? A

Goods Goods recei received ved note notess

B

Purc Purcha hase se orde orders rs

C

Suppli Supplier er statem statement entss

D

Purcha Purchase se requis requisiti ition on notes notes


QUESTION BANK

9

10

Which Which TWO of the the following following documents documents assist assist in testing testing cut-off cut-off for purchas purchases? es? A

Goods Goods recei received ved note notess

B

Purcha Purchase se requis requisiti ition on notes notes

C

Supp Suppli lier er invoi invoices ces

D

Purch Purchas ase e order orderss

Staple Staple Ltd, which which makes all of its sales sales on credit, has has seen a fall in trade trade receivable receivable days from 45 to 30 days in the past year. Which TWO of the following are plausible reasons for this fall?

11

A

There There has has been been a decre decrease ase in in the volume volume of of sales sales

B

Discounts Discounts for early settlement settlement have been introduced introduced

C

The company company has tightened tightened credit credit terms extended extended to to customers customers

D

There has has been a change change in sales sales mix towards towards more more expensive expensive goods goods being sold

Twist Twist Ltd is a large IT company company that sells sells computer computer hardware hardware and provides consulta consultancy ncy services. services. Which TWO of the following internal controls will BEST ENSURE that computers are not stolen/taken for the private purposes of employees?

12

A

All inventori inventories es are counted counted once a month month and and agreed agreed to the the inventory inventory records records

B

Inventories Inventories leave the storero storeroom om only once there there is is an approve approved d sales sales order order

C

Sales Sales invoices invoices are matche matched d against against customer-si customer-signed gned despa despatch tch notes notes

D

Sales Sales invoices invoices are checked checked for for accuracy accuracy prior to being being posted posted

The organisa organisationa tionall structure structure at Washy Ltd (a manufact manufacturer urer and retailer retailer of electrical electrical goods) goods) is as follows. The sales department is headed by Olivia Jones and her assistant is Mary Smith. Olivia Jones reports to the managing director John Waters. There are several other departments (production, accounting, purchasing, HR and internal audit). Which of the following statements reflects the most effective segregation/allocation of duties with regards to sales ordering? A

All sales sales orders orders shoul should d be recorded recorded by Mary Mary Smith Smith and and approved approved by Olivia Olivia Jones Jones

B

Mary Mary Smith should should record the sales sales orders, orders, Olivia Olivia Jones Jones should should review review them and and John John Waters Waters should give the final approval

C

Both Mary Smith Smith and Olivia Olivia Jones Jones can can approve approve the the sales sales orders orders

D

It is not not necessary necessary for for Olivia Olivia Jones to to become involv involved ed in the recordin recordingg and approval approval of sales orders


35

Chapter 7: Purchases system

36


QUESTION BANK

Chapter 8: Employee costs 1

The following following system of time time recordi recording ng operates operates at Green Green Ltd. Staff clock in and out of work using a swipe card. There is no supervision of this practice but there is a control in place ensuring that only current employees have a swipecard in their possession. Which of the following might be a consequence of the above?

2

A

Employ Employees ees are paid at an inapp inapprop ropria riate te rate rate

B

Employ Employee ee deduct deduction ionss are inappro inappropri priate ate

C

Employ Employees ees are paid for more more than than the hours hours worked worked

D

Ficti Fictiona onall emplo employee yeess may may be set up

The auditor auditorss of Pink Ltd Ltd have performed performed analy analytical tical procedures procedures on the salari salaries es figures figures in the financ financial ial statement statementss and the salary per head appears appears to have increased increased by 10% from the previous year. Assuming there are no errors in the salaries figure, which of the following explains this movement?

3

A

An increase increase in in staff staff numbers numbers along along all staff staff levels levels

B

An increa increase se in genera generall inflat inflation ion

C

An inc increa rease se in the num number ber of of low-s low-skil killed led staff staff

D

An increase increase in the number number of highlyhighly-skil skilled led staff staff

At Blue Ltd, the payroll payroll departme department nt is responsibl responsible e for both process processing ing salaries salaries and and for maintain maintaining ing all all staff records and contracts. Which TWO of the following represent risks in this system arising from the above responsibilities?

4

A

Fictitiou Fictitiouss employees employees are easily easily created created

B

Salar Salaryy deducti deductions ons are are miscal miscalcul culate ated d

C

Salar Salaries ies are paid paid at at the the wrong wrong time time

D

Changes Changes in employe employee e circumsta circumstances nces are are not updated updated on the payrol payrolll

In a system system where where wages are paid in cash, cash, which THREE of the the following following duties duties shoul should d be segregated segregated?? A

Prepa Preparin ringg the payrol payrolll summary summary

B

Request Requesting ing each each employ employee ee to sig sign n for his pay pack packet et

C

Fili Filing ng of pay pay packe packets ts

D

Distri Distribut bution ion of wages wages

E

Requesting Requesting verificatio verification n of employees’ employees’ identity identity


37


The followi following ng describes describes certain certain processes processes of the payrol payrolll system system in operati operation on at Orang Orange e Ltd. For each process select whether it represents a strength or a weaknesses in the system. There is no separate personnel department A

Stre trength ngth

B

Weak eakness ess

Only selected payroll staff have access to standing information on staff C

Stre trength ngth

D

Weak eaknes ness

All changes in salary rates are approved by the head of human resources

6

E

Stren rength

F

Weak eakness ess

The followi following ng are descriptions descriptions of internal internal controls controls in operation operation at Josh Ltd. For each description select the type of control activity which it illustrates. Payroll information is agreed to personnel files prior to processing A


B


C

Phys Physic ical al contr control ol

Budgeted salaries are compared to actual salaries on a monthly basis

7

D


E

Informa Informatio tion n process processing ing

F


Maryland Maryland Ltd employs employs 150 employees employees and has has very very high high annual annual staff staff turnover. turnover. Which of the following controls would BEST ENSURE that only existing employees are paid and that leavers do not continue to be paid?

38

A

Staff Staff records records are maintaine maintained d for each member member of staff staff

B

Staff Staff complete complete work work schedules, schedules, which they they submit submit direct to to the payroll payroll department department

C

Monthly Monthly compariso comparisons ns are made made between between staff staff records held by the human human resources resources manager manager and and the payroll office

D

Staff Staff are paid by direct direct transfers transfers to their their bank bank account accountss


QUESTION BANK

8

Picture Picture Ltd mainta maintains ins a computeri computerised sed payroll payroll system. system. All All employees employees are are paid by by BACS directly directly into into their bank account. Which TWO of the following controls will be most effective in ensuring that accurate payments are made to employees?

9

A

Authori Authorisat sation ion of overti overtime me worked worked

B

A sample sample of calculat calculations ions performed performed by by the payroll payroll package package are are manually manually reperformed reperformed each each month

C

The autopay autopay list list is reviewed reviewed by the the chief chief accountant accountant togethe togetherr with supporti supporting ng payroll payroll documentation

D

The print print out from the bank bank is agreed agreed to the autopay autopay list list and any discrepa discrepancies ncies investiga investigated ted

Hill Ltd operates operates a number number of controls controls over over its payroll. payroll. For the the following following three controls controls,, select select whether they are preventative or detective controls. All staff records are maintained by the human resources manager. Any changes in these records are promptly communicated to the payroll department A


B


Payroll costs are compared to budget on a monthly basis C


D


All employees employees who are paid weekly by cash, must show evidence evidence of their identification identification prior to receiving their wages. E


F



39

Chapter 8: Employee costs

40


QUESTION BANK

Chapter 9: Internal audit 1

The scope scope and objecti objectives ves of internal internal auditing auditing vary vary widely and depend depend on the the size and structure structure of of the entity and the requirements of its management. Which THREE of the following functions could internal audit perform and still operate effectively?

2

A

Evalua Evaluati ting ng corpo corporat rate e object objectives ives

B

Perfor Performin mingg operat operation ional al audits audits

C

Monit Monitori oring ng contro controls ls

D

Author Authoris isin ingg trans transact actio ions ns

The followi following ng statement statementss relate relate to the differen differences ces between between internal internal and external external audito auditors. rs. For each statement statement select whether it is true or false. false. Internal auditors should not co-operate with external auditors A

True

B

False

Statutory audits are carried out by external auditors only C

True

D

False

The internal audit department forms part of the overall internal control system

3

E

True

F

False

The scope scope and objecti objectives ves of internal internal auditing auditing vary vary widely and depend depend on the the size and structure structure of of the entity and the requirements of its management. Which THREE of the following functions could internal audit perform and still operate effectively?

4

A

Advising Advising on on the implement implementatio ation n of account accounting ing and and operationa operationall standard standardss

B

Liaisi Liaising ng with with externa externall audito auditors rs

C

Recommendi Recommending ng improvement improvementss in operations operations

D

Voting Voting on decisions decisions that involve involve external external audit matters matters

Why shoul should d the interna internall audit audit function function not not get involve involved d with operati operational onal matters? matters? A

For For reason reasonss of confide confident ntial iality ity

B

To preser preserve ve their their integr integrity ity

C

Internal Internal auditor auditorss do not not possess possess the skills skills to to handle handle operatio operational nal matters matters

D

To preser preserve ve their their indepe independen ndence ce


41


6

In order order to preserve preserve their their independenc independence, e, the interna internall audit audit function function should should report report directly directly to which which of of the following? A

The The chief chief acco accoun unta tant nt

B

The The fina financ nce e direc directo torr

C

The The audi auditt comm commit itte tee e

D

The non-ex non-execu ecutiv tive e direct directors ors

Smarter Smarter Supermarke Supermarkets ts operates operates a chain chain of of fifteen fifteen supermarket supermarketss across across London. London. At At head office, office, there is is an internal audit department which carries out audits and investigations on the individual supermarkets in the chain. Which THREE of the following could the internal audit department carry out?

7

A

Tests Tests of the controls controls at at the Westmins Westminster ter supermarket supermarket as as part of a routine routine interna internall audit cycle cycle

B

Temporaril Temporarilyy filling filling the the role of the the Lewisham Lewisham superma supermarket rket manage managerr while she she is on sick sick leave leave

C

Identifica Identification tion of risks risks at the proposed proposed Waterloo Waterloo supermarket, supermarket, which which is due to open next next year

D

Investiga Investigation tion into into the the physical physical contro controls ls at all the supermar supermarkets kets

Internal Internal and externa externall auditors auditors provide provide a variety variety of services services to companies companies.. For each of the following following examples select whether it is a service which would be provided by internal internal auditors only, by external auditors only or by either. Preparation of a report on the effectiveness of internal controls A

Inte Intern rnal al audi audito tors rs

B

Exte Externa rnall audi audito tors rs

C

Either

Investigation into a material fraud committed in the entity

8

D

Inte Intern rnal al audi audito tors rs

E

Exte Externa rnall audi audito tors rs

F

Either

Many of the procedure proceduress undertaken undertaken by the the internal internal audi auditor tor are very very similar similar to those those perfor performed med by the external auditor. Which of the following procedures will NOT normally performed by the external auditor?

42

A

Testing Testing interna internall contro controls ls

B

Making Making recommendati recommendations ons regarding regarding improvements improvements to controls controls

C

Making Making recommenda recommendations tions on the overal overalll operationa operationall effectivenes effectivenesss of the entity entity

D

Examinin Examiningg and and testi testing ng financial financial informat information ion


QUESTION BANK

9

The scope scope and objecti objectives ves of internal internal auditing auditing vary vary widely and depend depend on the the size size and structure structure of the entity and the requirements of its management. Which TWO of the following functions could internal audit perform and still operate effectively? A

Preparatio Preparation n of reconcilia reconciliations tions between between the payab payables les ledger ledger and the payable payabless ledger control control account

B

Approv Approving ing annua annuall budget budgetss

C

Reviewing Reviewing accountin accountingg systems systems and related controls controls

D

Examinin Examiningg financial financial and operat operational ional informatio information n for managem management ent


43

Chapter 9: Internal audit

44


QUESTION BANK

Chapter 10: Documentation 1

For each each of the followi following ng statements statements concerning concerning documentat documentation, ion, select select whether whether they they are true true or false false in accordance with BSA 230 Audit Documentation. The preparation of documentation is a legal requirement A

True

B

False

Documentation assists team members to direct and supervise work done C

True

D

False

Documentat Documentation ion may be in paper or electronic electronic form

2

3

4

E

True

F

False

Which Which THREE of the follow following ing documents documents would would be found on a permanen permanent, t, as opposed opposed to a current, current, audit file? A

Accou Account ntss chec checkli klist st

B

Company Company memorandum memorandum and articles articles of associati association on

C

Detai Details ls of client client compan companyy his history tory

D

Legal Legal documents documents such as lease lease agreem agreements ents and title title deeds

Which Which THREE of the follow following ing documents documents would would be found on a current, current, as opposed opposed to to a permanent permanent,, audit file? A

Manag Manageme ement nt accoun accounts ts

B

Summa Summary ry of unadju unadjuste sted d errors errors

C

Letter Letter of repres represent entati ation on

D

Enga Engage geme ment nt lette letterr

For how many years does the the ICAB ICAB require require firms firms to retain retain their their audit documentat documentation ion after after the the end of the accounting period to which the documentation relates? A

Six years ears

B

Suff Suffici icient ent peri period od of time time

C

Eigh Eightt yea years

D

Ten yea years


45


6

James James & Co are are the auditors auditors of Eye Ltd. Eye Eye Ltd has has asked asked to have have a look look at James James & Co’s working working papers in respect of itself. In accordance with ethical guidelines, what should the response of James & Co be? A

Refuse, Refuse, as the the working working papers papers belong belong to James James & Co and and are not part part of Eye Eye Ltd’s records

B

Refuse Refuse but agree agree to show Eye Eye Ltd any any working working papers papers they they request request only only once the the audit audit is complete

C

Show Show Eye Ltd Ltd whatev whatever er working working paper paperss they they reques requestt

D

Show Eye Eye Ltd the working working papers only only at James James & Co’s Co’s discretion discretion and and only those those documents documents that that will not prejudice the audit

Select Select whether whether the followin followingg statement statementss are true true or false false in respect respect of the reasons reasons for prepari preparing ng audit audit documentation. To enable an experienced auditor to carry out quality control reviews A

True

B

False

To provide evidence of audit work carried out in the event of a legal dispute C

True

D

False

To retain a record of matters of continuing significance to future audits

7

E

True

F

False

With With regards regards to auditors’ auditors’ working working papers, papers, select whether the the following following state statements ments are are true or false. false. Working papers belong to the auditor A

True

B

False

Auditors prepare working papers on a voluntary basis C

True

D

False

There are no circumstances under which auditors’ working papers should be given to a third party without the permission of the client

46

E

True

F

False


QUESTION BANK

Chapter 11: Evidence and sampling 1

For each each of the followin followingg statements statements concerni concerning ng the use use of test data data and audit audit software software select select whether whether they are true or false. false. Test data involves the use of the assurance provider’s own software A

True

B

False

Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation C

True

D

False

Audit software can be installed on a client’s system to reperform calculations relating to year-end balances

2

E

True

F

False

For each each of the following following stateme statements nts concernin concerningg analytical analytical proce procedures dures select select whether whether they they are true true or false. Analytical procedures can be used in tests of controls A

True

B

False

Analytical procedures are only helpful where the integrity of the underlying data is high C

True

D

False

Analytical procedures must be carried out by senior audit personnel only

3

E

True

F

False

There are are a number number of factors factors that the auditor auditor should should conside considerr when using using analyt analytical ical proced procedures. ures. These include suitability and reliability factors. Which THREE of the following factors relate to reliability? A

The source source of the inform informati ation on

B

The materi materiali ality ty of the items items involv involved ed

C

The relevance relevance of the informatio information n available available

D

The comparabi comparability lity of the the informatio information n avail available able


47


5

Which Which of the followin followingg describes describes sampling sampling risk? A

The risk risk that the the sample sample cannot cannot be tested tested due to a lack of source documenta documentation tion

B

The risk risk that the the sample sample chosen chosen is not representati representative ve of the popul populatio ation n

C

The risk risk that the audito auditor’s r’s testing testing techniques techniques cannot cannot be applie applied d to the sample sample chosen chosen

D

The risk that the underlyin underlyingg po populat pulation ion is incomp incomplete lete

The gross gross margin margin at West West Ltd Ltd has has increase increased d from from the the previou previouss year. year. Assuming there are no errors in the financial statements, which of the following explains this increase?

6

7

8

48

A

Sales Sales volum volume e has increa increased sed

B

Administ Administrativ rative e costs costs have increased increased

C

The cost cost of raw raw materials materials has has increased increased without without an effect effect on the sales sales price price

D

The compan companyy now employs employs more efficient efficient production production techniques techniques

Which Which of the follow following ing describes describes how how an assura assurance nce provider provider would would check check the completeness completeness asserti assertion on for non-current assets? A

Trace Trace an entry entry in the the non-curren non-currentt asset asset register register to to the physic physical al item item

B

Trace Trace the physical physical item item to a figure figure in the the finan financial cial statements statements

C

Trace Trace the physica physicall item to an an entry in in the non-cu non-current rrent asset asset register register

D

Trace Trace an entry entry in the the financial financial statem statements ents to to the physic physical al item item

Which Which of the the followin followingg sources sources of evidenc evidence e would assis assistt in verifying verifying the existenc existence e of the trade trade receivables balance? A

Trade Trade receiva receivable bless confi confirma rmation tionss

B

Sale Saless orde orders rs

C

Analytica Analyticall procedure proceduress over over the trade receivables receivables balance balance

D

Recalculat Recalculations ions of the individual individual receivable receivable balances balances

In testing testing for the comple completenes tenesss of liabilit liabilities, ies, which which THREE THREE of the followi following ng sources sources of documenta documentation tion would be helpful? A

Boa Board minu minute tess

B

Correspon Correspondenc dence e with with client client solicitors solicitors

C

Bank Bank stat statem emen ents ts

D

Ban Bank lette etterr

© The Institute of of Chartered Accountants Accountants in England and Wales, March March 2009

QUESTION BANK

9

10

11

12

Which Which THREE of the follo following wing are are the reasons reasons why why a bank letter is is sent to all the the client’s client’s banks? banks? A

Bank statement statementss held held by the client may have have been been tampered tampered with

B

The bank bank stat stateme ements nts may be less less accura accurate te

C

The bank bank letter letter contains contains other other informat information ion which which may be helpful helpful in the audit audit

D

The bank bank letter letter is sent sent directly directly to the the auditor auditor and and is therefo therefore re more reliabl reliable e

When auditi auditing ng a provision provision which TWO TWO of the following following methods methods are are MOST LIKELY LIKELY to detect understatement of the provision? A

Test the process process used by manag management ement to estimate estimate the amount amount

B

Use an indepen independent dent estim estimate ate

C

Review Review subsequ subsequent ent events events

D

Reperform Reperform the calculati calculation on of the the provision provision

Which Which of the followin followingg best describes describes random random selection selection in audit audit testing? testing? A

Testing Testing 100% 100% of a popul populati ation on

B

Testing Testing all all items items in a populati population on with with a particular particular characteris characteristic tic

C

Testing Testing items items in a populat population ion that that appear appear unusua unusuall or suspi suspicious cious

D

Testing Testing less less than 100% 100% of a populati population on where where each item item in the popula population tion has has an equal equal chance of of selection

For each each of the following statements concerning concerning statistical statistical and non-statistical non-statistical sampling sampling select whether whether they are true or false. false. Non-statistical sampling involves an element of subjectivity A

True

B

False

Statistical sampling involves the random selection of a sample C

True

D

False

Statistical sampling requires the auditor to input a required confidence level E

True

F

False


49


In testing testing the authorisati authorisation on of sales orders orders select whether whether each of the followin followingg factors would would cause an increase in the sample size, a decrease in the sample size or would have no effect on the sample size. An increase in the level of tolerable error A

Incr Increa ease se

B

Decr ecreas ease

C

No eff effect ect

An increase in the number of sampling units D

Incr Increa ease se

E

Decr ecreas ease

F

No effect

Detection risk is increased

14

G

Incr Increa ease se

H

Decr ecreas ease

I

No effect

In testing testing whether whether all goods goods received notes notes are matched with with purchase purchase orders, orders, select whether whether each of the following factors would cause an increase in the sample size, a decrease in the sample size or would have no effect on the sample size. An increase increase in the level of expected error A

Incr Increa ease se

B

Decr ecreas ease

C

No eff effect ect

An increase in the auditor’s required confidence level

15

D

Incr Increa ease se

E

Decr ecreas ease

F

No effect

In testing testing the valuation valuation assertio assertion n for non-current non-current assets, select select whether whether each of the following following factors factors would cause an increase in the sample size, a decrease in the sample size or would have no effect on the sample size. An increase in the use of other substantive procedures directed at the same assertion A

Incr Increa ease se

B

Decr ecreas ease

C

No eff effect ect

Stratification of the population

50

D

Incr Increa ease se

E

Decr ecreas ease

F

No effect


QUESTION BANK

16

In testing testing the valuation valuation assertion assertion for trade trade receivables, receivables, select select whether whether each of the following following factors factors would cause an increase in the sample size, a decrease in the sample size or would have no effect on the sample size. An increase in the level of tolerable error A

Incr Increa ease se

B

Decr ecreas ease

C

No eff effect ect

An increase in the auditor’s assessment of audit risk in this area

17

D

Incr Increa ease se

E

Decr ecreas ease

F

No effect

With With regards regards to tolerable error error and sampling sampling risk, select select whether the followin followingg statements statements are true or false. Tolerable error is the minimum error that the auditor would be willing to accept A

True

B

False

Tolerabl Tolerable e error is used by management management as a guide to the extent of errors they can make C

True

D

False

Sampling risk is the risk that the actual errors found in a sample will exceed the expected errors

18

E

True

F

False

For each each of the followin followingg descriptions descriptions relatin relatingg to sample selection selection select select whether whether they describe describe random selection, haphazard selection or systematic selection. Mark is selecting a sample of sales invoices to carry out a directional test. He uses a computerised generator to identify the items to be selected A

Random

B

Haph Haphaazard ard

C

Syst System emaatic tic

John is selecting a sample from fr om a list of accounts payable. He makes his selection by choosing every th 15 balance D

Rando ndom

E

Haph Haphaazard ard

F

Syst ystema ematic


51


Inspectin Inspectingg board minutes minutes is an important important test of detail detail that can assist assist in evidence gathering gathering for for many account balances and disclosures. Which THREE of the following account balances are supported by the evidence likely to be provided by board minutes?

20

21

22

23

A

Conti Continge ngent nt liabil liabiliti ities es

B

Comp Compan anyy comm commit itme ment ntss

C

Sund Sundry ry expen expense sess

D

Additions Additions to signi significa ficant nt tangi tangible ble non-cur non-current rent assets assets

E

Util Utilit ityy expens expenses es

When may block sampling sampling be be appropri appropriate? ate? A

When checking checking that that controls controls were in operatio operation n througho throughout ut the the year year

B

When testing testing whether whether certain certain transa transactio ctions ns have been been allocated allocated to the correct correct accountin accountingg period

C

When testing testing for understat understatement ement of assets assets

D

When testing testing for understat understatement ement of liabi liabilities lities

When is monetar monetaryy unit sampling sampling most most appropriate? appropriate? A

When testing testing for understat understatement ement of assets assets

B

When When testing testing for overst overstat atemen ementt of asset assetss

C

When testing testing for understat understatement ement of liabili liabilities ties

D

When testing testing for understat understatement ement of expenses expenses

In respect respect of an assurance assurance engageme engagement nt which of the follo following wing is the the LEAST persuasi persuasive ve method of gathering evidence? A

Reperforma Reperformance nce of a depreciatio depreciation n calculati calculation on

B

Inspec Inspectio tion n of a suppli supplier' er'ss invoic invoice e

C

Inspectio Inspection n of an internal internally-g ly-generat enerated ed order order for the purchas purchase e of a non-curre non-current nt asset asset

D

Communica Communicating ting with with a third third party party to confirm confirm ownersh ownership ip of a non-cur non-current rent asset asset

All methods methods of obtaining obtaining evidence evidence have weaknesses weaknesses.. These are listed below below in the options options presented. presented. For each method of obtaining evidence, select the weakness that is most likely to be present. Analytical procedures A

Limit Limited ed to to the the point point in time time it takes takes pla place ce

B

Limited Limited by underlying underlying accounting accounting system system

Observation of a procedure

52

C

Limit Limited ed to the poin pointt in time time itit takes takes place place

D

Limited Limited by underlying underlying accounting accounting system system


QUESTION BANK

Direct confirmation of a payables balance

24

E

A balance balance which is is understa understated ted may may be agreed agreed because because it favours favours the the responden respondentt

F

A balance balance which which is overstated overstated may be agreed because because it favours favours the respondent respondent

Auditors Aud itors obtai obtain n evidence evidence using using procedures procedures set set out in BSA 500 500

Audit Evidence.

For each of the following tests select the type of procedure which is being used. The auditor examines a title deed to confirm that the company has ownership of a plot of land A


B

Obse Ob serv rvat atio ion n

C

Conf Confir irma mati tion on

The auditor is present while a sales order is being processed to test if the controls are carried out D


E

Obse Ob serv rvat atio ion n

F

Conf Confir irma mati tion on


53

Chapter 11: Evidence and sampling

54


QUESTION BANK

Chapter 12: Management representations 1

2

Which Which THREE THREE of the follow following ing are are purposes purposes of a management management represe representat ntation ion letter letter?? A

Confirmati Confirmation on that the financial financial state statements ments are are free of material material miss misstatem tatements ents

B

Confirmati Confirmation on that managem management ent acknowledge acknowledgess its responsibi responsibility lity for for the preparatio preparation n of the financial financial statements

C

Confirmati Confirmation on that that managem management ent acknowledg acknowledges es the terms terms of the engage engagement ment

D

Confirmati Confirmation on that managem management ent acknowledge acknowledgess its responsibil responsibility ity for the design design and implementa implementation tion of internal control

For each each of the followi following ng statements statements in respect respect of managem management ent represent representations ations select select whether whether they are true or false. Management representation letters act as a substitute for other audit evidence A

True

B

False

Management representation letters contain confirmation that the effects of uncorrected misstatements are immaterial C

True

D

False

Management representation letters contain the statement that management has disclosed all relevant subsequent events to the auditors

3

E

True

F

False

For each each of the the following, following, select in which which letter letter issued issued by by the auditor auditor they they are are referred to. Details of any frauds or irregularities in the internal control system or confirmation that no such frauds or irregularities have taken place A


B


C

Mana Manage geme ment nt lette letterr

Weaknesses in the internal control system D


E


F

Mana Manage geme ment nt lette letterr


55


5

6

7

8

56

When should the managemen managementt represen representati tation on letter be signed? signed? A

Before Before the audit audit is commen commenced ced

B

During During the course course of the audit audit

C

Just Just prior prior to the the sign signing ing of the audit audit report report

D

After After the audit audit report report is is sign signed ed

Who normally normally drafts drafts and signs the managemen managementt represent representation ation letter? letter? A

Auditor Auditor drafts drafts and and signs signs

B

Auditor Auditor drafts drafts,, seni senior or mana manageme gement nt sign sign

C

Senior Senior manag managemen ementt draft draft and and sig sign n

D

Senior Senior management management draft, auditor auditor signs

Which Which of the followi following ng issues issues would would be likely likely to be included included in a management management representa representation tion letter? letter? A

Comple Completene teness ss of liabil liabiliti ities es

B

Comple Completene teness ss of trade trade account accountss recei receivab vable le

C

Existe Existence nce of non-cur non-current rent asset assetss

D

Accura Accuracy cy of prepaym prepayments ents

Which Which of the followi following ng statements statements is is an accurate accurate descri description ption of a management management represen representatio tation n letter? letter? A

It confir confirms ms the scope scope of the the engag engagemen ementt

B

It sets out material material weaknesses weaknesses in internal internal controls controls

C

It confirms confirms matters matters management management have have said to to audit staff staff as evidence evidence towards the the audit opinion opinion

D

It sets out matters matters arisin arisingg during during the engage engagement ment which which are of interest interest to managemen managementt

Which Which TWO of of the followi following ng situation situationss would would be referred referred to in the managemen managementt representa representation tion letter? A

Managemen Managementt has refused the auditor auditor permis permission sion to to contact contact a major major customer customer

B

Managemen Managementt has confirme confirmed d its belief belief that the ongoing ongoing litiga litigation tion with with a former former employee employee will will not result in the company having to pay compensation

C

Managemen Managementt has confirmed confirmed that it it believes believes that a defaulti defaulting ng customer customer will pay pay its debts in in due course

D

Managemen Managementt believes believes that that no fraud fraud has been been committed committed by by senior management management in the period period

© The Institute of of Chartered Accountants in England England and Wales, March March 2009

QUESTION BANK

9

Which Which TWO of of the followi following ng matters matters are managem management ent required required to confirm confirm in writing writing in a letter letter of representation? A

That manag management ement are are responsibl responsible e for the prepar preparation ation of of the financ financial ial statem statements ents

B

That management management are are responsib responsible le for protecting protecting the interests interests of the shareh shareholders olders

C

That manag management ement are are responsibl responsible e for the desig design n and implementa implementation tion of interna internall control control

D

That the audit audit fee will be paid paid in full within within three three months months of the signing signing of of the audit audit report


57

Chapter 12: Management representations

58


QUESTION BANK

Chapter 13: Substantive procedures – key financial statement figures 1

For each each of the followi following ng substant substantive ive procedur procedures es carried carried out on a schedule schedule of non-cur non-current rent assets assets which agrees to the financial statements, select which financial statement assertion will be addressed. Tracing items from the non-current asset register to the schedule A


B


C


Confirming whether the casts on the schedule are correct

2

D

Comp Comple lete tenes nesss

E


F

Existence nce

For each each of the followi following ng substant substantive ive procedur procedures es on non-curren non-currentt assets, assets, select select which which financial financial statement assertion will be addressed. Checking a sample of non-current assets to purchase invoices A


B


C


Selecting a sample of assets on the non-current asset register and confirming that they are physically present

3

D


E


F

Existence nce

When testing testing the rights rights and and obligati obligations ons asserti assertion on for for a sample sample of plant plant and machiner machinery, y, which of of the following sources of evidence would be most helpful? A

The client’ client’ss asset asset regist register er

B

Physic Physical al verifica verificatio tion n of of the assets assets

C

Purch Purchas ase e invo invoic ices es

D

Recalculat Recalculation ion of the depreciatio depreciation n charge charge


59


For each each of the following following risks of missta misstatement tement in in respect of intangibl intangible e non-current non-current assets assets select select the financial statement assertion which is directly affected. Intangible assets are not tested for impairment on an annual basis A


B


C


Expenses are inappropriately capitalised as intangible assets

5

D


E


F

Existence nce

For each each of the followin followingg audit audit tests on invent inventory ory select select which which financial financial stateme statement nt assertion assertion would would be supported. Enquiries about possible obsolete or slow-moving inventory A


B


C

Cut-off

Taking the last 10 goods received notes of the period and the first 10 goods received notes of the next period and checking that they have been allocated to the correct period

6

7

60

D


E


F

Cut-off

By attendin attendingg the invento inventory ry count on which THREE of of the followi following ng is the the auditor auditor gaining gaining assura assurance? nce? A

The quanti quantity ty of invent inventory ory

B

The existe existence nce of invent inventory ory

C

The rights rights and and obligati obligations ons over the inventory inventory

D

The effective effectiveness ness of of the compa company’s ny’s controls controls over the inventory inventory count

When reviewing reviewing the the instructio instructions ns for the the inventory inventory count count in respect respect of of the orga organisa nisation tion of of the count, count, which would cause concern to the auditor? A

All invento inventory ry is to to be tidied tidied and organised organised into into secti sections ons for for counting counting

B

The count count will will be be superv supervise ised d by the the store storess mana manager ger

C

There are are restrictio restrictions ns on the the movement movement of invento inventories ries while while the the count is is underway underway

D

Third party party inventory inventory is placed placed in a separate separate area area and marked marked as belonging belonging to the the third party party

© The Institute of of Chartered Accountants in England England and Wales, March 2009 2009

QUESTION BANK

8

For each each of the followi following ng statements statements in respect respect of perpetua perpetuall inventory inventory counts counts select select whether whether they are are true or false. Management do not need to ensure that inventory lines are counted at least once a year A

True

B

False

Management should ensure that all material differences that arise from the inventory counts are investigated and corrected C

True

D

False

The inventory count should be organised so there is minimal movement of inventories at the time of the count

9

10

E

True

F

False

Which Which THREE of the follo following wing are are MOST LIKELY LIKELY to indicate indicate that the the net reali realisable sable value of inventory inventory is lower than its cost? A

There is physical physical deteriorati deterioration on of of the inventory inventory

B

There There has has been been an an incre increase ase in sellin sellingg pric price e

C

Newer Newer mode models ls are now availa available ble

D

There has has been a marketing marketing decision decision to to offer small small discoun discounts ts during during a sale sale period period

E

There has has been a significa significant nt unforeseen unforeseen increase increase in in productio production n costs costs which cannot cannot be be passed passed on to the customer

There are a number number of ways that that the auditor auditor can test whether whether inventories inventories are are stated at the the lower of cost and net realisable value. Which TWO of the following procedures will assist the auditor in this?

11

A

Corres Correspon pondin dingg with with suppl supplier ierss

B

Reviewi Reviewing ng post post year-en year-end d sales sales

C

Compa Comparin ringg sale saless prices prices to cost cost

D

Sending Sending receivable receivabless confirmat confirmations ions

Direct Direct confirmatio confirmation n with customers customers assists assists in supporting supporting which which THREE of the following following assertio assertions? ns? A


B


C


D

CutCut-of off f


61


The following following stateme statements nts relate to the types of confirmat confirmations ions which which may be sought from from receivables. receivables. For each statement select whether it is true or false. Under the negative method, the customer is requested to confirm the accuracy of the balance shown or state his disagreement A

True

B

False

Under one of the options available for the positive method of direct confirmation, the customer may be requested to provide the balance owed C

True

D

False

Positive confirmations must be used where there are a large number of balances

13

14

15

E

True

F

False

In which TWO circums circumstances tances might might it be permissibl permissible e to use the negative negative method method of receivables receivables confirmation? A

The assessed assessed risk of material material misstateme misstatement nt is is high

B

A smal smalll numbe numberr of large large balance balancess is involv involved ed

C

A subst substantia antiall number of errors is not not expecte expected d

D

The auditor auditor has no reason reason to believe believe that that customer customerss will disrega disregard rd the request request

If the client client refuses permissi permission on for the auditor auditor to communic communicate ate with custome customers rs for the purposes purposes of confirming their trade accounts receivable balances, the auditor should do which of the following? A

Seek evidence evidence from from the invoices invoices sent to customers customers

B

Seek evidence evidence from from post year-end year-end payments payments from customers customers

C

Consider Consider it a limitatio limitation n on the scope of the audit

D

Rely Rely on analy analytic tical al procedu procedures res

The following following stateme statements nts relate relate to the selection selection of a sample sample of customers customers from whom whom direct confirmation of balances will be sought. For each statement select whether it is true or false. Samples should be selected giving each customer an equal chance of being selected. There should be no further considerations. A

True

B

False

The sample of customers should include accounts that are old, unpaid, written off and with credit balances

62

C

True

D

False


QUESTION BANK

Customers with whom it is difficult to communicate should be avoided

16

E

True

F

False

For each each of the following following audit audit tests on trade receivab receivables les select which which financial financial statement statement asserti assertion on would be supported. Comparing the method of calculating the provision against trade receivables against other entities in the same industry A


B


C


Obtain and review an analysis of aged receivables at the period end for amounts outstanding for more than the allowed credit period

17

D


E


F

Existence nce

During During the course course of the audit of Ham Ltd, Mary receives receives 24 replies replies out of the 27 direct direct customer customer confirmation letters. Mary has already communicated with the three outstanding responders on at least four occasions. What action should Mary now take?

18

A

No action action is necessa necessary ry as 24 out out of 27 27 responses responses is sufficien sufficientt

B

Mary Mary should pass pass on the detail detailss of the outstan outstanding ding respons responses es to an independe independent nt company company official official for chasing

C

Mary Mary should should continue continue her her efforts efforts to contact contact the customers customers

D

Mary Mary should should deem that they are fictit fictitious ious customers customers

For each each of the following following risks risks of misstatem misstatement ent in respect respect of the bank and cash cash balance balance select the financial statement assertion to which they relate. Not all the client’s bank balances being disclosed A


B

Exis Existe ten nce

C


Reconciliation differences between the bank balance and the cash book balance are not investigated and resolved by management D


E


F



63


Keeping Keeping the cash book book open to take take credit for remittan remittances ces received after after the year end, is is one way of window dressing. How can the auditor address this risk?

20

21

22

A

By checking checking the cheque cheque payment payment slips slips to ensure ensure that outsta outstanding nding paymen payments ts really really relate relate to the current period end

B

By checking checking the the bank paying paying in slips slips of outsta outstanding nding lodgements lodgements to ensure ensure they they belong belong to the the current year end

C

By confirmi confirming ng with customers customers the the date of of their their payment payment to the the client client

D

By confirmi confirming ng with suppliers suppliers the the date date of receip receiptt of the client’s client’s paymen paymentt

Which Which THREE of the followin followingg items will will be included included in a bank letter from from a specific specific bank? A

Details Details of all standing standing orders orders with with the bank

B

The bank balance balance on on each each account account with the specific specific bank

C

Any guaran guarantees tees made made by the client client

D

Any titles titles or other assets assets held held for safe custody custody by the bank bank

Direct Direct confirmati confirmations ons from from supplier are are not always always used by auditors. auditors. Under Under which TWO of the following circumstances are supplier confirmations necessary? A

Where Where supplier supplier invoic invoices es and supplier supplier statements statements are availab available le and part part of the standard standard documentation of a purchases cycle

B

Where Where there there is a pressure pressure on the the auditor auditor to complete complete his audit audit on on time time

C

Where Where the auditor auditor suspects suspects that that the client client is delibera deliberately tely trying trying to understa understate te payables payables

D

Where Where the client client refuses to provide provide supplie supplierr statement statementss to the the auditor auditor

An important important control control within within the payables payables cycle is the compariso comparison n between supplier supplier statements statements and the the payables ledger accounts. Which of the following assertions is most supported by this control procedure?

23

64

A


B


C


D

Pres Present entat atio ion n

Which Which of the following following sources of informat information ion will not not be helpful helpful for auditing auditing non-current non-current liabiliti liabilities? es? A

Loan Loan agre agreem emen ents ts

B

Ban Bank lette etters rs

C

Shar Share e certi certifi fica cates tes

D

Boa Board minu minute tess


QUESTION BANK

24

The results results of substantive substantive tests tests on trade payables payables at Waltham Waltham Ltd are set out below. The materiali materiality ty threshold set for these tests was CU12,000. For each of the following results, select the action which should be taken by the audit senior. Of the 15 supplier confirmations sent, only 10 were returned A

Draw Draw concl conclus usio ion n

B

Refer Refer to senior senior colle colleag ague ue

C

Exte Extend nd samp sample le

In a sample of 30 supplier invoices out of approximately 300, representing 5% of the payables balances, errors were found on the payables ledger concerning the recording of liabilities from 8 invoices totalling CU200

25

26

D

Draw Draw concl conclus usio ion n

E

Refer Refer to senior senior colle colleag ague ue

F

Exte Extend nd samp sample le

Which Which THREE of the following following are the more significa significant nt risks in relation relation to a non-current non-current asset balance balance in the financial statements? A

Non-curren Non-currentt assets assets exist exist and have been been included included in the financial financial statem statements ents but belong belong to a third third party

B

Non-c Non-curr urrent ent assets assets have not been depreci depreciate ated d

C

Expenses Expenses unrelated unrelated to non-cur non-current rent assets assets have have been included included in in the non-current non-current asset asset balance balance

D

Non-curren Non-currentt assets assets have not been disclose disclosed d properly properly in the financ financial ial stateme statements nts

For each each of the following following circumstan circumstances ces in respect respect of inventory, select select which financial financial statement statement assertion would be affected. Differences identified at the inventory count have not been adjusted in the inventory records A


B


C

Cut-off

Inventory in transit at the end of the year has not been taken into account

27

D


E


F

Cut-off

The auditor auditor of Ilford Ilford Ltd carried out a receivable receivabless circularisati circularisation on at the year year end to confirm the accuracy of total trade receivables in the balance sheet at that date. Two of the replies to the circularisation disagreed the balance. For each of these two disagreements, select whether the disagreement would be considered an error or would not be considered an error for the purposes of evaluating the accuracy of total trade receivables in the balance sheet at the year end.


65

Chapter 13: Substantive procedures – key financial statement figures Colchester Ltd disagreed the balance stating that the amount owed was CU11,100 and not CU15,600 as was written on the confirmation letter. On investigation, the auditor discovered that invoice number SI 8976 for a total of CU1,600 had been recorded by Ilford Ltd as CU6,100 A

Error

B

Not error ror

Rainham Ltd disagreed the balance because their records had cancelled invoice number SI 11493. This was because because Rainham Ltd had returned some goods three days prior to the year end. The auditor auditor has verified that the goods have been returned and that cut-off with inventory is correct

28

C

Error

D

Not Not erro errorr

Marianne Marianne has obtained obtained a list of items items which make make up the cash balance balance CU15,350 CU15,350 in the financia financiall statements of Browns Ltd. Materiality has been set at CU7,000. For each item select whether whether or not Marianne Marianne should should test the item. Current account balance CU14,100 A

Test

B

Not test

Petty cash float CU250 C

Test

D

Not test

Special directors’ cash account CU1,000

29

E

Test

F

Not test

Two types of procedures procedures used in gathering gathering evidence evidence are tests of controls controls and substanti substantive ve procedures. procedures. For each of the following examples select the type of procedure illustrated. Carrying out analytical procedures on the income statement A

Test Test of contr ontrol ol

B


Reviewing board minutes for evidence of authorisation of major additions to non-current assets C

Test Test of cont contro roll

D


Reperforming only the year-end bank reconciliation

66

E

Test est of contr ontrol ol

F

Subs Substa tant ntiv ive e proc proced edur ure e


QUESTION BANK

Chapter 14: Codes of professional ethics 1

For each each of the followi following ng statements statements in relation relation to guidance guidance on professi professional onal ethics ethics select select whether whether they they are true or false. It is in the public interest for accountants to follow a professional ethics framework A

True

B

False

Ethical guidance from the ICAB is in the form of rules rather than principles C

True

D

False

Rules-based codes offer a more straightforward ethical framework, as they cover specific situations

2

E

True

F

False

Select Select which which of the the following following statement statementss are are true true or false. false. A principles-based ethical framework encourages auditors to apply general principles to their specific situation A

True

B

False

A principles-based ethical framework takes the form of a checklist of forbidden items which auditors can efficiently check off C

True

D

False

A principles-based ethical framework can more effectively accommodate a fast-changing environment

3

E

True

F

False

Which Which of the the following following is is not one one of the stated stated fundamen fundamental tal principl principles es of the the IFAC IFAC code? A

Inte Integgrity rity

B

Courte rtesy

C

Obje Object ctiv ivit ityy

D

Confid Confidenti entiali ality ty


67


Smith & Co audit audit firm firm has been been approached approached to to audit audit Tube Ltd, Ltd, a listed listed company. company. A partner partner in Smith Smith & Co has shares in Tube Ltd and another partner’s sister is the managing director of Tube Ltd. What types of threats would taking on the audit of Tube Ltd present?

5

A

Advoca Advocacy cy and intimi intimidat dation ion threat threatss

B

Advoca Advocacy cy and self-i self-inter nteres estt threat threatss

C

Self-revie Self-review w and self-intere self-interest st threats threats

D

Familiarit Familiarityy and self-intere self-interest st threats threats

Marr Marr & Co are are the auditor auditorss of Dreams Dreams Ltd. Dreams Dreams Ltd, Ltd, a liste listed d company, company, has has approached approached Marr & Co Co to help it design and implement a new IT system. Which of the following threats is created if Marr & Co accept this assignment?

6

A

Intim Intimida idatio tion n threat threat

B

Advo Advoca cacy cy thre threaat

C

Famil Familia iarity rity threat threat

D

Manag Manageme ement nt threat threat

Bubbles Bubbles Ltd, an audit audit client client of Johnson Johnson & Co, Co, is unhappy unhappy with with the way way the audit audit is being being carried carried out and has threatened threatened to replace replace Johnson & Co if the firm does not issue the opinion opinion Bubbles Ltd wants. Which of the following threats is created by this situation?

7

A

Inti Intimi mida dati tion on

B

Advoca ocacy

C

Famil amilia iari rity ty

D

Mana Manage geme ment nt

Whitely Whitely & Co are are the auditors auditors of East Ltd. Ltd. East East Ltd has approa approached ched Whitely Whitely & Co Co to carry out out share dealings on its behalf. Which threat to independence is created by this?

68

A


B

Advoca ocacy

C


D

Self Self-i -int ntere erest st


QUESTION BANK

Chapter 15: Integrity, objectivity and independence 1

Flyby Flyby Ltd is a publi publicly cly listed listed airline. airline. Because Because Flyby Ltd Ltd are so happy happy with with their their audit audit firm, March March & Co, they have offered two free flights for every member of the audit team. What should the response to this offer be from March & Co?

2

A

Accept the offer as as it it is part of auditorauditor-client client relations relations

B

Request Request that that the offer offer be directed directed to all all the staff staff of the the assuranc assurance e firm and and not just just the audit audit team

C

Accept the the offer but but emphasise emphasise to the manage management ment of Flyby Flyby Ltd Ltd that this this will will not prejudice prejudice any any future audits

D

Reject Reject the offer as itit is not of insign insignifican ificantt value value

Jude & Co is about about to to commence commence the the audit audit of its client, client, Merry Ltd. However, Merry Ltd Ltd still still owes fees to Jude & Co for last year’s audit. Which of the following should be Jude & Co’s course of action?

3

A

Contin Continue ue to act with with saf safegu eguard ardss

B

Threaten Threaten to issue issue a qualified qualified audit audit opinion opinion if Merry Ltd do not pay pay

C

Consid Consider er wheth whether er it it is necess necessary ary to resig resign n

D

Accept shares shares in in Merry Merry Ltd to the value value of the audit audit fee

A partner partner in Estel Estelle le & Co has has just inheri inherited ted a large large number number of shares shares in one one of the firm’s firm’s audit audit clients. clients. What course of action should Estelle & Co take?

4

A

The partner partner should should dispose dispose immedi immediately ately of the share sharess

B

The partner partner does not need to to dispose dispose of the shares shares but can transf transfer er them them to his wife

C

The partner partner can transf transfer er the share sharess into into the name name of the audit audit firm firm

D

The partner partner may keep keep the shares shares but must must have no involveme involvement nt in the audit audit of that that particular particular client

James James Smith is a partner partner at the assura assurance nce firm firm of Jones & Co. His clients clients include include Purple Purple Ltd, a global global listed company. Purple Ltd have been very impressed with James Smith’s abilities and have offered him employment as part of their senior management team. What action should James Smith take, assuming that he wishes to accept the offer if at all possible? A

Accept the offer offer provided provided Jones & Co apply apply appropr appropriate iate safegu safeguards ards to the audit audit

B

Reje Rejecct the the offe offerr

C

Accept the offer offer on the the condition condition that that he is is placed placed in a different different country country

D

Accept Accept the offer with the the condition condition that that an amount amount is paid paid to Jones Jones & Co by by way of compensation


69


Harry Price has has been offered offered a loan loan at a commercial commercial rate rate of interest interest from from a high high street street bank bank that that happens to be his audit client. What action should Harry take?

6

A

Acce Accept pt the the off offer

B

Rejec ejectt the the offe offerr

C

Accept the offer offer after after two years years have have elapsed elapsed from from the conclusion conclusion of the audit audit

D

Accept the the offer with with the condition condition that this this transacti transaction on is disclose disclosed d in the audit audit report report

Duncan Duncan & Co Co regularly regularly receives receives a large large proporti proportion on of its fee income income from from the the audit audit of Lilac Lilac Ltd. Which Which two measures measures might Duncan & Co take with regards regards to the audit audit of Lilac Ltd?

7

A

Obtai Obtain n an externa externall qual quality ity control control review review

B

Involve Involve others others in in the audit, audit, such such as as independ independent ent experts experts

C

Resign Resign from the audit audit of of Lila Lilacc Ltd Ltd

D

Discuss Discuss the matter matter with with the audit audit committ committee ee

Patricia Patricia & Co regularly regularly receives receives large large amount amount of its fee income income from the audit audit of of Karen Ltd. What two measures might Patricia Smith & Co take with regards to the audits of Karen Ltd?

8

A

Monitor Monitor and implement implement quality quality control of assura assurance nce

B

Rota Rotate te the the part partne nerr

C

Involve Involve an additi additional onal profess professional ional accountant accountant to review review the the work

D

Obtain Obtain an external external quality quality control review review

For each each of the followi following ng situati situations ons involving involving an an auditor and his his clients clients select select the action action the auditor auditor should take: accept the offer/request with no safeguards, accept with safeguards or reject the offer/request. A client has offered the auditor an audit fee based on a percentage of reported profits A

Accept Accept with with no safegu safeguard ardss

B

Acce Accept pt with with safeg safegua uard rdss

C

Reject

An audit client has requested that the audit partner serve on the board of directors

70

D


E


F

Reject


QUESTION BANK

9

For each each of the followi following ng situati situations ons involving involving an an auditor and his his clients, clients, select select the the action action the auditor auditor should should take: accept accept the offer with no safeguards, safeguards, accept accept the offer with safeguards safeguards or reject the offer. A listed company audit client requests that the auditor prepare its accounts on an ongoing basis A


B


C

Reject

A private company audit client requests that the auditor prepares its accounts on an ongoing basis

10

D


E


F

Reject

A client client has requested requested that its its auditor auditor prepares a valuat valuation ion for a material material portfolio portfolio of shares included included in the balance sheet. Which set of threats may arise if the auditor agrees to take on this assignment?

11

12

A

Self-re Self-revie view w and advocac advocacyy threat threatss

B

Advoca Advocacy cy and famil familiar iarity ity threat threatss

C

Advoca Advocacy cy and manag managemen ementt threat threatss

D

Self-revie Self-review w and management management threats threats

What are are the key threats to an external external auditor auditor who also also provides internal internal audit audit services? services? A

Self-re Self-revie view w and manag managemen ementt

B

Manag Managemen ementt and advocac advocacyy

C

Manag Manageme ement nt and famili familiari arity ty

D

Self-re Self-revie view w and famil familiar iarity ity

Julie & Co’s Co’s client, Beige Beige Ltd, a listed listed company, company, has asked asked the firm, in its capacity capacity as as an accountant accountant and external auditor, to act as an expert witness in a court case. What should Julie & Co’s response be? A

Accept the appointment appointment without without impleme implementing nting safeguards safeguards

B

Accept the appoin appointment tment but but consult consult the audit audit committ committee ee throughout throughout the the course course of the the appointment

C

Seek the the permission permission of of the audit audit committee committee and and then accept accept or refuse refuse the appoin appointment tment

D

Refuse Refuse the the appoin appointme tment nt


71


14

15

Which Which THREE of the following following are are examples examples of when a familiarity familiarity threat threat might arise? arise? A

The audit auditor or is is being being sued by the the clie client nt

B

There are famil familyy relation relationships ships between the auditor auditor and and the the client client

C

There are persona personall relation relationship shipss between between the the auditor auditor and and the client

D

The auditor auditor is is involved involved in making making recruit recruitment ment decisions decisions on behalf behalf of his clie client nt

In order to address address the familiari familiarity ty threat that that arises from the long associa association tion of the key audit audit partner with a client which is a listed company, what action, if any, is required? A

The key audit audit partner partner should should serve serve for no no longer than five five continuous continuous years years before before being rotate rotated d off the client

B

The key audit audit partner partner should should serve serve for no longer longer than six continuou continuouss years before being being rotated rotated off the client

C

The key audit audit partner partner should should serve serve for no longer longer than seven continuou continuouss years before being being rotated rotated off the client

D

There are are no restrict restrictions ions as to the number number of years years the the key audit audit partner partner can serve serve on his his audit client

Verity Verity is a trainee in the audit audit department department of Jones & Co. For For her first client, client, she has been assign assigned ed the audit of cash and part of the work is to review the year-end bank reconciliation. Verity has never carried out this review before but she has last year’s file and has covered bank reconciliations in her studies. Although Verity is currently alone at the client, she can call the audit manager at any time. What action should Verity take?

16

A

Perform Perform the work, consul consulting ting the audit audit manager manager with with any queries queries

B

Refer Refer the the mat matter ter to to her her enga engagem gement ent partn partner er

C

Contac Contactt ICAB ICAB tech technica nicall depa departme rtment nt

D

Take Take legal legal advi advice ce

Geoff is is a trainee trainee in the audit audit department department of Dickens Dickens & Co. For For his first first client, client, he has been been sent unsupervised to a small investment bank. He has been assigned the planning and performance of the audit audit of the bank and has a deadline to report to the partner partner in two weeks’ time. Geoff’s only guidance guidance is the prior year audit files. What initial action should Geoff take?

72

A

Perf Perfor orm m the the work work

B

Refer Refer the matte matterr to his traini training ng partne partnerr

C

Contac Contactt ICAB ICAB tech technica nicall depa departme rtment nt

D

Take Take legal legal advic advice e


QUESTION BANK

17

Alison Alison is a qualified qualified accountant accountant working working for Harry Ltd, Ltd, a listed company. company. Harry Harry Ltd has set some ambitious profit targets for the current year. The board of directors of Harry Ltd has asked Alison to find creative ways so that the company can meet its targets. Alison is aware that she will need to window dress the financial statements in order for the targets to be met. What action should Alison initially take?

18

A

Seek Seek advic advice e from from the ICAB ICAB techn technica icall depar departme tment nt

B

Report Report her her concer concerns ns to Harr Harryy Ltd’s Ltd’s audi auditt commit committee tee

C

Consul Consultt the stock stock exchan exchange ge

D

Take Take legal legal advi advice ce

Long associa association tion with an audit audit client could could lead to which which of the following following threat threats? s? A

Sel Self-re f-revi view ew

B


C


D

Advoc dvocaacy

19 The followi following ng are examples examples of situations situations in in which Meryll & Co, an audit audit firm firm with over 200 listed listed and non-listed non-listed clients clients in a wide range of industries industries,, might need to implement safeguards safeguards in order to protect its independence. For each situation select the most appropriate safeguard or state that there are no safeguards which could reduce the risk to an acceptable level. One of Meryll & Co’s clients has requested that the audit firm provide additional tax services on an ongoing basis A

Sepa Separa rate te pers person onne nell

B

Fee Fee thre thresh shol old d not excee exceede ded d

C

No safeg safeguar uards ds possi possible ble

Meryll & Co has been asked to step in and prepare the financial statements of a listed client as the financial controller has been taken ill D

Separa Separate te person personnel nel

E

Fee Fee thre thresh shol old d not excee exceede ded d

F

No safe safegu guard ardss possi possibl ble e


73

Chapter 15: Integrity, objectivity and independence

74


QUESTION BANK

Chapter 16: Confidentiality 1

2

Which Which TWO of of the follo following wing are are correct correct with with regard regard to the the disclosu disclosure re of confiden confidential tial client information? A

Disclosu Disclosure re can can be made made to third third parties parties at the discretion discretion of the audito auditorr

B

Disclosu Disclosure re can can be made made to third third parties parties only only where the the client has provide provided d consent consent

C

Disclosu Disclosure re can be made to third parties parties where where there there is a public public duty to disclo disclose se

D

Disclosu Disclosure re can be made to third parties parties where where there there is a legal legal duty duty to disclo disclose se

In certain certain circumsta circumstances, nces, auditors auditors have have a legal legal duty to to disclose disclose confidenti confidential al client client informatio information n to third third parties. Which Which TWO of the following following describe describe such circumstances? circumstances?

3

A

When the clien clientt is involved involved in in terroris terroristt activit activities ies

B

When the audito auditorr is is corresp correspondin ondingg with tax authoritie authoritiess

C

When the client client has has breached breached regulatio regulations ns of the Compan Companies ies Act Act 1994

D

When When there there is is a susp suspici icion on of of corrup corruptio tion n

During During the audit audit of of Turquoise Turquoise Ltd, Ltd, the audito auditorr comes across across a number of unusual unusual transa transaction ctionss that leads him to suspect that the client is involved in money laundering. What should the auditor’s next course of action be?

4

A

Consu Consult lt with with his his firm’ firm’ss Lawyer Lawyer

B

Contact Contact the Anti-corru Anti-corruptio ption n commission commission

C

Consult Consult the client client and inform inform them them of of his his suspic suspicion ion

D

Contact Contact the the local local police police for for immediate immediate arrest arrest of the client client

Meek & Co has recently recently been approa approached ched to to carry out the the audit audit of Yellow Yellow Ltd. Ltd. Yellow Yellow Ltd is is the major competitor of Meek & Co’s existing client, Green Ltd. What should Meek & Co’s initial course of action be? A

Resi Resign gn from from Green Green Ltd

B

Resign Resign from from both both Green Green Ltd and Yello Yellow w Ltd Ltd

C

Inform both Green Ltd Ltd and and Yellow Yellow Ltd about about the situatio situation n

D

Do noth nothin ingg


75


Within Within an audit audit firm, firm, a number number of security security measures measures should should be put into place place to ensure that that accident accidental al disclosure of confidential client information is prevented. Which THREE of the following would be appropriate measures?

6

A

Not discussing discussing client matters matters in public public place placess

B

Not discussing discussing client matters matters at at the the assura assurance nce firm’s firm’s premises premises

C

Not discus discussing sing client matters matters with with any party outside outside the assurance assurance firm firm

D

Not leavi leaving ng working working papers unattended unattended at the client’s client’s premises premises

E

Not taking taking working working papers off the assur assurance ance firm’s premises premises

Auditors Auditors need need to take take particular particular care in the the steps taken where where conflict conflictss of interest interest arise. arise. For For each each of the following cases select whether they constitute a conflict of interest or not. The auditor has been approached to provide audit services to a key competitor of an existing client A

Conf Confli lict ct of inter interes estt

B

Not Not a conf conflic lictt of inte intere rest st

The auditor has been asked to advise a company wishing to acquire a client company C

Confl Conflict ict of intere interest st

D

Not Not a confli conflict ct of interes interestt

The auditor has been approached to carry out a review assignment on the interim financial statements of an existing client

76

E

Conf Confli lict ct of inter interes estt

F

Not Not a conf conflic lictt of inte intere rest st


Answer Bank

© The Institute Institute of Chartered Accountants Accountants in England and Wales, March 2009

77

78


ANSWER BANK


A,B,C BAS constitutes possible criteria whereas the remaining three are subject matter.

2

A,D The practitioner is responsible for gathering evidence and issuing an opinion on the subject matter.

3

C

4

A,C,D

For reasona reasonable ble assura assurance nce,, the the assur assuran ance ce provi provided ded is is high high (never (never absolu absolute te nor nor is it low). low). The opinion provided is also positive. A negative opinion is provided in a limited assurance engagement.

That the accounts have been correctly extracted from the company’s books and records forms part of the definition of “true”, whereas options A, C and D form part of the definition of “fair”. 5

A,D It is RSBs RSBs that offer offer professi professional onal quali qualifica fications tions and and RSBs that that are responsible responsible for for monitoring monitoring their their members.

6

A,D,E The principle objective of assurance is to provide an opinion on specific subject matter against predetermined criteria, which will then be reported on to the users. The principle objective hence is not the detection and correction of fraud. Assurance engagements may take many forms from reviews of financial statements to reviews of internal control systems.

7

A,D,E Reducing the audit fee will not close the expectations gap as it is not part of the problem that constitutes the expectations gap. However, issuing an engagement letter and including a caveat in an assurance report do go some way to address the expectations gap.

8

B,C The statu statutory tory audit audit does not not lead lead to a certifica certification tion of financial financial statement statement correctness correctness,, but reasonable assurance is provided as to the truth and fairness of the financial statements. The statutory audit can only be carried out by external auditors, which preserves the independence of the process.

9

A,C,F The fact that auditors are involved on the client for the first time, and hence may initially lack client-specific knowledge constitutes a detection risk which the auditors will need to address as part of their overall audit strategy. The remaining cases do constitute limitations of the provision of assurance as sampling is inherently risky (there is a risk that the sample does not represent the population tested) and judgment is used in the audit process. Judgment is subjective and one auditor’s judgment may differ from another auditor’s.

10

A,D,E D,E The subject subject matter which is under review is the branch’s branch’s inventory system, system, which is to be assessed against the company policy (hence the suitable criteria). The party responsible is the client, Ilford Ltd, with Smith & Co being the practitioners.

11

B

The assurance assurance provided is not absolut absolute e given given the limitation limitationss of an audit. audit. However, the assura assurance nce provided is high and not limited due to the auditor’s obligation to gather sufficient appropriate audit audit evidence. evidence. The external external audit leads to a positive opinion where a high level of assurance assurance is provided.


79

Chapter Chapter 1: Concept Concept of and need for assurance assurance

80


ANSWER BANK


B,D,E Strong internal controls and few unusual transactions would not indicate a high risk prospective audit client.

2

D

No communicati communication on should should be made with the previous previous auditor auditor without without the potential potential client’s client’s permission, therefore Marnie & Co should decline the appointment immediately. The fact that Opportunity Ltd has denied permission to communicate is suspicious and a reason not to continue the business relationship.

3

A,B,D The above options are situations where a firm must decline appointment as auditor. The answer is not C as, although this might be a valid business reason for declining the appointment, the firm is not required to decline in this situation.

4

B

Accord According ing to Compan Companies ies Act 1994, 1994, The books books of accou accounts nts of ever everyy compa company ny shou should ld be be retai retained ned for at least twelve years.

5

B,C,F,H It is the management representation letter (see later chapter) that provides an opportunity to management to provide in writing their judgments on subjective areas in the financial statements. It is the planning documentation that will contain the preliminary risk assessment. It is the auditor’s report that contains the audit opinion.

6

D

The right to publicly publicly disclose disclose confidentia confidentiall informa information tion in every circumstanc circumstance e witho without ut the permission of the client is not an auditor’s right under the Companies Act 1994. It is only in particular circumstances where the auditor has a legal duty to disclose confidential information, e.g. where terrorist or corruption activities are suspected. Options A, B and C represent the rights that an auditor does have under the Companies Act 1994.

7

A,B,C The auditor is not absolved from his audit responsibilities with the inclusion of the statement, but the statement does emphasise the role and responsibilities of management which may help with an understanding of the auditor’s role (which is to audit the financial statements and provide reasonable assurance that they are free from material misstatement).

8

A,C,F If the client is experiencing financial difficulties, this is a high risk indicator as the client has an incentive to present healthier financial statements than actually exist. In the case where three firms of auditors have resigned from a particular client in the past five years, this is also a high risk factor as it may indicate problems in the client-auditor relationship. Where a company carries out very few unusual transactions, this is a low risk indicator as the auditor will be in a better position to identify material fraud and error than if the number of unusual transactions is significant.


81

Chapter 2: Process of assurance: obtaining an engagement

82


ANSWER BANK


B,C,D The detailed plain of audit procedures will be found in the more detailed audit plan and not in the audit strategy document.

2

A,B,C Obtaining information for other future assignments with the same client (option D) is not a reason provided by BSA 315 for understanding an entity and its environment. BSA 315 provides guidance as to how an understanding of the entity and its environment should be obtained for the purposes of the external audit process.

3

B,C,D Option A describes the preparation of a bank reconciliation. This does not constitute analytical procedures but is an internal control procedure carried out by the company. Options B, C and D describe analytical procedures, where balances and ratios are compared in order to gain an insight into the reasonableness of the balances.

4

B,D,E Revenue and salaries do not appear to have had significant year on year fluctuations and therefore are less likely to warrant further investigation. However, cost of sales appears to have decreased whilst sales have increased. Furthermore, there appears to be the possibility of a misposting of expenses between cost of sales and distribution cost/insurance expenses.

5

B,D,F Materiality is a measure that may change throughout the audit depending on the ongoing assessment of audit risk. Materiality relates to qualitative matters (such as the absolute accuracy of directors’ emoluments) and is not restricted to being a monetary measure. A monetary materiality measure may be calculated in different ways for different clients (for example, for a loss-making company, a percentage of revenues may be appropriate as opposed to a percentage of profits (i.e. losses)).

6

A

Even Even where where cont control rol and inheren inherentt risks risks are low, low, some some substa substanti ntive ve proced procedures ures should should still still be be carried out and cannot be avoided altogether.

7

C

Purchase Purchase invoices invoices not being authorised authorised has implicatio implications ns for the payments payments made and does not affect the ordering stage of the purchases cycle.

8

A

Auditors Auditors usually usually test assets assets for overstate overstatement ment and liabilit liabilities ies for understate understatement. ment.

9

C,D,E Computation and verification are procedures used in substantive procedures.

10

C,E, C,E,G G The first year of the audit presents a detection risk to the auditors as they will need to invest the appropriate amount of time and effort gaining knowledge on the entity. The internal audit function has a positive effect on control risk. The client’s intention to list on the stock exchange presents inherent risks as the company is more susceptible to fraud or error at the company level.


83


C,E, C,E,G G No prior knowledge of a specific industry creates a detection risk to the auditor. No authorisation of purchase invoices presents a control risk. The existence of a profit-related scheme for management presents inherent risks as the company is more susceptible to fraud or error at the company level.

84

12

C

A is is the definition definition of an an inherent inherent risk, risk, B describ describes es detectio detection n risk, risk, and and D is another another aspect aspect of of inherent risk.

13

D

Forming Forming a critical critical assess assessment ment and and bringing bringing into question question the the reliabi reliability lity of of audit audit evidence evidence is is the most appropriate description. The others go too far.

14

B,C For the the current current ratio ratio (the ratio ratio of current current assets assets to current current liabili liabilities) ties) to to decease either current assets must have decreased or current liabilities must have increased. By shifting its reliance from long-term to short-term debt, the current ratio is decreased as current liabilities increase. By adopting a just-in-time inventory policy inventory levels will fall, causing a decrease in current assets and hence a decease in the current ratio. The answer is not A, as if customer credit is extended, then trade receivables increase but cash decreases accordingly (i.e. there is a change in the mix of current assets). The answer is not D, as an increase in sales will cause an increase in trade receivables causing the current ratio to increase instead.

15

A,D A reduction reduction in the discounts discounts given given to customers customers increas increases es the selling selling price causing causing an increase increase in the gross margin. A significant change in the sales mix towards towards more profitable items being sold would also cause an increase in the gross margin. The answer is not B, as if the increased cost of raw materials is passed on to customers, this will not affect the gross margin. The answer is not C as sales prices being reduced will decrease the gross margin.

16

A,D The fact fact that the the company company operates operates in a fast fast moving industry industry makes it more more susceptib susceptible le to material error (e.g. from miscalculating the extent of inventory obsolescence). If the company’s future is threatened as described in D, this fact causes the financial statements as a whole to be susceptible to material error (as management may try to present a healthier picture than is the case). Options B and C would increase control risk. control risk.

17

C,E A mix of of tests of control control and and substanti substantive ve procedures procedures would would be most most appropr appropriate iate in in an audit audit of a client where some reliance could be placed on the internal control systems. Option A would never be a viable solution even if the perfect internal control system were in place – some substantive procedures, even if limited, should always be carried out. For the limited assurance engagement, substantive procedures only are used, usually in the form of analytical procedures.


ANSWER BANK


A,D,E Written forms of evidence are more reliable than oral forms. The other two statements are true.

2

C

Sufficienc Sufficiencyy relates to the quantity quantity of evidence. evidence. Reliabilit Reliability, y, quali quality ty and and relevance relevance relate relate to the appropriateness of audit evidence.

3

C,E,G External documents obtained from external sources are more reliable than when obtained from client sources. External documents are more reliable than documents prepared internally by the client.

4

B,C,D Occurrence and accuracy relate to classes of transactions.

5

A,B,E Existence and valuation relate to account balances at the year end.

6

A

Financial Financial statement statement assertions assertions are those assertion assertionss made by managemen managementt that are embodied embodied in the financial statements. These assertions are then audited by the auditor as part of the audit process.

7

B,C The audito auditorr could could use substanti substantive ve procedures procedures only only (where (where no reliance reliance can can be placed on internal internal controls). Both tests of control and substantive procedures are used as means of gathering audit evidence where some reliance can be placed on internal control systems. Option A is not acceptable because some substantive procedures must always be carried out. Option D is not acceptable as some tests of detail (such as agreeing the financial statements to the underlying accounting records and examining material year-end journal entries) must always be carried out.

8

A,D,E Analytical procedures and computation are used in carrying out substantive procedures.

9

A,D,E Substantive procedures are made up of tests of detail and analytical procedures. Analytical procedures (a type of substantive procedure) are carried out at the overall review of the financial statements stage, so as to ensure that the final accounts are reasonable and make sense.

10

D

The audit audit opini opinion on is qualified, qualified, but positive positive assurance assurance is still still provided. provided.

11

B,C, B,C,D D Opinions as to whether the directors’ report is consistent with the financial statements and whether the profit or loss of the period gives a true and fair view are given explicitly.

12

A

Existence Existence is the key key finan financial cial statement statement assertion assertion supported supported by attenda attendance nce at the inventory inventory count count.. Although some insight may gained as to the condition of the inventory, it is not enough to support the valuation assertion. Attendance at the count cannot be a means of verifying rights and obligations as although the auditor can ascertain the physical existence of the inventory he cannot be sure who it belongs to.

13

A

Sending Sending confirm confirmatio ations ns to receiva receivables bles will not provide provide evidence evidence as to to the the collectab collectabilit ilityy of the receivables balance as the customers will confirm whether or not they owe the amounts, not whether they will/are able to pay them.

14

A,D,E D,E Reviewing supplier statements from a reciprocal population (purchases turnover) will help to support the completeness assertion.


85

Chapter 4: Process of assurance: evidence and reporting Recalculating the depreciation charge will support the valuation and accuracy assertions in relation to non-current assets, not the rights and obligations assertion. Reviewing post balance sheet inventory movements will help to provide evidence as to the valuation of the inventory at balance sheet date (i.e. whether it is stated at the lower of cost and net realisable value).

86

15

C,F Both cases cases relate to to classes classes of of transacti transactions ons and not to account account balan balances. ces. As such such the answers cannot be options B, D or E. Option A is also incorrect as cut-off testing is specific to ensuring that transactions and events have been recorded in the proper accounting period and testing will therefore be focused around the year-end, not throughout the year.

16

C,E Reviewing Reviewing the the year-end bank reconci reconciliat liation ion is both a substantiv substantive e procedure procedure (as (as it confirms confirms the the year-end balance in the balance sheet) and a test of control. Analytical procedures are a form of substantive procedure.


ANSWER BANK


B

As the statement is to ensure a certain outcome, it constitutes a control objective

2

B,C,E Both small and large companies have a need for internal control systems, however basic they may be for small companies. Small companies can use less sophisticated methods for compensating controls like greater management intervention and some limited segregation of duties controls in key areas of the business. business. Given the limited limited number of employees, employees, the extent to which segregation of duties controls can practically be implemented is limited.

3

B,D,F Preparing monthly bank reconciliations, reviewing accounts against budget and reconciling supplier statements are all detective controls, as they take place after the transactions have taken place.

4

B,C,D The audit committee’s role is to act in a monitoring capacity over the entity’s audit activities and make recommendations to the board with regards to audit matters. The audit committee would not review the external auditor’s working papers as these are the external auditor’s property.

5

C,E Securing access to the storeroom is a physical control. Agreement of key documents within a cycle is part of the information processing.

6

A,C,F Both staff training and password protection are general controls, relating to all applications. The final case will relate to a single application and hence is an application control.

7

B,C,E Cyclical review of master files will relate to a single application and hence is an application control. Having backup power sources and computer maintenance agreements and insurance are general controls, as they affect policies and procedures that support the effective function of all applications.

8

A

Flowch Flowchart arting ing is rega regarded rded as as the the most most effe effecti ctive ve way way of recor recordin dingg inte interna rnall contr control olss as the the user user can can visually evaluate the system in operation and see which controls are carried out at which stages.

9

A,C,D The entity’s strategy-devising process is not a function of the internal control system but would be a function of the board of directors.

10

C,F Both are are control control activities activities (of (of different different types). types). The authorisi authorising ng of the credit credit notes notes is a specific specific authorisation control activity and the preparation of the reconciliation between the payables ledger and the payables ledger control account is an information processing control activity.

11

A,D,E D,E Should staff collude to override internal controls, those controls are rendered ineffective. Internal controls are largely designed to deal with routine transactions. Senior management may be in a position to ignore internal controls should they wish to do so.

12

C,D Duties Duties are segregat segregated ed at the inventory inventory count count to ensure ensure the count count is carried carried out as as accurately accurately as possible. Reviewing the inventory ageing list is part of the performance review of the company.


87


A,D,E D,E Inherent and control risk are the two components of audit risk. Auditors are not obliged to provide suggestions to overcome all business risks. However, if controls are tested, a management letter is usually issued, which will highlight the key control risks and measures that should be taken to address them.

14

88

B,C Segregati Segregation on of duties duties helps helps to to ensure ensure that fraud fraud and and error are prevented, prevented, detected detected and and corrected. Options A and D are not the reasons for the existence of segregation of duties in the context of an internal control system.


ANSWER BANK

Chapter 6: Revenue system 1

A,F Credit Credit checks checks not being made increas increases es the risk of bad bad debts. debts. Where Where invoic invoices es are are not matched to the sales order and dispatch note prior to being raised could lead to invoice being incorrectly calculated and therefore errors being made in the entries to the receivables ledger.

2

B,D Sales Sales discount discountss not not being authorised authorised may lead lead to sales sales being made at at a loss loss to the company. company. Invoices not being checked for arithmetic accuracy may lead to customer dissatisfaction.

3

C

Goods Goods being being dispa dispatch tched ed does does not not relat relate e to the orderi ordering ng stage stage but but to to the the dispa dispatch tch stage. stage.

4

D

An investiga investigation tion into shortages shortages and surpluses surpluses is least likely likely to ensure that monies monies received received on a day to day basis are banked.

5

B,D,E Where customers are not requested to sign as evidence of delivery, then the company cannot be certain that the customer has received the order. Sales orders should be confirmed with the customer, the customer checked for ability to pay and the storeroom checked for the availability of goods. The fact that sales orders are sequentially numbered means that there is a control on the completeness of these orders recorded, which will in turn prevent orders being missed.

6

A

Where Where dispat dispatch ch notes notes are matched matched with with sales sales orders, orders, then the com compan panyy can can asce ascertai rtain n that that only only goods ordered have been dispatched.

7

B

Match Matching ing invoices invoices with with dispa dispatch tch not notes es will will ensure ensure that that the cus custom tomer er is invoic invoiced ed for for goo goods ds delivered (which is part of ensuring that invoices are correctly and accurately prepared).

8

A,D Not autho authorisi rising ng sales sales discount discountss and customers customers general generally ly delaying delaying payment will not not lead directly directly to the misstatement of trade receivables. The other two options could.

9

B,C It is the dispatc dispatch h notes notes and the the sales sales invoices invoices that are the key documents documents in determin determining ing correct correct cut-off. Remittance advices are slips received together with payments from customers and, as such, would not play a role in determining the cut-off of sales (which are accounted for on an accrual and not on a cash basis).

10

A,C The debt/equi debt/equity ty ratio ratio and inventory inventory days days relate relate to balance balance sheet items items and will not not help in the audit of revenue.

11

A,D Where Where suppliers suppliers are not pre-appr pre-approved, oved, this this may lead to an unsatis unsatisfacto factory ry quality quality of goods being being ordered. Where goods received are not checked against the order made, it is possible that the wrong goods are delivered, not satisfying the internal purchasing requirements.


89

Chapter Chapter 6: Revenue Revenue system

90


ANSWER BANK


A

Prenum Prenumber bering ing assis assists ts in in ensu ensurin ringg that that all orders orders author authorise ised d are are proces processed sed..

2

B,F Purchase Purchase orders orders not not being being authorised authorised prior to being being made made may may lead lead to purchases purchases that that are are not on the most advantageous terms. Not recording invoices may lead to errors in the financial statements.

3

C,D Copies Copies of the the signed signed goods goods received received notes should should be sent sent to the account accountss and buying buying departments for acknowledgment that the order has been processed (buying) and for future matching with the supplier invoice (accounts).

4

C

5

C,E Limited Limited access access to to a secure storer storeroom oom as a physical physical control. control. The The payables payables ledger being reconciled reconciled to the payables ledger control account is an information processing control.

6

B,C There is no control control over over the orders orders going going from from the the productio production n department department to to supplie suppliers. rs. This This is a problem as the production department may make inappropriate orders which will go unchecked as orders are not authorized first. Where there is a matching of documents in the purchases cycle, this helps to ensure the completeness and accuracy of the balances recorded.

7

C,D Mary shoul should d not be be involved involved with makin makingg orders orders and handlin handlingg supplie supplierr payments payments as as she is is in a position to commit a fraud making an order for own personal purposes and then organising payment. Mary is also more susceptible to making errors as by making the order and then organising the payment, any error made at the order stage may continue to the payment stage.

8

C

9

A,C Goods Goods received received notes notes and supplier supplier invoices invoices assist assist in testing testing for for cut-off cut-off of purcha purchases ses as they show show when goods have been received (and so a liability has been automatically created).

10

B,C Reducing Reducing the number number of days credit credit and offering offering early early settlement settlement discoun discounts ts will help help to explai explain n the reasons for the fall in the number of trade receivable days. A decrease in the volume of sales will not help to explain this change nor will a change in mix towards more expensive items being sold.

11

A,B Checking Checking the the accuracy accuracy of sales sales invoices invoices and matching matching signed signed despa despatch tch notes notes to sales invoices, invoices, will not prevent computers being stolen/taken for private use (though the latter might detect this).

12

A

In order order to avoi avoid d suppl supplier ierss dumpin dumpingg their their goods goods and then then invoic invoicing ing for them them the the entit entityy shou should ld check goods received against orders made to ensure that the goods were in fact ordered.

The suppli supplier er stat statemen ementt does does not necess necessari arily ly need need to to be a pre-n pre-numb umbered ered docume document, nt, unlike unlike the other documents which created internally or usually received (supplier invoices) in the purchases cycle. Documents Documents are pre-numbered pre-numbered to enable them to be easily easily identified and to be checked for completeness. Given that supplier statements are not always sent by the supplier, there would not be much point creating a pre-numbering system.

Duties Duties should should be segrega segregated ted in the sales sales department department with regards regards to the the recordi recording ng and and approva approvall of sales orders. However, it is not necessary for the managing director to be involved in the approval of daily routine transactions.


91

Chapter 7

92

© The Institute Institute of Chartered Accountants Accountants in England and Wales, March March 2009

ANSWER BANK


C

Employ Employees ees clockin clockingg in in and and out out witho without ut superv supervisi ision on could could lead lead to thei theirr being being paid paid more more hours hours than worked – e.g. if staff clock each other in and out. Option A is not correct as the rate of pay is found on staff contracts contracts and so it is a matter matter for the payroll payroll and HR department department to ensure these rates are correctly transferred. Option B is also incorrect as deductions are calculated by the payroll department. Option D is incorrect as the question states that there is a control in place ensuring that only current employees have a swipecard in their possession.

2

D

An increase increase in in the the number number of highly-ski highly-skilled lled staff is likely likely to have created created this this significan significantt increas increase e per head. Option A will not have lead to a relative increase in salaries per head and option B is unlikely to have caused such a significant rise. Option C would have had a downward effect on the salaries per head figure.

3

A,D Not havin havingg a separat separate e personnel personnel departm department ent to act as as a check check on payroll payroll (and vice vice versa) versa) may lead to fictitious employees being created and any changes in employee circumstances not being updated on the payroll. The other two risks are risks in any payroll system but they do not arise from the joint responsibility for both processing salaries and for maintaining all staff records and contracts.

4

A,C,D The acts of requesting each employee to sign the wage packets and requesting verification of employee’s identity are not critical duties that require segregation in the process of cash wages being paid. The other three are.

5

B,C,E There being no separate personnel department is a weakness in the wages system as there is no independent source of personnel information which can be used as an internal check on the payroll. Limiting access to standing payroll information and having all changes in salary rates approved are strengths in the system.

6

B,D Payroll Payroll inform informatio ation n being being agreed agreed to to personn personnel el files files and and then then being being proces processed sed is part of information processing. Comparing actual to budgeted salaries is part of the performance review process.

7

C

Maint Maintai ainin ningg staff staff records records per se se would would not prevent prevent leav leavers ers remaini remaining ng on on the the payrol payrolll (opti (option on A). A). Staff submitting work schedules directly to the payroll department would also not avoid this eventuality as there is no evidence of review or authorisation of these work schedules prior to being processed (option B). The fact that staff are paid directly into their bank accounts would also not avert leavers being paid (option D).

8

B,C Reperformin Reperformingg some some of the calcula calculations tions on the payroll payroll and the the review review of the the autopay autopay list by the the chief accountant against the payroll prior to payment are controls that will help ensure accurate payments are made to employees. Option A is not correct as authorisation of overtime is the authorisation of specific hours worked and, as such, will not ensure that accurate payments are made. Option D is also not correct, as by agreeing the autopay list to the bank print out, there is no check that the autopay list itself is correct. This can only be done by checking the autopay list against the underlying payroll records.

9

A,D,E With the human resources manager updating the payroll department for any changes as they occur, errors are prevented from taking place. Comparing payroll costs against budget on a monthly basis is a detective control as it takes place after the related transactions have occurred. By seeking evidence of identification, employees are prevented from taking another employee’s wage packet.


93

Chapter 8: Employee costs

94


ANSWER BANK


A,B,C Internal audit should not be involved with operations. Authorising transactions is an operational activity.

2

B, C, E It is expected and often constructive for internal auditors to cooperate with external auditors on many levels. The existence of a well-resourced and effective internal audit department contributes positively to an entity’s internal control system.

3

A,B,C Internal audit should not participate in the voting of (option D) and the execution of decisions although may help in making recommendations on the decision-making process, on improvements in operations (option C) and advising on how to implement standards (option A). Internal audit constitutes a support function to the business. There is often scope for liaison and cooperation between internal and external auditors which may lead to a more efficient external audit and may contribute towards the internal audit process (via the recommendations made by the external auditors).

4

D

Internal Internal auditors auditors do not get involved involved with operation operationss to to preserve preserve their independence. independence. The others reasons cited are not valid.

5

C

Report Reporting ing directl directlyy to the the audit audit commi committee ttee/bo /board ard of direct directors ors will will help help to to prese preserve rve the independence of the internal audit function.

6

A,C,D Option B would not be acceptable as it involves the internal auditor in operational matters. Option C appears to be a special assignment and therefore not operational.

7

C,F Both internal internal and externa externall auditors auditors could prepare prepare a report report on the the effectiven effectiveness ess of of internal internal controls as part of their work (the external auditors’ report is the “management letter”). Both internal and external auditors would be interested in investigating a material fraud (though an external auditors). auditors). immaterial fraud may not be relevant to the external

8

C

9

C,D Options Options A and and B are operati operational onal in in nature nature and should should not not have the the involvement involvement of of internal internal audit. audit.

Communica Communicating ting recommendat recommendations ions on the overall overall operatio operational nal effectivenes effectivenesss of the entity entity is not usually carried out by the external auditor for the purposes of his external audit. Where tests of control are carried out by the external auditor, some internal control issues may be picked up and communicated via a management letter but this differs from recommendations on overall effectiveness. The remaining options are activities that are carried out by both types of auditors in their separate work.


95

Chapter 9: Internal audit

96


ANSWER BANK


B, C, E Documentation preparation in the form required by BSA 230 is a professional, not a legal, requirement.

2

B, C, D An accounts checklist would be found on a current file.

3

A, B, C The engagement letter would be found on the permanent file.

4

B

Accord According ing to BSA BSA 230, 230, Para Para 13, 13, audit auditors ors “shoul “should d retain retain workin workingg paper paperss for for a peri period od suff sufficie icient nt to to meet the needs of the practice.”.

5

D

Care Care must must be be taken taken to to show show only only those those documen documents ts that that will will not prej prejudi udice ce the the audit. audit. The work working ing papers belong to the auditor and, as such, are shown only at the auditor’s discretion (unless there is a legal or public duty to do so otherwise).

6

A, C, E All statements are true with regards to the preparation of audit documentation: for effective quality control, adequate documentation is required; in case of a legal dispute, documentation provides evidence of the work carried out and the approach taken and finally, documentation provides an opportunity to retain a record of matters that may be of continuing significance (e.g. details of assets held under lease arrangements).

7

A, D, F It is not on a voluntary basis that working papers are prepared, but it is a professional requirement of BSA 230. The final statement is also false, as there are particular circumstances where the auditor has a legal obligation to disclose information about his client without the client’s permission (e.g. if the client is involved in terrorist or corruption activities).


97

Chapter 10: Documentation

98


ANSWER BANK


B,C,E The first statement is false as test data does not use the auditor’s software but is data that is used to test the client’s system/software.

2

B,C,F Analytical procedures are only as helpful as the integrity of the underlying data. Analytical procedures do not need necessarily to be carried out by senior audit personnel. However, as with all audit work carried out, it should be supervised supervised and reviewed by a more senior member.

3

A,C,D The materiality of items involved (as per option B) is a suitability factor when deciding to use analytical procedures.

4

B

The risk risk the the sample sample chosen chosen is is not represe representa ntative tive of the the popul populat ation ion is a defini definitio tion n of sampli sampling ng ris risk, k, which in itself is an element of detection risk.

5

D

The company company is now more efficient, efficient, reducing reducing its production production cost cost and therefore therefore increasing increasing its gross margin. Option A is not correct as an increase in sales volume will see cost of sales rise proportionately. Option B does not apply as administrative expenses are not part of the gross margin calculation. Option C would cause the gross margin to fall.

6

C

The direct directio ion n of test testing ing when testin testingg the comple completen teness ess asserti assertion on will will be from from the physica physicall item item to the accounting records (i.e. the non-current asset register). (The answer is not B as the financial statements will not contain the analysis required for this test.)

7

A

Trade Trade receivab receivables les confirmati confirmations ons would assist assist in confirmi confirming ng their existence. existence. Options Options C and D would assist in verifying the valuation assertion. Option B would have no bearing necessarily on the trade receivables balance, as some sales orders may have been sales for cash, others may have led to goods being returned, and others may have been cancelled prior to delivery.

8

A,B,D Bank statements would not assist in testing for completeness of liabilities. The other sources mentioned may provide insights as to liabilities that have been omitted.

9

A,C,D The bank letter issued by the bank should agree to the bank statement so the bank letter will be no more accurate (so Option B is not a reason) – but the bank letter may contain more information (Option C).

10

B,C Reperformin Reperformingg the calcula calculation tion of the provi provision sion is is not a testing testing directed directed towards towards understate understatement ment but may equally pick up any overstatement. Testing the process used by management to estimate the process is not a substantive procedure and contributes less to the detection of understatement than options B and C do.

11

D

12

A,C,E

A random random sample sample is less than 100% and represents represents the characteri characteristics stics of the populat population. ion.

Subjectivity is involved with non-statistical sampling as the choice of the sample is made via a series of decisions taken by the auditor. Statistical sampling requires the auditor to input a number of sampling parameters of which the required confidence level is one.


99


B,F B,F,G An increase in the level of tolerable error will cause a decrease in the sample size as the number of errors the auditor regards as acceptable has increased and therefore he needs to test less items. An increase in the number of sampling units will have no effect on sample size. An increase in detection risk will lead to an increase in sample size to address the additional risk faced.

14

A,D Increases Increases in both both expected expected error and and the auditor’s auditor’s requir required ed confidence confidence level will will lead to an increase in sample size.

15

B,E Both an an increase increase in in the use of of other subst substantiv antive e procedures procedures and and stratify stratifying ing the population population will will lead to a decrease in sample size.

16

B,D An increase increase in the level level of the the error that that is tolera tolerable ble will will decrease decrease sample sample size, whereas whereas an an increase increase in the assessmen assessmentt of audit audit risk will lead to an increase increase in the work required, and hence the sample size.

17

B,D B,D,F Tolerable is the maximum acceptable error that an auditor (and not management) can accept and still conclude that the financial statements show a true and fair view. Sampling risk is the risk that the sample chosen does not represent the population under examination.

18

A,F The use of the computer computerised ised generat generator or will ensure the the random random selectio selection n of the sample. sample.

19

A,B,D Sundry and utility expenses are unlikely to be mentioned in the board minutes.

20

B

Block Block sampli sampling ng may be appropr appropriate iate for cut-off cut-off testing testing which is what option option B describ describes. es.

21

B

Monetary Monetary unit unit samplin samplingg tends tends to focus on high high value items in a population. population. As such such it it is is most most helpful for testing the overstatement of assets.

22

C

Auditor-g Auditor-generat enerated ed evidence evidence (per option option A) is is more more reliable reliable than the client’s client’s presentati presentations ons hence option C provides the least persuasive evidence. Third party evidence (options B and D: supplier’s invoice or third party correspondence) is more reliable than internally/client-generated evidence.

23

B, C, F Analytical procedures are limited by the integrity of the underlying accounting system. Observation of a procedure is limited to the point in time it takes place as what takes place under the observation of the auditor may not take place any other time. Direct confirmation of a payables balance is limited by the fact that should the payables balance be overstated, it might still be agreed as it favours the supplier (the respondent).

24

100

A,E A title title deed is is inspected inspected for for the purpose purpose of checking checking ownership ownership details. details. By being being present present for part part of the sales cycle, the assurance provider is taking the opportunity to observe the process and the controls applied.


ANSWER BANK


A,B,D The answer is not option C as acknowledgement as to the terms of engagement is sought in the engagement letter.

2

B,C,E Management representation letters can not act as a substitute for other audit evidence where it is expected to be available. The representation letter contains a statement of management’s belief that the financial statements are free from material error.

3

A,F Details Details of of the occurren occurrence ce of any frauds or the confirma confirmation tion of no no such such occurrence occurrence is found found in in the management representation letter. Any weaknesses in the internal control system found in the course of the audit are reported to management in the management letter.

4

C

The management management representat representation ion letter letter shoul should d be signed signed by management management just prior prior to to the signing signing of the audit report to ensure all areas are covered up to that point.

5

B

It is is usual usually ly the auditor auditor who drafts drafts (then (then discus discusses ses with with mana manageme gement nt)) and and senio seniorr mana managem gement ent who sign off the representation letter.

6

A

Knowl Knowledg edge e of com comple pletene teness ss of lia liabil biliti ities es is is an area area tha thatt rests rests with with manag managemen ementt and and othe otherr evidence may not be available.

7

C

Optio Option n A refers refers to the the engage engagemen mentt lette letter. r. Opti Option on B refe refers rs to the man manag ageme ement nt letter letter.. There There is is no particular letter as is referred to in option D, although some of these issues could possibly covered in the management letter.

8

B,C Matters Matters where where knowledge knowledge is confined confined to manage management ment are are amongst amongst the represent representatio ations ns made made by by management. Option A is not correct as this would constitute a limitation of scope and would be referred referred to in the audit report. Option D is not correct as a more general general statement is made by management with regards to fraud and irregularities (not one that covers management frauds only).

9

A,C A,C Optio Options ns B and D are not not requi required red in in a repre represent sentati ation on lett letter. er.


101

Chapter 12: Management representations

102


ANSWER BANK


A,E Tracing Tracing items items from from the non-current non-current asse assett register register to the the schedule schedule of of non-curre non-current nt assets assets is a test supporting the completeness assertion, as all balances should be carried over. Confirming the casts on the schedule are correct will support the valuation assertion.

2

B,F Checking Checking against against invoices invoices is is one one procedur procedure e that that supports supports the valuatio valuation n asserti assertion on (by (by checkin checkingg original cost). Confirming recorded assets are physically present supports the existence assertion.

3

C

4

B,E Lack of impai impairment rment testing testing means means that potential potentially ly the the intang intangible ibless are are overvalu overvalued. ed. Where Where expenses are inappropriately capitalised, the same threat of overvaluation exists.

5

B,F Enquiries Enquiries of possi possible ble obsolet obsolete e or slow-moving slow-moving inventory inventory is is a test test of of the valuation valuation of inventor inventory. y. Testing the allocation of transactions around the period end supports the cut-off assertion.

6

A,B,D

For the rights rights and obligat obligations ions assertion assertion evidence evidence is needed that the plant plant belongs belongs to the client client entity. The purchase invoice should have the client entity’s name on it.

Attending the inventory count does not support the rights and obligations assertion as the auditor cannot be sure to whom the inventory belongs. 7

B

Havin Havingg the the count count supervi supervised sed by the the store storess manag manager er cons constit titute utess a lack lack of indepe independe ndence nce in in the inventory counting process and is therefore a weakness which would be of concern to the auditor.

8

B,C,E Where there are perpetual counts, management should ensure that inventory lines are counted at least once a year.

9

A,C,E Increasing the selling price or offering small discounts during a sale period do not indicate that NRV is lower than cost (provided there was already a large enough profit margin to cover the “small” discounts). With newer models being available, existing inventory is likely to be obsolete. The significant unforeseen increase in production costs which cannot be passed on to the customer is likely to push the product cost over the NRV.

10

B,C Correspon Corresponding ding with with suppliers suppliers and and sending sending receivables receivables confirmat confirmations ions are are not means means of testing testing whether inventories are stated at the lower of cost and NRV.

11

A,B,D Receivables confirmations do not assist in confirming the collectability of the amounts owed.

12

B,C B,C,F Under the negative method, the customer is requested to respond only in cases of disagreement. The third statement is false as there is no such requirement to use positive confirmations where there are a large number of balances. Further, it is more appropriate in this situation to use negative rather than positive confirmations.

13

C,D Where Where the assessed assessed risk risk of material material missta misstatemen tementt is high or there there are a small small number of of large balances involved, then the positive method should be used.

14

C

Refusal Refusal to to cooper cooperate ate with with the auditor auditor would would lead to a limitat limitation ion of scope scope on the the audit. audit.


103


B,C B,C,F The sample of trade receivables circulated should include unusual accounts also e.g. nil balances, credit balances. Customers who are difficult to find should not be avoided but special efforts should be made to locate them in order to get the confirmation required.

16

B,E Comparin Comparingg provision provision method methodss against against industry industry and and reviewing reviewing the the trade receivables receivables ageing ageing analysis analysis help to support the valuation assertion.

17

B

18

A,F Non-disclo Non-disclosure sure of bank bank balances balances affects affects the complet completeness eness asserti assertion on as assets/l assets/liabil iabilities ities are understated. Unresolved errors in the bank reconciliation will affect the valuation assertion.

19

B

20

B,C B,C,D

Outstandi Outstanding ng respons responses es should should be passed passed on to an an independe independent nt compa company ny official official for chasin chasingg as as all all positive (which this seems to be) requests must be followed up.

Checking Checking the paying paying in slips slips to ensure ensure that that remittances remittances relate relate to before the year year end end will will address address the risk that credit is taken for remittances received after the year end. Cheque slips for payment (per option A) would not lead to increased remittances being recognised. Confirming dates of payments with customers would also not assist in addressing the risk as there is a timing difference difference between the time the customer pays and the time the client receives the payment (option C). The same applies to confirming with suppliers date of receipt from the client (option D).

Standing order details (option A) will not be included in the bank letter. 21

C,D Supplier Supplier confirmat confirmations ions are are recommended recommended where where supplier supplier statement statementss are incomplet incomplete e or unavailable. Where the purchases cycle contains all the documentation and there is no particular suspicion that management are trying to understate payables, then supplier confirmations are not necessary (option A). Option B is not correct as the process surrounding supplier confirmations is likely to be more time consuming than the alternative procedures available.

22

B

Reconcili Reconciling ng payables payables ledger ledger account accountss with with supplier supplier statement statementss most most supports supports the compl completenes etenesss assertion.

23

C

Share certificat certificates es support support investments investments (assets) (assets) not non-current non-current liabili liabilities. ties.

24

B,D Supplier Supplier confirmat confirmations ions not not being being returned returned should should be referred to to a senior senior colleague colleague so that that further action may be planned. With regards to the second test, given the extrapolated error is well below the materiality threshold (CU200 X 10 is CU2,000), the assurance provider should draw a conclusion.

25

A,B,C The disclosure requirements that relate to non-current assets are not so onerous as to constitute as great a risk as those presented in options A, B and C.

26

B,F Unadjusted inventory differences identified at the inventory count affect the valuation assertion. Not taking into account inventory in transit at the year end affects the cut-off assertion.

27

A,D The difference found constitutes an error (of transposition) which, if material, will need to be adjusted in the financial statements. The second case is a timing difference, not an error, which does not require an adjustment to the financial statements, provided that cut-off is correct.

28

A,D,E D,E Whereas the current account is tested as it is over the materiality threshold (hence the reason why the petty cash balance is not tested), the special directors’ cash account is also tested despite the fact that it is below the quantitative materiality threshold. This is because the disclosure of directors’ emoluments is a legal requirement to which no monetary materiality threshold is applied.

104


ANSWER BANK 29

B,C B,C,F Analytical procedures are a type of substantive procedure. Reviewing board minutes for evidence of authorisation tests an authorisation control. Reperforming the year-end bank reconciliation is a substantive procedure, performed as part of the process to verify the year-end bank balance.


105

Chapter 13: Substantive procedures – key financial statement figures

106


ANSWER BANK


A,C,E Guidance from the ICAB is in the form of rules. Although rules-based codes are more straightforward, they are more open to manipulation.

2

A,D,E A framework does not take the form of a checklist of forbidden items to tick off – that smacks more of a rules-based approach.

3

B

Courtes Courtesyy is not one of the stated stated funda fundament mental al princip principles les of the the IFA IFAC C code. code.

4

D

A famil familiar iarity ity threa threatt is created created due to the the fac factt that that a partne partner’s r’s sis sister ter is the the MD MD of of Tube Tube Ltd. Ltd. Independence Independence could be threatened threatened by the MD’s influence influence o ver the sister sister and, in turn, her influence over the partner. A self-interest threat is created by the fact that another partner has shares in Tube Ltd. This partner could be motivated to influence the outcome of the audit if there might otherwise be a detrimental affect on the value of Tube Ltd (and hence the shares).

5

D

Helpi Helping ng Drea Dreams ms Ltd Ltd design design and and imple implemen mentt a new IT IT syste system m consti constitut tutes es a manag managemen ementt threa threatt as as the auditor may be taking on a management role.

6

A

Threat Threateni ening ng to repl replac ace e Johns Johnson on & Co ifif it it does does not not deli deliver ver the desi desirab rable le outcom outcome e consti constitut tutes es an an intimidation threat.

7

B

An advocac advocacyy threa threatt is create created d as Whitel Whitelyy & Co Co will will be be promot promoting ing the cli client’ ent’ss posi position tion in its its investment dealings.

© The Institute Institute of Chartered Accountants Accountants in England and Wales, March March 2009

107

Chapter 14: Codes of professional ethics

108


ANSWER BANK


D

The offer offer must must be be reject rejected ed as it is not not of of insign insignific ificant ant value. value.

2

C

If the the clien clientt does does not not pay pay overdu overdue e fees fees then then a loa loan n relati relations onship hip is is auto automat matica ically lly crea create ted d which which is is a threat to independence. As such, where the overdue fees involve an amount that cannot be regarded as trivial, the audit engagement partner, in consultation with another partner or partners, should consider whether the firm can continue to act as auditors or whether it is necessary to resign.

3

A

On inheriting inheriting the shares, shares, the partner partner should should dispose dispose of them at the first availabl available e opportuni opportunity. ty.

4

A

As per IFAC IFAC Ethic Ethics, s, where where a part partner ner leaves leaves a firm firm and is appoin appointed ted as as direct director or or or in a key key management position in a company where he had acted as key engagement partner, the firm should apply safeguards, such as using different audit methods, approach and using a different audit team, partner for the audit.

5

A

Takin Takingg a loan loan from from a high high stree streett bank bank at at a comm commerci ercial al rate rate is not not prohib prohibite ited d as as there there is no no favourable treatment.

6

A,D Safeguard Safeguardss should should be implement implemented. ed. The The firm might discuss discuss the matter matter with the audit committee, committee, and also use external quality control review.

7

A,C Safeguard Safeguardss should should be implement implemented. ed. Which Which might might include include monitoring monitoring and impleme implementing nting quality quality control of assurance and also involve an additional professional accountant to review the work.

8

C,F The audit auditor or must must reject reject a proposition proposition of contin contingent gent fees and also also reject reject the offer offer to to serve serve on the board of directors. Both are prohibited.

9

C,E The audit auditor or must must not not prepare prepare the the accounts accounts of a listed listed company, company, unless unless it is an an emergency emergency situation. The auditor may prepare the accounts of a private company, provided safeguards are implemented (e.g. allocating different teams to accounts preparation and the audit).

10

D

Valuing Valuing a portfoli portfolio o of shares shares leads leads to self-review self-review and managem management ent threats threats.. This This is is because because the the auditor will then come to audit the valuation of the same portfolio. Also the responsibility for the valuation should be taken by management.

11

A

In providing providing both the internal internal and and externa externall audits, audits, there are both both self-re self-review view and management management threats. The auditor is carrying out work which should be the responsibility of management (management threat) and he will then audit own his work (self-review threat).

12

D

Acting Acting as as an an expert expert witness witness constitute constitutess an insurmoun insurmountable table advocacy advocacy threat. threat.

13

B,C B,C,D A familiarity threat relates to a threat coming from a family, close personal relationship or long association with the client. The threat also arises where the auditor is making recruitment decisions on behalf of his clients. The answer is not option A as this would give rise to an intimidation threat.

14

C

The Code of Ethics Ethics requires requires that that rotati rotation on should should take place after seven years of conti continuous nuous service.

15

A

Perfor Perform m the work as supp support ort is ava availa ilable ble and and the the level level of work work is approp appropria riate. te.

16

B

In this case, case, Geoff Geoff is unsupervised unsupervised with a task in excess excess of his capab capabiliti ilities. es. The The most most appropr appropriate iate course of action would be to refer to the Dickens & Co engagement partner. If this proves ineffective then option C would be the next step.

17

B

Alison Alison should should initia initially lly report her concerns concerns to the the audit committee. committee. Other options options may may then prove necessary.

18

C

Long client client associatio association n would would lead to a familiari familiarity ty threa threatt being being created. created.


109


110

A,D Providing Providing additiona additionall taxation taxation services services on an ongoing ongoing basis basis should should involve an an additional additional team to avoid the threat of self-review. Stepping in to prepare the financial statements in an emergency situation for a listed client is acceptable provided safeguards are taken, of which separate personnel is one (to avoid the self-review threat).


ANSWER BANK


C,D It is not not the case case that that disclosure disclosure of of client client confident confidential ial informa information tion can be made made to third third parties parties solely at the discretion of the auditor (option A), and there are occasions where the auditor does not need client consent to make disclosure (option B), as is the case where a public or legal duty exists.

2

A,D There is no legal legal duty duty when when correspon corresponding ding with tax authori authorities ties (option (option B), or or to disclos disclose e the non-compliance of CA 94 to third parties other than including that in the report.

3

A

The first first course course of action action should should be to consul consultt the firm firm lawyer lawyer..

4

C

Where Where two client clientss are are in direct direct compet competiti ition on with with each each other other,, they they should should both both be made made aware aware of the fact and informed consent obtained.

5

A,C,D Not discussing client matters at the assurance firm’s premises and not being allowed to take working papers off the premises would be unreasonable (and impracticable) measures.

6

A,C,F Auditing competing clients creates a conflict of interest but is permissible provided both clients are aware and accept the situation and safeguards are in place (e.g. separate teams are placed on each client). The second case also presents a conflict of interest there is a threat to independence arising from the conflict between acting as advisor to one client company possibly against the interests of another client company (quite apart from the advocacy threat presented). Carrying out a limited assurance engagement should not create a conflict of interest with the external audit assignment.


111

Chapter 16: Confidentiality

112


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