Jones & Co is the external auditor of Blue plc, a listed company. The directors of Blue plc have requested that Jones & Co carry out a review engagement assessing the effectiveness of its corporate governance policies against the UK Corporate Governance Code.
For the above review engagement, select which part of the engagement description constitutes the subject matter?
- A . Blue plc’s corporate governance policies
- B . The UK Corporate Governance Code
- C . Jones & Co
- D . The directors of Blue plc
Grey Ltd has recently discovered that it has been paying invoices in respect of goods which had been returned as faulty prior to acceptance. It is company policy to record goods only if they have been accepted.
Which of the following controls would be useful in preventing such incidence in future?
- A . Matching of purchase invoices with goods received notes
- B . Matching of purchase invoices with orders
- C . Comparison of supplier statements with payables ledger accounts
- D . Date stamping purchase invoices on receipt
Internal auditors must exercise due care if they are to meet their responsibilities for fraud detection. Thus, the existence of certain conditions should raise auditor’s professional scepticism concerning possible fraud .
Which of the following is most likely to be considered as an indication of possible fraud?
- A . A new management team installed as the result of a takeover.
- B . Rapid turnover of financial executives.
- C . Rapid expansion into new markets.
- D . Tax authorities’ audit of tax returns.
Rostar Ltd develops games for X-box and PCs. The unique gaming experience made the company outstandingly popular among the local customers and its last game release outperform its expectation. This popularity leads to sudden growth in revenues that quadrupled during the last period. As a result, Rostar Ltd is now obliged to have a statutory audit for the first time.
Which of the following is not a benefit that Rostar Ltd may obtain from the statutory audit?
- A . Assurance of compliance with Companies Act
- B . Recommendations on systems via management letter
- C . Increased accountability of the IT department
- D . Independent confirmation of profits earned/net assets
Dan Lawrence is the auditor of Nava Ltd. The directors are Bernard Russell, Pauli Morin and Cyndi Clifford. They are also the only shareholders owning 35% of total shares by Russell and Morin and the rest by Cyndi. Recent dispute between Russell and Morin arises that Dan believesmay be impossible to resolve. However, Morin requested Dan to provide her with details of all last year purchases through company’s accounts by Russell and Cyndi. Dan Lawrence has all the company’s books and records in his office.
What would be the most appropriate action by Dan Lawrence when Pauli Morin asked him to disclose company’s accounts details?
- A . Provide with all the relevant information as was requested by Pauli Morin because she has the controlling interest in the company.
- B . Decline the request of Pauli Morin even if she has the controlling interest in the
company. - C . Provide the relevant information before taking the consent from other directors.
- D . Arrange dispute resolution meeting and find a way to resolve the dispute between Russell and Morin.
Audit documentation provides evidence that the audit complies with the ISAs. However, it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit. Further, it is unnecessary for the auditor to document separately (as in a checklist, for example) compliance with matters for which compliance is demonstrated by documents included within the audit file. For example the existence of an adequately documented audit plan demonstrates that the auditor has planned the audit.
Which one of the following is not an objective of audit planning?
- A . To determine the scope of the engagement
- B . To ensure appropriate attention is devoted to the important areas of the audit
- C . To identify potential problems and resolve them on a timely basis
- D . To assign work to members of the audit team
When you audit a company, your main goal is to provide assurance to the users of the company’s financial statements that those documents are free of material misstatement. You use the audit risk model, which consists of inherent, control, and detection risk on your client’s financial statements.
‘Audit risk’ here does refer to________________.
- A . process of auditing
- B . loss from litigation
- C . adverse publicity
- D . events arising in connection with the audit of financial statements
The auditor of Net plc carried out an external confirmation of receivables at the year end to confirm the accuracy of total trade receivables in the balance sheet at that date. Two of the replies to the confirmations disagreed the balance.
For each of these two disagreements, select whether the disagreement would be considered as a misstatement or would not be considered as a misstatement for the purposes of evaluating the accuracy of total trade receivables in the balance sheet at the year end.
(i)Word Ltd disagreed the balance because they had made a payment two days before the year end. The auditor has confirmed that the cheque cleared the bank two days after the year end.
(ii)Red Ltd disagreed the balance because their records did not contain invoice number SI 00942. This invoice and associated goods were despatched by Net plc on the last day of the year. The auditor has verified that the despatch note and cut-off with inventory are correct.
- A . Both (i) and (ii) would be considered as misstatement
- B . (i) would be considered as misstatement and (ii) would not be considered as misstatement
- C . (i) would not be considered as misstatement and (ii) would be considered as misstatement
- D . Both (i) and (ii) would not be considered as misstatement
David Copper is performing the audit of financial statement of Igma Co and is in doubt about some of the transactions.
If David believes an illegal act may have occurred, which of the following will be the LEAST necessary action?
- A . Inquire of management of Igma Co, at a level above those likely to be involved with the illegality.
- B . Consult with Igma Co’s legal counsel.
- C . Consider accumulating additional evidence to determine if there is actually an illegal act.
- D . File a case against the client as soon as possible.
When performing risk assessment procedures and related activities to obtain an understanding of the entity and its environment, including the entity’s internal control, required by ISA 315, the auditor shall perform certain procedures to obtain information for use in identifying the risks of material misstatement due to fraud.
Which of the following is not a part of an entity’s risk assessment process?
- A . Identify relevant business risks
- B . Assess the likelihood of occurrence
- C . Decide upon actions to manage the risks
- D . Report the process to the auditors
During an operational audit, an auditor observes a large number of aboveground storage containers and a large amount of black emissions from a company smokestack. The organisation has an environmental safety department. The audit engagement is not designed to consider environmental concerns. The best course of audit action would be to
- A . Make a note to consider environmental risk concerns when developing the audit plan for the next year, but do not expand the scope of the existing audit since the budget and risk priorities are already set.
- B . Report the observations to the audit committee and seek their advice on whether the audit should be expanded for the environmental audit.
- C . Document the observations and report them to the environmental safety department. Determine if their response will be timely, and follow up to determine if they have taken timely action.
- D . Inquire of local management as to the use of the storage tanks in order to determine if they are properly classified as an asset. Do not take action on the environmental issues because the auditor is untrained in the area, and such action is the responsibility of an already existing department.
Cates plc is a large organisation with a complex accounting and information system. Critical to an understanding of the system are the reporting lines and relationships between different departments.
Which of the following represents inherent limitation of a system of internal controls in Cates plc?
- A . Lack of controls over the purchases system
- B . Lack of in-depth knowledge of the purposes of controls
- C . Lack of staff to ensure segregation of duties
- D . The possibility that staff members will collude in fraud
Acer Ltd is a client of your firm and is seeking funding in order to expand the business. The directors have prepared profit and cash flow forecasts for the next three years ending 30 June 2016 in support of the request for funding. The company’s bankers require this information to be reviewed by independent accountants and the board of directors has requested that your firm undertakes this review.
The following is an extract from an independent accountant’s unmodified report on the profit and cash flow forecasts:
‘Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.’
Which of the following BEST describes the type of assurance provided by this statement?
- A . Positive assurance expressed negatively
- B . Negative assurance expressed positively
- C . High level of assurance expressed negatively
- D . Limited level of assurance expressed negatively
A personnel department is responsible for processing placement agency fees for new hires. A recruiter established some bogus placement agencies and, when interviewing walk-in applicants, the recruiter would list one of the bogus agencies as referring the candidate.
A possible means of detection or deterrence is to
- A . Process all personnel agency invoices via a purchase order through the purchasing department.
- B . Verify new vendors to firms listed in a professional association catalog and/or verify the vendor name and address through the telephone book.
- C . Monitor the closeness of the relationships of recruiters with specific vendors.
- D . Require all employees to sign an annual conflict of interest statement.
Internal auditors and management have become increasingly concerned about computer fraud .
Which of the following control procedures would be least important in preventing computer fraud?
- A . Programme change control that requires a distinction between production programmes and test programmes.
- B . Testing of new applications by users during the systems development process.
- C . Segregation of duties between the applications programmer and the programme librarian function.
- D . Segregation of duties between the programmer and systems analyst.
Smith and Co is considering preliminary audit strategy for Well Ltd. Well Ltd is an established company with well-documented systems and controls. It has an internal audit function whose principal activity is to monitor the implementation and effectiveness of existing controls.
Which of the following statements would be correct about the reliability of audit evidence of Well Ltd?
- A . To be reliable, evidence of Well Ltd should be conclusive rather than persuasive
- B . Effective internal control system of different systems of Well Ltd can provide reliable audit evidence
- C . Evidence obtained from outside sources routed through Well Ltd will be more reliable
- D . Limited internal control system of Well Ltd can provide reliable audit evidence
John has been given the following draft figures for Kulran Ltd for the year ended 30 June 2011 to analyse. Materiality has been set at $35,000 and the finance director has told John in a planning meeting that there have been few changes in the year. Budgets were set at 2010 levels and there have been no major movements in non-current assets.
20112010
$$
Revenue3,497,2843,487,286
Cost of sales1,867,2942,008,967
Salaries467,900420,975
Which of the following is normally designed to detect possible material monetary errors in the above figures of financial statements?
- A . Test of control
- B . Walk-through test
- C . Analytical procedure
- D . Observation of a procedure
Frederich Gastona has been invited by ECA Co to perform the audit of financial statements of 2012-13. When deciding whether to accept an auditing engagement, Frederich must judge his independence and objectivity. If Frederich’s audit firm lacks independence or objectivity, Frederich can’t accept the engagement.
What does “Independence” mean in the context of the above case?
- A . Remaining aloof from client ECA Co.
- B . Not being financially dependent on client ECA Co.
- C . Taking an unbiased viewpoint while conducting audit of ECA Co.
- D . Being an advocate for ECA Co in the law suit.
A payroll clerk with authorised access to the local area network (LAN) was able to update personnel files directly, independent of the application programmes.
The best control to prevent a clerk from doing this would be to
- A . Restrict access to LAN workstations by such means as automatic lock-up after a predefined period of keyboard inactivity.
- B . Restrict access to and monitor installation of software products or tools having powerful update capabilities.
- C . Use password security to authenticate users as they attempt to log on to the LAN.
- D . Establish a security policy for the department that prohibits direct updating of data files.
After partially completing an internal control review of the accounts payable department, the auditor suspects that some type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach would be to use
- A . Simple random sampling to select a sample of vouchers processed by the department during the past year.
- B . Probability-proportional-to-size sampling to select a sample of vouchers processed by the department during the past year.
- C . Discovery sampling to select a sample of vouchers processed by the department during the past year.
- D . Judgmental sampling to select a sample of vouchers processed by clerks identified by the department manager as acting suspiciously.
New credit policies have been implemented to prevent entering any new sales order that would cause customers’ accounts receivable balance to exceed average sales for any two-month period in the prior twelve month period resulting in controlled collectability. After implementation there were decreased sales and slower order entries as reported from divisional sales management. Division management contends that these are a direct result of the new credit policy constraints.
Sales management’s data and information provides
- A . Feedback control data on the new credit policy.
- B . Irrelevant argumentative information.
- C . Evidence that the new credit policy is not meeting the stated corporate objective to control the collectability of new sales volume.
- D . A statistically valid conclusion about the impact on customer goodwill concerning the credit policy.
Mike Robin, ACA is identifying risk in the statement of Mohin Co as a part of his audit work.
Which of the following defines control risk for Mohin Co?
- A . The risk that the financial statements of Mohin Co are materially misstated prior to audit.
- B . The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls of Mohin Co.
- C . The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by Mohin Co’s internal control.
- D . The risk that the procedures performed by Mike to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
A firm’s inventory consisted of 5,000 various types of stocks, 100 of which accounted for 75% of the total monetary value. The most recent regular quarterly manual count revealed that there was an unnecessary two years’ supply of the more expensive items.
The control that would best help to correct this oversupply problem is
- A . Use of a control total over the number of unique inventory items.
- B . Limit check on the total monetary value of the inventory.
- C . Use of authorising signatures on requisitions for inventory requested by production.
- D . Maintain perpetual inventory of the larger dollar value items in the inventory.
Pahari Robert has been appointed the auditor of Safe Haven which has a year end of 31 May. Safe Haven is a small registered charity based in a small town in Warshire. The organisation provides shelter for abandoned dogs and puppies with the aim of finding new homes for as many as possible.
Safe Haven also employs a number of paid employees. The shelter is managed by John and Jane Sheldon, who are husband and wife. Safe Haven has a high turnover of staff in the accounts department.
Which type of risk has been illustrated in Safe Haven?
- A . Inherent risk
- B . Control risk
- C . Detection risk
- D . Audit risk
When preparing audit documentation, the auditor of a smaller entity may find it helpful and efficient to record various aspects of the audit together in a single document, with cross-references to supporting working papers as appropriate. Examples of matters that may bedocumented together in the audit of a smaller entity include the understanding of the entity and its internal control, the overall audit strategy and audit plan, materiality, assessed risks, significant matters noted during the audit, and conclusions reached.
Which one of the following would not be included in the overall audit strategy?
- A . Details of economic factors and industry conditions
- B . The results of initial analytical procedures
- C . Confirmation of management’s responsibility for the financial statements
- D . Identification of specific audit risks