Practice Exam Flashcards
(30 cards)
Which of the following statements best describes the term ‘assurance services’?
C. Independent professional services that improve the quality of information for decision makers.
Who is responsible for overall quality control on an audit engagement?
A. Audit engagement partner.
Audit fees should be determined by:
D. the time, skill and responsibility required to complete the audit.
An example of an auditor gathering evidence by enquiry is:
B. asking the warehouse manager to explain the inventory receipting procedures.
Knowledge of the client’s business will not help the auditor to:
B. reduce inherent risk.
Which of the following factors would indicate that there is a higher possibility of a fraud occurring for a client
B. There is no segregation of duties.
An auditor may assess control risk as high because:
A. control activities do not exist.
B. controls are not expected to operate effectively.
C. testing controls would not be the most efficient audit approach.
D. All of the given answers are correct.
During the audit of accounts receivable, an auditor obtains sufficient, appropriate evidence in support of the existence assertion. This evidence can be used to support which of the following assertions in respect of sales?
: Tests of existence in the statement of financial position indicate the relevant balance (accounts receivable) exists, and consequently the transactions (sales) making up that balance have occurred. Existence is a statement of financial position assertion and does not apply to an income statement account such as sales. The existence of the debt does not provide assurance that sales have all been recorded for the correct period or that all sales have been included.
In estimation sampling, which of the following must be known in order to estimate the appropriate sample size?
In estimation sampling, which of the following must be known in order to estimate the appropriate sample size?
D. The risks of incorrect acceptance and incorrect rejection need to be specified to estimate the sample size. Estimating the total dollar amount of the population is the objective of the sample. Qualitative aspects of misstatements are a matter for sample evaluation, not sample size selection. Deviation rate is concerned with attribute sampling.
- An example of the three parties in an assurance engagement would be
- An example of the three parties in an assurance engagement would be
- Agency theory can be described as the theory of:
c. the relationship between the owner and the management of the business when the owner is not the manager of the business.
- An auditor’s report included an additional paragraph disclosing that the he cannot find sufficient evidence to support a material account on the balance sheet. The opinion paragraph of the auditor’s report most likely expressed:
b. a qualified “except for” opinion
- The ‘if not, why not’ approach of the ASX Corporate Governance Council to its recommendations requires companies to:
a. disclose whether they have complied with the principles and recommendations
- By setting a lower planning materiality level an auditor:
c. increases the quality and quantity of evidence that needs to be gathered
- If the total projected error in an account balance was $7,585 and the tolerable error was $5,000, the auditor would:
a. conclude that the errors uncovered are material
- Assessing an expert’s report involves the auditor:
b. assess the consistency of information included in the expert’s report with their understanding of the client
- Vouching involves:
b. agreeing the details of a transaction to supporting evidence outside of the company’s accounting records.
- The typical procedures performed to verify that the client has not omitted any amounts from the payables balance include:
d. subsequent payments testing.
- The occurrence assertion for sales relates to which of the following audit objectives:
c. all sales included in the income statement represent the exchange of goods or services with customers during the period.
Why is it important to review subsequent events?
Subsequent events, although happening in the next accounting period, can have significant effects on the current year’s financial statements. These events may require adjustments to the financial statements figures or require a disclosure notes on the financial statements. Therefore, in auditing the current year’s financial statements, the auditors need to review subsequent events.
(i) On 1 September 20x2 the auditor discovered a debtor of Torota Manufacturing Company had been placed in liquidation on 20 August 20x2 due to declining financial health. The debtor owed $155,200 on 30 June 20x2 and no cash receipt had been received since that date. This amount is considered material by the auditors.
Adjustment is needed
Dr Bad Debt Expense $155,200
Cr Accounts Receivable $155,200
(ii) A delivery note showed a quantity of goods (amounting $330,000), were delivered to a customer on 29 June 20x2 and the invoice was written on 3 July 20x2 and the sales were recorded in July’s journal at the time the invoice was issued.
This sales should be included in this year’s financial statements (June 20x2).
An adjustment is needed as follows:
Dr Accounts Receivables $330,000
Cr Sales $330,000
(iii) In reading the Board’s meeting minutes, you discovered that that the board was discussing a plan to acquire a small supplier company to ensure a more consistent supply of inventory. The parties have signed the agreement and the board is in the process of acquiring to finance the purchase. The board has obtained an approval from the ASX and was in the process of issuing the shares, which would help generate half of the funds needed to purchase the company. The remaining portion is financed internally.
Disclosure is required. A note disclosure regarding the issuance of shares is required, and the auditor emphasise the matter on the financial statements
(iv) You have noticed from the media that in the beginning of 20x2, there were a number of cars with defect brake systems that have caused some accident. Customers are filing legal action against the company. The company is in the process of dealing with legal sues. The court decision has not yet been reached, but the company is expecting to have to pay compensations to the customers.
Disclosure is required. This is contingent liability as the liability is quite likely but the amount cannot be reasonably estimated. A note disclosure is needed about the legal case.
