Practice Qs

Question 1

Numerical sequence need not necessarily be applied to which of the following types of documentation?

a) Goods Received Record
b) P.Os
c) Supplier Statements
d) Purchase Requisition Notes

Answer 1

c) Supplier Statements

Supplier statements are provided externally and therefore may not be pre-numbered in a way which is meaningful to the organisation receiving them.

Supplier statements are not always sent by a supplier so an entity cannot ensure a numerical sequence

Question 2

As part of her analytical procedures on the financial statements of PC Ltd, a manufacturing company, Amisha has identified that the gross margin has increased from 23% to 28%.

Which two of the following could explain this increase?

a) The company has considerably reduced discounts for bulk purchases given to customers

b) The price of raw materials has increased and this increase has been passed on to customers through increasing sale prices proportionately

c)The recent increase in competition has resulted in the sale price having to be reduced

d) There has been a significant change in the sales mix

Answer 2

a & d

A reduction in the discounts given to customers increases the selling price causing an increase in the gross margin.

A significant change in the sales mix towards more profitable items being sold would also cause an increase in the gross margin.

The second statement is not correct, as if the increased cost of raw materials is passed on to customers, this will not affect the gross margin.

The reduction in sales price due to the recent increase in competition is also incorrect as sales prices being reduced will decrease the gross margin.

Question 3

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

a) Test the process used by management to estimate the amount.

b) Use an independent estimate.

c) Review subsequent events.

d) Reperform the calculation of the provision.

Answer 3

b & c

Reperforming the calculation of the provision is not a test directed towards understatement and 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 the
answers above.

Question 4

In testing for the completeness of liabilities, which THREE of the following sources of documentation would be helpful?

a) Board Minutes
b) Correspondence with clients solicitors
c) YE Bank statements
d) Bank letter

Answer 4

a, b & d

The year-end bank statement would not assist in testing for completeness of liabilities (though a post year-end one might show bank charges which needed to be accrued). The other sources may all provide insights as to liabilities that have been omitted.

Question 5

Direct confirmations from supplier are not always used by auditors.

Under which TWO of the following circumstances are supplier confirmations necessary?

a) Where supplier invoices and supplier statements are available and part of the standard documentation of a purchases cycle.

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

c) Where the auditor suspects that the client is deliberately trying to understatepayables.

d) Where the client refuses to provide supplier statements to the auditor.

Answer 5

c & d

Supplier confirmations are recommended where supplier statements are incomplete 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.

The second statement is not correct as the process surrounding supplier confirmations is likely to be more time consuming than the alternative procedures available.

Question 6

Which of the following are implied in the auditor’s report and reported only by exception?

1. Adequate accounting records have been kept
2. Details of the director’s emoluments are in agreement with the accounting records
3. Adequate returns have been received from branches
4. Information given in the director’s report is consistent with the financial statements

Answer 6

1, 2 & 3

The Companies Act 2006 s.496 requires auditors to state explicitly whether, in their opinion, the
directors’ report is consistent with the financial statements.

Question 7

What are the three parties involved in an assurance engagement?

Answer 7

Practitioner: (the auditor) expresses the conclusion that enhances the degree of confidence of the intended users

Responsible Party: the directors, responsible for preparing the subject matter

Intended users: e.g. shareholders

Question 8

Which two of the following describe the roles of the responsible party in any insurance engagement?

a) Setting the criteria of the assurance engagement

b) Gathering evidence on the subject matter

c) Issuing an opinion of the subject matter against the criteria set

d) Preparing the subject matter

Answer 8

a & d

The practitioner is responsible for gathering evidence and reaching a conclusion on the subject matter

Question 9

Which body is responsible for issuing ISAs?

Answer 9

The Financial Reporting Council

Question 10

In which legislation are the terms “true” and “fair” defined?

Answer 10

The terms are not defined by legislation

Question 11

Which of the following transactions indicates that an entity is at the higher end of the inherent risk spectrum?

a) The business is well financed

b) Strong internal controls are in place

c) Unusual transactions

d) Small owner-managed entity

Answer 11

c

Unusual transactions lead to a higher risk of misstatement in the FSs.

The fact that an entity is small and owner-managed does not indicate a higher risk as long as it is well managed, well-funded and has strong internal controls

Question 12

Which of the following are elements of an assurance engagement?

a) A written report from the assurance team addressed to the Responsible Party

b) A relationship involving the practitioner, shareholders and the management of an organisation

c) Documentary evidence of the testing of internal controls relied upon by the assurance team

Answer 12

b & c

The written report will be addressed to the users of the financial statements, not the responsible party

Question 13

Which two of the following items must be included in the audit engagement letter?

a) The objective of the audit of financial statements

b) The fact that because of the test nature and other inherent limitations of an audit, there is an unavoidable risk that some material misstatements may remain undiscovered

c)

Question 13

Which two of the following items must be included in the audit engagement letter?

a) The objective of the audit of financial statements

b) The fact that because of the test nature and other inherent limitations of an audit, there is an unavoidable risk that some material misstatements may remain undiscovered

c) The reporting framework that is applicable for the financial statements being prepared

d) The basis on which fees are computed and any billing arrangements

Answer 13

a & c

The other options can be included in the engagement letter, but there is no requirement to do so

Question 14

Which one of the following is not an objective of audit planning?

a) To assign work to the audit team

b) To identify risk areas and focus on them appropriately

c) To identify potential problems and resolve them

d) To determine the scope of the engagement

Answer 14

d

This is the purpose of the engagement letter

Question 15

Auditing firm A are succeeding Auditing firm 1 as the auditors of Entity A, following their A
acquisition by entity 1.

Auditing firm A intends to consult Auditing firm 1 and review their PY working papers.

Auditing firm A may do this with the consent of:

a) Auditing firm 1 and Entity A

b) Entity A

c) Auditing firm 1, entity A and Entity 1

d) Auditing firm 1

Answer 15

a

Confidentiality, courtesy and consideration mean that the client must also be consulted. The parent company need not be consulted

Question 16

Which two of the following would normally be included in the overall audit strategy?

a) Confirmation of management’s responsibility for the financial statements

b) Details of the industry of the client and any industry wide factors affecting them

c) Detailed plan of the audit procedures to be carried out

d) Calculation of preliminary materiality

Answer 16

b & d

The confirmation of management’s responsibility for the FSs is included in the engagement letter

Question 17

Which of the following best describes the concept of assurance?

a) An assurance firm’s high level of satisfaction as to the reliability of an assertion being made by one party for the use of another party

b) An assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party

c) An assurance firm’s limited level of satisfaction as to the reliability of an assertion being made by one party for the use of another party

d) A user’s satisfaction as to the reliability of an assertion being made by another party

Answer 17

b

Question 18

What are the purposes of planning an audit?

Select all that apply

a) To ensure appropriate attention is devoted to different areas of the audit

b) To identify problem areas

c) To facilitate delegation of work to audit team members

d) To ensure the audit is completed within budget and time restraints

Answer 18

a, b & c

The time and cost restraints are not the main aim of planning - rather that the audit is carried out in an effective manner

Question 19

Which three of the following functions could internal audit perform and still operate effectively?

a) Evaluating corporate objectives

b) Performing operational audits

c) Monitoring controls

d) Authorising transactions

Answer 19

a, b & c

Internal auditors should not be involved with operations.

Authorising transactions is an operational activity

Question 20

Statutory audits are carried out by _____ auditors.

Operational audits are carried out by _____ auditors.

Answer 20

External

Internal

Question 21

Select the type of control that each description illustrates:

1. Payroll information is agreed to personnel files prior to processing.
2. Customers cannot order goods exceeding their predetermined credit limits.

a) Authorisation and approval

b) Physical or logical controls

c) Information processing

Answer 21

1. c
2. a

Question 22

Which one of the following controls would be the best way to ensure that only existing employees are paid?

a) Staff records are maintained for each member of staff

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

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

d) Staff are paid directly to their bank accounts

Answer 22

c

Maintaining staff records would not necessarily prevent leavers remaining on the payroll.

Staff submitting work schedules does not indicate any level of review or authorisation of these schedules prior to processing.

Question 23

Which two of the following documents assist in testing cut-off for purchases?

a) Goods received record

b) Purchase requisition notes

c) Supplier invoices

d) Purchase orders

Answer 23

a & c

GRN that has been received post YE can be tested to check that its associated invoice was not posted pre-YE - as expenditure should not be accounted for until goods are in possession

Question 24

Picture Ltd maintains a computerised payroll system. All employees are paid by BACS directly into their bank account. Which TWO of the following controls will be most effective in ensuring that accurate payments are made to employees? a) Authorisation of overtime worked. b) A sample of calculations performed by the payroll package are manually re-performed each month. c) The BACS list is reviewed by the chief accountant together with supporting payroll documentation. d) The printout from the bank is agreed to the BACS list and any discrepancies investigated.

Answer 24

b & c Reperforming some of the calculations on the payroll and the review of the BACS list by the chief accountant against the payroll prior to payment are controls that will help ensure accurate payments are made to employees. Authorisation of overtime is incorrect as it is the authorisation of specific hours worked and, as such, will not ensure that accurate payments are made. The last statement is also not correct, as by agreeing the BACS list to the bank print out, there is no check that the BACS list itself is correct. This can only be done by checking the BACS list against the underlying payroll records.

Question 25

Staple Ltd, which makes all of its purchases on credit, has seen a fall in trade payables days from 45 on 31 December 20X5 to 30 days on 31 December 20X6. Which TWO of the following are plausible reasons for this fall? a) Invoices relating to goods received after the year end were posted to the ledger before the year end. b) Invoices relating to goods received before the year end were posted to the ledger after the year end c) Suppliers have tightened credit terms given to Staple Ltd. d) Suppliers have extended credit terms given to Staple Ltd.

Answer 25

b & c The invoices were not posted until after YE so there is a shorter time frame in which the trade payable is recognised, thus, reducing trade payables days Tightened credit terms means the invoice has to be paid quicker, reducing the amount of time it will remain in trade payables - reducing trade payables days

Question 26

Which of the following questions would you expect to find on an internal control questionnaire for the payroll system of a limited company? 1. Can the payroll supervisor authorise the payment of wages? 2. Can employees be paid for work not done? 3. Can bonuses be wrongly paid? 4. Can statutory deductions be incorrectly recorded?

Answer 26

2, 3 & 4 Internal Control Questionnaires contain key control questions which focus on the objectives of the system under review. Questions (2), (3) and (4) all focus on the objectives of a payroll system, whilst question (1) focuses on a control procedure only.

Question 27

Which THREE of the following controls is likely to ensure that the wage expenditure recorded in the books is complete? a) Timesheets and clock cards are pre-numbered and checks are made to ensure that all timesheets and clock cards are accounted for before the payroll is calculated. b) After the payroll is calculated by the computer, a payroll clerk checks that the calculations are accurate for a small number of employees. c) The accountant performs analytical procedures on the payroll costs at the end of each quarter. d) The software that is used to calculate the payroll produces a report at the end of each period showing all employees who were paid in the previous month that are not to be paid in the current month; this report is reviewed by the accountant. e) The internal auditors periodically check to ensure that employees on the payroll have not handed in their timesheets or clock cards twice.

Answer 27

a, c & d Checking pre-numbered timesheets and clock cards helps ensure that all of the wage costs have been accounted for. The review performed by the accountant helps ensure that the figure is not understated or overstated. The exception report produced by the computer helps identify employees that may have been missed. The check on the accuracy of payroll calculations helps ensure that calculations are accurate, it does not ensure that calculations are complete. Similarly, the internal auditors' check on the employees helps ensure that the company is only paying for the work that has been done, it does not ensure that the wages costs are complete - doesn't check for understatement.

Question 28

The purchases system of Max Co, a manufacturing company, requires that a multi-part pre-numbered goods received note is raised in respect of raw material deliveries. One copy of the goods received note is forwarded to the accounts department; invoices are only approved for posting if they have been matched with the goods received note, a copy of which is then attached to the invoice. In respect of which ONE of the following key questions do these controls provide a positive assurance to the auditor? a) Can cheque payments be made which are not authorised? b) Can goods or services be recorded as purchases which have not been received? c) Can arithmetical errors occur in the recording of purchase invoices in the accounting records? d) Can purchases of goods be made which have not been authorised?

Answer 28

b Goods or services that are recorded as purchases which have not been received provides a positive assurance to the auditor. The controls provide assurance that purchases are not overstated and would contribute to a satisfactory response (i.e. 'No') to the key question 'Can goods or services be recorded as purchases which have not been received?'

Question 29

You are testing controls in the revenue cycle. Which THREE of the following controls are you likely to test in order to ensure that the revenue figure in the statement of profit or loss is accurate? a) The reference to the sales order number that is made on the sales invoice. b) The reference to the sales invoice number that is made on the sales order. c) The signatures on the batch book used by computer operators who check that the total value of invoices input into the system equals the total value of invoices processed. d) The signature on large sales invoices by the credit controller indicating that the calculation of the invoice has been checked. e) The review of sales invoices posted prior to the year-end and those posted after the year-end and reviewing the accrued revenue account.

Answer 29

c, d & e Testing signatures on the batch book used by computer operators will provide comfort that the revenue figure is accurate. The signature on large sales invoices by the credit provide comfort on the accuracy of the revenue figure. The review of invoices posted to the system prior to and after the year-end tests that cut-off is correct. This shows that revenue is not overstated by sales invoices which should be included in the financial statements for the following period being included in the current year. Similarly, it shows that revenue is not understated if invoices posted in the following period relate to the following year. It also tests whether revenue that should be included in the accrued revenue account at year end has been corrected treated. The references between sales order numbers and sales invoices, in either direction, do not provide evidence in relation to the accuracy of the revenue figure, although they do provide evidence in relation to the completeness and existence of revenue and receivables.

Question 30

Which ONE of the following controls is most likely to contribute to the auditor's confidence that all revenue has been recorded in the financial statements? a) Matching pre-numbered sales invoices to despatch notes. b) Sales manager authorising all invoices before they are issued. c) Matching pre-numbered despatch notes to invoices. d) Preparing and following up an aged receivables' analysis by someone independent of the receivables ledger function.

Answer 30

c Testing for completeness, thus, SOURCE (dispatch notes) -----> FS (Invoices that are posted)

Question 31

Which ONE of the following controls would help to ensure that a receivables ledger invoice is raised for all goods despatched to customers? a) Reviews of the open order book against dispatch information. b) Sales invoices are compared to customer orders and initialled as evidence of this check. c) Sales invoices are matched with pre-numbered despatch notes before being recorded in the receivables ledger. d) Pre-numbered despatch notes are matched with sales invoices and unmatched items are followed up.

Answer 31

d This addresses completeness of revenue by starting with despatch notes, agreeing to invoices and identifying any unmatched items. Periodic receivables ledger reconciliations being performed by personnel independent of the goods despatched department is a key reconciliation that gives comfort that the sales transactions have been correctly posted to the receivables control account and the memorandum ledger. Reviewing the open order book and verifying it back to dispatch information will only verify whether there is an open order or following up on reasons why the goods have yet to be dispatched. It will not check that an invoice has been raised correctly. Sales invoices that are compared to customer orders and initialled as evidence of this check provides comfort that the invoice details are the same as what the customer requested, this is an accuracy check. Sales invoices that are matched with pre-numbered despatch notes before being recorded in the receivables ledger checks validity of sales invoices being recorded in the receivables ledger.

Question 32

During the course of a purchases test, in which the auditor has been checking that a sample of 25 purchase invoices have been stamped with evidence of goods received, the auditor discovers that one invoice with a value of £7 has no such evidence. Which ONE of the following procedures should the auditor follow next? a) Extend substantive testing of purchases because internal control has not proved reliable. b) Evaluate the likely misstatement in the population as a whole on the basis of the test results to assess whether a material misstatement may have occurred. c) Extend the sample and inform the client of the error found in the report to management. d) Request an explanation from the client to assess whether the misstatement is an isolated incident.

Answer 32

d Extending substantive testing of purchases because the system of internal control has not proved reliable would not be required as at this stage it is not clear if this is a one-off misstatement or if the control is not operating effectively. Evaluating the likely misstatement in the population as a whole on the basis of the test results to assess whether a material misstatement may have occurred is irrelevant and so to extrapolate the misstatement across the population is incorrect. Extending the sample and informing the client of the misstatement found in the report to management would be the next step after requesting an explanation from the client to assess whether the misstatement is an isolated incident or not. Prior to extending testing an understanding of why this misstatement occurred is required.

Question 33

Indicate whether the following procedures could be carried out by internal auditors, external auditors, or both. a) Preparation of a report on the effectiveness of internal controls. b) Investigation into a material fraud committed in the entity.

Answer 33

a & b BOTH a is included in Letter to management An immaterial fraud may not be relevant to auditors

Question 34

Which three of the following duties should be segregated? a) Preparing payroll summary b) Requesting each employee to sign for his pay packet c) Filling pay packets with cash d) Distribution of wages e) Requesting verification of employee's identity

Answer 34

a, c & d Prevents a false amount getting onto the payroll, being paid and distributed

Question 35

For each of the following examples, select whether the procedure is a test of control, a substantive procedure or both. a) The year-end bank reconciliation is reviewed. b) Revenue for the year is compared to budget.

Answer 35

a) Both For each of the following examples, select the type of procedure(s) illustrated. Reviewing the year-end bank reconciliation is both a substantive procedure (as it confirms the year-end balance in the statement of financial position) and a test of control. b) Substantive Procedure Analytical procedures are a form of substantive procedures

Question 36

For each of the following statements select whether they are true or false. a) Test data involves the use of the assurance provider’s own software. b) Test data can test the operation of the client’s system and so ascertain whether certain controls are in operation. c) Auditors can analyse a digital download of a client’s ledgers using automated tools and techniques to identify risks of material misstatement d) Recalculation is a strong form of evidence as it is created by the assurance provider

Answer 36

a) FALSE Auditor uses client's system to test date b) TRUE c) TRUE d) TRUE

Question 37

For each of the following statements concerning analytical procedures select whether they are true or false. a) Analytical procedures can be used in tests of controls. b) Analytical procedures are only helpful where the integrity of the underlying data is high. c) Analytical procedures must be carried out by senior audit personnel only.

Answer 37

a) FALSE b) TRUE c) FALSE

Question 38

Barton Systems plc has a multi departmental Head Office based in Nottingham. It's controls change very little from one year to the next. The audit has been with the same engagement team for the last three years. Sam is a part-qualified junior auditor on the engagement and has been tasked with recording the controls in the system. Which of the following methods would be the most appropriate option for Sam to use in this engagement? a) Narrative notes taken by interviewing the key members of staff. b) Drawing up a flow chart based on the information held on the prior year audit file. c) Internal control questionnaire drawn up by the audit senior. d) Rolling forward the controls from the prior year audit file and asking the finance director if there have been any changes.

Answer 38

c The internal control questionnaire is a simple, but effective tool which can be used by part-qualified or less experienced members of the engagement team. As the controls change little and the evidence suggests that this is fairly robust and established finance function, using the ICQ would help to highlight any key changes in a simple, efficient manner. Having interviews with all the members of staff and building narrative notes would be more suited to a new engagement or one where the client has had significant changes to the system of internal control in the year. Just relying on the prior year information will not highlight any changes and would not meet the requirements of sufficient and appropriate audit evidence.

Question 39

Which two of the following are correct a) Inspection of assets confirms rights and obligations b) Inspection of a purchase invoice confirms the cost of inventory c) Observation gives strong ongoing evidence of the matter being observed d) Inquiry of third parties gives better evidence than inquiries of entity insiders

Answer 39

b & d Observation only confirms evidence at the time the process was observed

Question 40

Select the impact that the following factors would have on sample size - if any a) An increase in tolerable misstatement b) An increase in number of invoices in population c) A decrease in auditor's required confidence level d) Stratification of the population

Answer 40

a) Decrease b) Negligible effect c) Decrease d) Decrease

Question 41

How frequently must all inventory lines be counted?

Answer 41

Once per year

Question 42

Direct confirmation of receivables balances is evidence in respect to which of the following two assertions? a) Existence b) Accuracy, valuation & allocation c) Rights & Obs d) Completeness e) Occurrence

Answer 42

a & c Testing for existence and ownership of asset

Question 43

Does a positive confirmation request always ask respondents to reply to the auditor indicating whether or not they agree with the information provided?

Answer 43

NO It can do, or it can ask respondent to state amount owed by entity

Question 44

What type of threat is displayed if a member of the audit team enters into negotiations with the audited entity?

Answer 44

Self-Interest Threat

Question 45

Thatch pls's current ration this year is 1:33:1 compared with 1:25:1 Which two of the following are possible explanations of this? a) Thatch paid its payables earlier than usual from an overdraft b) Thatch made an unusually large sale before the YE c) Thatch made an unusually large purchase of goods for cash immediately before the YE, these goods were held in inventory d) Thatch paid its payables earlier than usual from a cash balance

Answer 45

b & d The current ratio has increased, so assets are greater than liabilities

Question 46

Which two of the following controls will help ensure that money received is banked? a) Matching cash receipts with invoices b) Monthly bank recs c) Daily banking of money received d) Investigation of shortages and surpluses of cash in the business

Answer 46

b & c Bank recs will identify amounts recorded in the cash book but not banked

Question 47

A partner in Estelle & Co has just inherited a large number of shares in one of the firm's audit clients. What course of action should Estelle & Co take? a) The partner should dispose immediately of the shares. b) The partner does not need to dispose of the shares but can transfer them to his wife. c) The partner can transfer the shares into the name of the audit firm. d) The partner may keep the shares but must have no involvement in the audit of that particular client.

Answer 47

a. On inheriting the shares, the partner should dispose of them at the first available opportunity as, per the FRC Ethical Standard, no partner in the audit firm or an immediate family member (ie spouse) is permitted to hold shares in one of the firm's audit clients.

Question 48

Indicate whether the following are TOC or TOD a) Carrying out analytical procedures on the statement of profit or loss. b) Reviewing board minutes for evidence of the authorisation of major additions to non-current assets. c) Reconciling the transactions listed in the year end bank reconciliation to supporting documentation

Answer 48

a) TOD b) TOC c) TOD

Question 49

The following statements describe ways in which the assurance provider might be able to “close” the expectations gap. For each statement select whether it is true or false. a) By stating in the auditor's report the responsibilities of management for the financial statements. b) By reducing the audit fee. c) By stating the basis for opinion in the auditor's report

Answer 49

a) True b) False c) True

Question 50

For each statement select whether it is a limitation or is not a limitation. a) Sampling is part of the audit process. b) The provision of audit in itself can be a subjective process. c) The auditors may be auditing that particular client for the first time.

Answer 50

a) Limitation b) Limitation c) Not a limitation 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.

Question 51

For each of the following factors indicate whether or not it is a plausible explanation for a reduction in the gross profit margin. a) The price of sugar, one of the company’s principal raw materials, has increased during the year. b) During the year the company has introduced an early payment discount for customers who pay within 14 days.

Answer 51

a) Plausible b) Not Plausible An increase in cost of raw materials will result in an increase in the cost of sales and fall in profit margin. Early payment discounts do not affect gross margin,but do have an impact on net profit margin.

Question 52

Which ONE of the following methods of recording controls and document flow is generally regarded as the most user friendly and easy to understand? a) Flowcharts b) Interviews with key management personnel c) Narrative notes d) Questionnaires

Answer 52

Flowcharts are regarded as the most user friendly and easy to understand way of recording controls as the user can visually evaluate the system in operation and see which controls are carried out at which stages.

Question 53

For each weakness select the most likely consequence which might arise as a result of that deficiency. a) Purchase orders are not authorised prior to being placed. b) Invoices are not always recorded. Options: The company may not purchase goods on the most advantageous terms. There are misstatements in the financial statements. The company may not purchase goods on the most advantageous terms

Answer 53

a) The company may not purchase goods on the most advantageous terms. b) There are misstatements in the financial statements.

Question 54

Direct confirmation with customers assists in obtaining evidence about which THREE of the following assertions? a) Existence b) Rights and obligations c) Valuation d) Cut-off

Answer 54

a, b & d Recievables confirmations do not confirm the collectability of the amounts owed - hence do not verify valuation

Question 55

The following statements relate to the types of confirmations which may be sought from receivables. For each statement select whether it is true or false. a) Under the negative method, the customer is requested to confirm the accuracy of the balance shown or state their disagreement. b) Under one of the options available for the positive method of direct confirmation, the customer may be requested to provide the balance owed. c) Positive confirmations must be used where there are a large number of balances.

Answer 55

a) False b) True c) False There is no such requirement

Question 56

The following statements relate to the selection of a sample of customers from whom direct confirmation of balances will be sought. For each statement select whether it is true or false. a) Samples should be selected giving each customer an equal chance of being selected. There should be no further considerations. b) The sample of customers should include accounts that are old, unpaid, written off and with credit balances. c) Customers with whom it is difficult to communicate should be avoided.

Answer 56

a) False b) True The sample of trade receivables circulated should include unusual accounts also e.g. nil balances, credit balances. c) False 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.

Question 57

For each of the following statements concerning documentation, select whether they are true or false in accordance with ISA (UK) 230 Audit Documentation. a) The preparation of documentation is a legal requirement b) Documentation assists team members to direct and supervise work done c) Documentation may be in paper or electronic form

Answer 57

a) False b) True c) True Documentation preparation in the form required by ISA (UK) 230 is a professional, not a legal, requirement.

Question 58

James & Co are the auditors of Eye Ltd. Eye Ltd has asked to have a look at James & Co’s working papers in respect of itself. In accordance with ethical guidelines, what should the response of James & Co be? a) Refuse, as the working papers belong to James & Co and are not part of Eye Ltd’s accounting records. b) Refuse but agree to show Eye Ltd any working papers they request once the audit is complete. c) Show Eye Ltd whatever working papers they request. d) Show Eye Ltd the working papers only at James & Co’s discretion and only those documents that will not prejudice the audit.

Answer 58

d Care must be taken to show only those documents that will not prejudice the audit. The working 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).

Question 59

A private company client has requested that its auditor prepares a valuation for a material portfolio of shares included in the statement of financial position. Which set of threats may arise if the auditor agrees to take on this assignment? a) Self-review and advocacy threats b) Advocacy and familiarity threats c) Advocacy and management threats d) Self-review and management threats

Answer 59

d Valuing a portfolio of shares leads to self-review and management threats. This is because the auditor will then come to audit his own valuation of the same portfolio. Also, the responsibility for the valuation should be taken by management.

Question 60

In which ONE of the following situations may confidential information in respect of a client only be disclosed if the permission of the client has first been granted? a) Where there is a suspicion of money laundering b) As part of a defence in a negligence claim c) Where there is a suspected regulatory breach of a charity and the report is made to the Charity Commision d) To avoid giving an incorrect auditor's report to another client

Answer 60

d The other options, client permission is not required (it may be construed as 'tipping off' the client if there is a suspicion of money laundering or a regulatory breach) and permission is not required if the auditor is protected by the court.

Question 61

Will materiality impact the audit opinion given?

Answer 61

Yes The existence of material uncorrected errors and misstatements will impact the audit opinion

Question 62

What is the risk associated with this deficiency? Invoices are not in numerical sequence a) Invoiced sales might not be properly recorded b) Credit notes might not be properly recorded c) Debts might be included in the receivables ledger that are not recoverable

Answer 62

a

Question 63

True or false, in cases where significant judgement is required, the auditor can choose to delay the preparation of working papers in order to allow for suitable reflection

Answer 63

False Documentation must be prepared on a timely basis

Question 64

Which of the three following relationships are reasons why analytical procedures can give strong evidence to the accuracy of purchases? a) Operating margin b) Purchases and payables c) Purchases and invoices d) Gross margin

Answer 64

b, c, d

Question 65

Which TWO of the following are auditors ALWAYS required to do upon being invited to tender for an audit engagement? a) Ensure they are professionally qualified to act. b) Ensure they have adequate existing resources to carry out the audit. c) Obtain references for key personnel within the entity to be audited. d) Communicate with the existing auditors to discover any reasons as to why they should not accept appointment.

Answer 65

a & b It is not ALWAYS necessary to contact previous auditors - it may be firm's first audit

Question 66

ISA (UK) 315 (Revised) Identifying and Assessing the Risks of Material Misstatement states that a system of internal control in an organisation consists of five components: The control environment The entity's risk assessment process The entity’s process to monitor the system of internal control The information system and communication Control activities. For each of the following examples, select the component which it illustrates. (1) Management's philosophy and operating style (2) Management's review of the competence levels for particular roles within the business, and assessing the necessary skills and knowledge required by staff.

Answer 66

Both are examples of the control environment 2 - displays attitude to ensuring the best practice across the business

Question 67

True or false, Having an internal audit function is a requirement of the UK Corporate Governance Code

Answer 67

False, having an internal audit function is not a requirement of the UK Corporate Governance Code but the need for directors to review the need for one annually is. The other statements are both true.

Question 68

Strength or deficiency; Orders are placed by department heads, usually by telephone, when they determine a service is required

Answer 68

Deficiency - no segregation of duties

Question 69

What is the main purpose of completing an internal control questionnaire? a) To provide information from which to flowchart internal control. b) To determine whether appropriate controls exist in respect of each of the major transaction cycles. c) To identify deficiencies in internal control for the report to management. d) To determine whether there are controls in place to prevent or detect specific errors.

Answer 69

b d would be a test of control

Question 70

Which of the following descriptions accurately defines audit documentation? a) The record of procedures performed by the auditor, and all evidential matters including discussions with management and third parties. b) The record of audit evidence obtained by the auditor and conclusions with regard to the financial statements subject to audit. c) The record of a current nature of procedures performed by the auditor and all evidence, matters and conclusions relevant to the audit. d) The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

Answer 70

d First option omits the important matter of the recording of conclusions reached by the auditor and is therefore incomplete. Second option does not mention the recording of the audit procedures carried out and option makes reference to work carried out of a current nature only (ignoring work for inclusion on the permanent file). Fourth statement is the only comprehensive description of audit documentation.

Question 71

Which of the following is not an example of an audit working paper? Audit strategy Memorandum of the company Audit file Analytical procedures

Answer 71

Audit file - it is not a WP, it is used to keep records of WPs

Question 72

Auditors seek written representations in certain areas. In which of the following areas would it not be appropriate to seek written representations from management as audit evidence? a) The company's expectations in relation to the outcome of legal claims. b) The completeness of disclosure of related party transactions. c) Confirmation that there are no subsequent events that have not been disclosed to the auditor. d) An acknowledgement of the directors' responsibility for the financial statements. e) On the completeness and accuracy of inventory where the auditor was unable to attend the inventory count.

Answer 72

e It would not be appropriate to seek representations on the completeness and accuracy of inventory where the auditor was unable to attend the inventory count because management representations are not critical to sufficient appropriate audit evidence in this area.