Auditing and Assurance Services in Australia Grant Gay 7th Edition – Test Bank

Description

Auditing and Assurance Services in Australia Grant Gay 7th Edition – Test Bank

 Sample Questions

Instant Download With Answers

Chapter 02 Testbank

Student: ___________________________________________________________________________

 

1.

Which of the following statements best explains why the auditing profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? A. Ethical standards that emphasise excellence in performance over material rewards establish a reputation for competence and character.   B. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.   C. A distinguishing mark of a profession is setting appropriate fees.   D. A requirement for a profession is to establish ethical standards that stress a responsibility to the public, clients and colleagues.

 

2.

Which of the following statements is correct about the status of auditing as a profession? A. Auditing obtained its status as a profession through the establishment of the Australian Auditing and Assurance Board.   B. Auditing is recognised as a profession through its registration with the Australian Securities and Investments Commission.   C. Auditing obtains its status as a profession through community sanction.   D. Auditing is recognised as a profession because it generates high fees.

 

3.	Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly? A. Financial Reporting Council.   B. Companies Auditors Disciplinary Board.   C. Auditing and Assurance Standards Board.   D. Australian Securities Exchange.

 

4.	Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board? A. Financial Reporting Council.   B. Companies Auditors Disciplinary Board.   C. Australian Securities Exchange.   D. Australian Securities and Investments Commission.

 

5.

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) are intended to be applied to: A. all audit, review, other assurance and related engagements conducted by external firms.   B. only audits of entities listed on the Australian Securities Exchange.   C. all audits of companies incorporated under the Corporations Act 2001.   D. all audit, review, other assurance and related engagements where the entity has more than five shareholders.

 

6.	Which of the following bodies monitors the operation of the Australian Accounting Standards Board? A. Australian Securities Exchange.   B. Financial Reporting Council.   C. Australian Securities and Investments Commission.   D. Auditing and Assurance Standards Board.

 

7.	To become a registered company auditor, a person must be: A. a fit and proper person.   B. a member of one of the accounting bodies.   C. ordinarily resident in Australia.   D. All of the given answers are correct.

 

8.

The types of actions by members of accounting bodies that may result in disciplinary action being taken by the member’s accounting body include: A. if the member is found guilty of a fraud.   B. if the member practises while bankrupt or insolvent.   C. if the member continues practising despite being declared of unsound mind.   D. All of the given answers are correct.

 

9.

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) contain: A. the effective date of the standard.   B. references to the enforcement provisions of the Corporations Act 2001.   C. the penalties for non-compliance with the standard.   D. specific audit procedures to meet the requirements of the standard.

 

10.

An auditor of a company finds that there are rare and exceptional circumstances where they are unable to comply with a relevant requirement in an auditing standard. They are, however, able to perform appropriate alternative audit procedures. To whom do they have to report or document these circumstances? A. The auditor must report these circumstances to either management or the audit committee and obtain their agreement that the alternative procedures are appropriate.   B. If the auditor can use appropriate alternative audit procedures, no reporting or documentation is required.   C. The auditor is required to document the circumstances in the auditor’s report.   D. The auditor is required to document the circumstances in the audit working papers.

 

11.	Who is responsible for assessing whether company auditors meet the required competency standards for registration? A. Auditing and Assurance Standards Board.   B. Australian Securities and Investments Commission.   C. Companies Auditors Disciplinary Board.   D. Financial Reporting Council.

 

12.	All auditing standards have: A. a reference to Framework for Assurance Engagements.   B. an introduction.   C. a conclusion.   D. All the given answers are correct.

 

13.

Which of the following statements is correct? A. The Australian Securities and Investments Commission is a member of the International Forum of Independent Audit Regulators.   B. International auditing standards are mandatory for all auditors.   C. The Financial Reporting Council is a member of the International Federation of Accountants.   D. Membership of the International Auditing and Assurance Standards Board is restricted to members of the Forum of Firms.

 

14.	Members of the International Auditing and Assurance Standards Board are appointed by A. The International Federation of Accountants.   B. The Forum of Firms.   C. The Public Interest Oversight Board.   D. None of the given answers is correct.

 

15.

Which of the following is not a standard-setting board or committee of the International Federation of Accountants (IFAC)? A. International Auditing and Assurance Standards Board (IAASB).   B. International Ethics Standards Board for Accountants (IESBA).   C. International Public Sector Accounting Standards Board (IPSASB).   D. International Accounting Standards Board (IASB).

 

16.	Membership of the International Auditing and Assurance Standards Board (IAASB) consists of: A. international audit firms.   B. International Federation of Accountants (IFAC) member bodies.   C. non-auditor representatives.   D. All of the given answers are correct.

 

17.	Which of the following types of companies can only be used by an audit firm with the consent of the National Council of Chartered Accountants Australia and New Zealand? A. Nominee company.   B. Service company.   C. Practice company.   D. All of the given answers are correct.

 

18.	Which accounting body in Australia was established under Royal Charter? A. CPA Australia.   B. Chartered Accountants Australia and New Zealand.   C. Institute of Public Accountants.   D. None of the given answers are correct.

 

19.	The largest accounting organisation in Australia is: A. Chartered Accountants Australia and New Zealand.   B. CPA Australia.   C. Institute of Public Accountants.   D. International Federation of Accountants.

 

20.

Which of the following best describes the elements of an audit firm’s quality control that should be considered in establishing its quality control policies and procedures? A. Personnel management and monitoring.   B. Personnel management, monitoring and engagement performance.   C. Personnel management and engagement performance.   D. Monitoring and engagement performance.

 

21.

The objective of quality control dictates that an audit firm should establish policies and procedures for professional development that provide reasonable assurance that all entry-level personnel: A. prepare working papers that are standardised in form and content.   B. have the knowledge required to enable them to fulfil the responsibilities assigned.   C. advance within the organisation.   D. develop specialties in specific areas of assurance services.

 

22.

A firm of independent auditors must establish and follow explicit quality control policies and procedures because these standards: A. are necessary to meet increasing requirements of auditors’ liability insurers.   B. give reasonable assurance that the firm as a whole will conform to the auditing standards.   C. include formal filing of records of such policies and procedures.   D. are required by the Australian Securities and Investments Commission for auditors of all entities.

 

23.

In pursuing its quality control objectives with respect to acceptance of a client, an audit firm is not likely to: A. make enquiries of the proposed client’s legal adviser.   B. review financial reports of the proposed client.   C. make enquiries of previous auditors.   D. review the personnel practices of the proposed client.

 

24.	The mandatory continuing professional education (CPE) requirement for members of Chartered Accountants Australia and New Zealand is: A. 120 CPE hours every year.   B. 120 CPE hours every three years.   C. 60 CPE hours every three years.   D. 60 CPE hours every year.

 

25.

Within the context of quality control, the primary purpose of continuing professional development and training activities is to enable an audit firm to provide personnel with: A. knowledge required to fulfil assigned responsibilities.   B. technical training that assures proficiency as an auditor.   C. professional education to ensure that audit work is performed with due professional care.   D. knowledge required to perform a peer review.

 

26.

An auditor who is approached by their accounting body to undergo a quality control audit must: A. provide audit files to the investigators without delay.   B. obtain the client’s permission to disclose information to the investigators prior to giving them any information.   C. cooperate in every way without delay.   D. disclose to the investigators any potential quality control problems that the member is aware of.

 

27.

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to: A. enable the audit firm to attest to the reliability of the client.   B. satisfy the audit firm’s duty to the public concerning the acceptance of new clients.   C. minimise the likelihood of association with clients whose management lacks integrity.   D. anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

 

28.

In pursuing the audit firm’s quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm’s clients. Which quality control objective would this be most likely to satisfy? A. Professional relationship.   B. Supervision.   C. Independence.   D. Advancement.

 

29.

A basic objective of an audit firm is to provide professional services in conformance with professional standards. Reasonable assurance of achieving this basic objective is provided through: A. continuing professional education.   B. a system of quality control.   C. compliance with Australian Securities Exchange listing requirements.   D. a system of peer review.

 

30.	An auditor’s duty of care to a client would most likely be breached if the auditor failed to: A. meet their reporting deadline.   B. detect all of a client’s fraudulent activities.   C. conduct the audit for the most competitive price.   D. comply with all relevant auditing standards.

 

31.	Due professional care does not require: A. critical review at every level of supervision of work done and judgment exercised.   B. good faith and integrity.   C. appointment of the auditor by the shareholders.   D. compliance with the auditing standards.

 

32.	Common law requires that the auditor: A. guarantees their work.   B. performs their work with due care.   C. discovers all fraud.   D. checks all transactions.

 

33.

When performing an audit, an auditor would most likely be considered negligent if they failed to: A. detect all of the client’s fraudulent activities.   B. include a negligence disclaimer in the client engagement letter.   C. warn the client of any known internal control weaknesses.   D. warn the client’s customers of embezzlement by the client’s employees.

 

34.

Big Ltd wished to acquire the ordinary shares of Small Pty Ltd and engaged Albert & Associates to audit the financial report of Small Pty Ltd. Albert & Associates failed to discover a significant liability when performing the audit. In a common law action against Albert & Associates, Big Ltd, at a minimum, must prove: A. negligence on the part of Albert & Associates.   B. fraud on the part of Albert & Associates.   C. that Albert & Associates knew that the liability existed.   D. All of the given answers are correct.

 

35.

The court found that Roberts & Associates had performed a negligent audit of Pinnacle Ltd, but the plaintiff did not receive damages because the court found insufficient proof of causation. Causation means that: A. the auditor caused the misstatement of the financial report.   B. the auditor’s failure to perform a proper audit caused the damages.   C. the auditor was negligent, but the plaintiff suffered no real damages.   D. the plaintiff was an unforeseen third-party user of the financial report.

 

36.

The Pacific Acceptance case established that: A. reasonable care and skill means following the auditing standards.   B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.   C. auditors are only liable for the proportion of damages attributable to their actions.   D. auditors have a duty of care only to the shareholders as a group.

 

37.	To which of the following parties does the auditor owe a duty of care under contract? A. The company itself.   B. The board of directors.   C. Shareholders as individuals.   D. Potential investors.

 

38.

The AWA case established that: A. reasonable care and skill means following the auditing standards.   B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.   C. auditors are only liable for the proportion of damages attributable to their actions.   D. auditors have a duty of care only to the shareholders as a group.

 

39.

Contributory negligence: A. has always been available as a defence to the auditor.   B. indicates the auditor has played no part in the plaintiff’s loss.   C. will result in an apportionment of damages arising from the plaintiff’s loss between the defendant and the plaintiff.   D. is used to describe the causal relationship between the actions of the auditor and any loss suffered by a plaintiff.

 

40.	Cases that have allowed the auditor to use the defence of contributory negligence include: A. Kingston Cotton Mill.   B. Pacific Acceptance.   C. AWA.   D. None of the given answers are correct.

 

41.

ABC Ltd (ABC) engaged the accounting firm of Ace & King to perform its annual audit. Ace & King performed the audit in a competent, non-negligent manner and billed ABC for $30 000, the agreed fee. Shortly after delivery of the audited financial report, Sam Lloyd, the assistant controller, disappeared, taking with him $40 000 of ABC’s funds. It was then discovered that Sam had been engaged in a highly sophisticated, novel defalcation scheme during the past year. He had previously embezzled $50 000 of ABC’s funds. ABC has refused to pay the auditor’s fee and is seeking to recover the $90 000 that was stolen by Sam. Which of the following is correct? A. The auditor cannot recover the audit fee and is liable for $90 000.   B. The auditor is entitled to collect the audit fee and is not liable for $90 000.   C. ABC is entitled to recover the $40 000 defalcation of the current year and is not liable for the $30 000 fee.   D. ABC is entitled to rescind the audit contract and thus is not liable for the $30 000 fee, but it cannot recover damages.

 

42.

In the Caparo case, the court held that the auditor owes a duty of care to: A. all users of the published financial report.   B. only those parties specified in the engagement letter.   C. the shareholders as a body, but not individual shareholders or third parties.   D. all shareholders, but not third parties.

 

43.	An auditor can be sued for damages under which of the following Acts? A. Crimes Act 1914.   B. ASIC Act 2001.   C. Corporations Act 2001.   D. None of the given answers are correct.

 

44.	Privity letters are issued by auditors to: A. limit the auditor’s liability to a specified amount.   B. disclaim any liability.   C. establish proximity and foreseeability.   D. None of the given answers are correct.

 

45.

Simpson & Associates issued an unmodified auditor’s opinion on the financial report of Ridge Ltd (Ridge). Simpson & Associates did not detect material misstatements in the financial report as a result of negligence in the performance of the audit. Based upon the financial report, Clark purchased shares in Ridge. Shortly afterwards, Ridge became insolvent, causing the price of the shares to decline drastically. Clark has commenced legal action against Simpson & Associates for damages. Simpson & Associates’ best defence to such an action would be that: A. Clark lacks a contractual relationship as a basis to sue.   B. the engagement letter specifically disclaimed all liability to third parties.   C. there is no proof of proximity.   D. there has been no subsequent sale of the shares for which a precise loss can be calculated.

 

46.

A claim for a breach of duty of care might arise against an auditor if: A. an existing shareholder suffered losses because they increased their investment in the company based on figures in the audited financial report.   B. a bank made a loss due to a loan made to the company based on figures in an audited financial report commissioned by the bank.   C. a new investor suffered losses because they purchased shares in the company based on figures in the annual audited financial report.   D. a finance company made a loss due to a loan made to the entity based on figures in an audited financial report commissioned by the entity.

 

47.

Harry & Joseph rendered an unmodified auditor’s opinion on the financial report of a company that sold shares in a public offering. Based on a false statement in the financial report, Harry & Joseph is being sued by an investor who purchased shares in this public offering. Which of the following represents a viable defence? A. The investor has not met the burden of proving fraud by Harry & Joseph.   B. The false statement is immaterial in the overall context of the financial report.   C. Detection that the statement was false occurred after the date of the auditor’s report.   D. The investor did not actually rely upon the false statement.

 

48.	The CLERP 9 reforms now provide for limitation of auditor’s liability through: A. a statutory cap.   B. proportionate liability.   C. incorporation.   D. All of the given answers are correct.

 

49.

Which of the following statements about the statutory cap on auditor’s liability is correct? A. The statutory cap covers the auditor for both fraud and negligence.   B. The statutory cap saves the auditor the cost of professional indemnity insurance.   C. The auditor must disclose the limit on their liability to clients.   D. All of the given answers are correct.

 

50.

Which of the following statements about proportionate liability is correct? A. Proportionate liability means that auditors are only responsible for the amount of any claim for which they are to blame.   B. Proportionate liability applies only when the auditor is an authorised audit company.   C. Proportionate liability applies only when the auditor has appropriate professional indemnity insurance.   D. All of the given answers are correct.

 

 

 

Chapter 02 TestbankKey

1.

Which of the following statements best explains why the auditing profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? A. Ethical standards that emphasise excellence in performance over material rewards establish a reputation for competence and character.   B. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.   C. A distinguishing mark of a profession is setting appropriate fees.   D. A requirement for a profession is to establish ethical standards that stress a responsibility to the public, clients and colleagues.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.01 Identify the attributes of professional status and describe to what extent they exist in public accounting Topic: Professional status of the auditor

 

2.

Which of the following statements is correct about the status of auditing as a profession? A. Auditing obtained its status as a profession through the establishment of the Australian Auditing and Assurance Board.   B. Auditing is recognised as a profession through its registration with the Australian Securities and Investments Commission.   C. Auditing obtains its status as a profession through community sanction.   D. Auditing is recognised as a profession because it generates high fees.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.01 Identify the attributes of professional status and describe to what extent they exist in public accounting Topic: Professional status of the auditor

 

3.	Which of the following bodies is able to impose penalties on auditors who have failed to carry out their duties properly? A. Financial Reporting Council.   B. Companies Auditors Disciplinary Board.   C. Auditing and Assurance Standards Board.   D. Australian Securities Exchange.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

4.	Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board? A. Financial Reporting Council.   B. Companies Auditors Disciplinary Board.   C. Australian Securities Exchange.   D. Australian Securities and Investments Commission.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

5.

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) are intended to be applied to: A. all audit, review, other assurance and related engagements conducted by external firms.   B. only audits of entities listed on the Australian Securities Exchange.   C. all audits of companies incorporated under the Corporations Act 2001.   D. all audit, review, other assurance and related engagements where the entity has more than five shareholders.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

6.	Which of the following bodies monitors the operation of the Australian Accounting Standards Board? A. Australian Securities Exchange.   B. Financial Reporting Council.   C. Australian Securities and Investments Commission.   D. Auditing and Assurance Standards Board.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

7.	To become a registered company auditor, a person must be: A. a fit and proper person.   B. a member of one of the accounting bodies.   C. ordinarily resident in Australia.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

8.

The types of actions by members of accounting bodies that may result in disciplinary action being taken by the member’s accounting body include: A. if the member is found guilty of a fraud.   B. if the member practises while bankrupt or insolvent.   C. if the member continues practising despite being declared of unsound mind.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

9.

Australian auditing standards (ASAs) issued by the Australian Auditing and Assurance Standards Board (AUASB) contain: A. the effective date of the standard.   B. references to the enforcement provisions of the Corporations Act 2001.   C. the penalties for non-compliance with the standard.   D. specific audit procedures to meet the requirements of the standard.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

10.

An auditor of a company finds that there are rare and exceptional circumstances where they are unable to comply with a relevant requirement in an auditing standard. They are, however, able to perform appropriate alternative audit procedures. To whom do they have to report or document these circumstances? A. The auditor must report these circumstances to either management or the audit committee and obtain their agreement that the alternative procedures are appropriate.   B. If the auditor can use appropriate alternative audit procedures, no reporting or documentation is required.   C. The auditor is required to document the circumstances in the auditor’s report.   D. The auditor is required to document the circumstances in the audit working papers.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

 

11.	Who is responsible for assessing whether company auditors meet the required competency standards for registration? A. Auditing and Assurance Standards Board.   B. Australian Securities and Investments Commission.   C. Companies Auditors Disciplinary Board.   D. Financial Reporting Council.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

12.	All auditing standards have: A. a reference to Framework for Assurance Engagements.   B. an introduction.   C. a conclusion.   D. All the given answers are correct.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.02 Describe the regulation of auditing and its subject matter Topic: Regulation of auditing and of the subject matter of audits

 

13.

Which of the following statements is correct? A. The Australian Securities and Investments Commission is a member of the International Forum of Independent Audit Regulators.   B. International auditing standards are mandatory for all auditors.   C. The Financial Reporting Council is a member of the International Federation of Accountants.   D. Membership of the International Auditing and Assurance Standards Board is restricted to members of the Forum of Firms.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.03 Explain the impacts of internationalisation on auditing Topic: Internationalisation of auditing

 

14.	Members of the International Auditing and Assurance Standards Board are appointed by A. The International Federation of Accountants.   B. The Forum of Firms.   C. The Public Interest Oversight Board.   D. None of the given answers is correct.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.03 Explain the impacts of internationalisation on auditing Topic: Internationalisation of auditing

 

15.

Which of the following is not a standard-setting board or committee of the International Federation of Accountants (IFAC)? A. International Auditing and Assurance Standards Board (IAASB).   B. International Ethics Standards Board for Accountants (IESBA).   C. International Public Sector Accounting Standards Board (IPSASB).   D. International Accounting Standards Board (IASB).

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.03 Explain the impacts of internationalisation on auditing Topic: Internationalisation of auditing

 

16.	Membership of the International Auditing and Assurance Standards Board (IAASB) consists of: A. international audit firms.   B. International Federation of Accountants (IFAC) member bodies.   C. non-auditor representatives.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.03 Explain the impacts of internationalisation on auditing Topic: Internationalisation of auditing

 

17.	Which of the following types of companies can only be used by an audit firm with the consent of the National Council of Chartered Accountants Australia and New Zealand? A. Nominee company.   B. Service company.   C. Practice company.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.04 Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal structure of an audit firm Topic: Profile of the auditing profession and of audit firms

 

18.	Which accounting body in Australia was established under Royal Charter? A. CPA Australia.   B. Chartered Accountants Australia and New Zealand.   C. Institute of Public Accountants.   D. None of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.04 Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal structure of an audit firm Topic: Profile of the auditing profession and of audit firms

 

19.	The largest accounting organisation in Australia is: A. Chartered Accountants Australia and New Zealand.   B. CPA Australia.   C. Institute of Public Accountants.   D. International Federation of Accountants.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.04 Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal structure of an audit firm Topic: Profile of the auditing profession and of audit firms

 

20.

Which of the following best describes the elements of an audit firm’s quality control that should be considered in establishing its quality control policies and procedures? A. Personnel management and monitoring.   B. Personnel management, monitoring and engagement performance.   C. Personnel management and engagement performance.   D. Monitoring and engagement performance.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

21.

The objective of quality control dictates that an audit firm should establish policies and procedures for professional development that provide reasonable assurance that all entry-level personnel: A. prepare working papers that are standardised in form and content.   B. have the knowledge required to enable them to fulfil the responsibilities assigned.   C. advance within the organisation.   D. develop specialties in specific areas of assurance services.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

 

22.

A firm of independent auditors must establish and follow explicit quality control policies and procedures because these standards: A. are necessary to meet increasing requirements of auditors’ liability insurers.   B. give reasonable assurance that the firm as a whole will conform to the auditing standards.   C. include formal filing of records of such policies and procedures.   D. are required by the Australian Securities and Investments Commission for auditors of all entities.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

23.

In pursuing its quality control objectives with respect to acceptance of a client, an audit firm is not likely to: A. make enquiries of the proposed client’s legal adviser.   B. review financial reports of the proposed client.   C. make enquiries of previous auditors.   D. review the personnel practices of the proposed client.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

24.	The mandatory continuing professional education (CPE) requirement for members of Chartered Accountants Australia and New Zealand is: A. 120 CPE hours every year.   B. 120 CPE hours every three years.   C. 60 CPE hours every three years.   D. 60 CPE hours every year.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

25.

Within the context of quality control, the primary purpose of continuing professional development and training activities is to enable an audit firm to provide personnel with: A. knowledge required to fulfil assigned responsibilities.   B. technical training that assures proficiency as an auditor.   C. professional education to ensure that audit work is performed with due professional care.   D. knowledge required to perform a peer review.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

26.

An auditor who is approached by their accounting body to undergo a quality control audit must: A. provide audit files to the investigators without delay.   B. obtain the client’s permission to disclose information to the investigators prior to giving them any information.   C. cooperate in every way without delay.   D. disclose to the investigators any potential quality control problems that the member is aware of.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

27.

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to: A. enable the audit firm to attest to the reliability of the client.   B. satisfy the audit firm’s duty to the public concerning the acceptance of new clients.   C. minimise the likelihood of association with clients whose management lacks integrity.   D. anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

28.

In pursuing the audit firm’s quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm’s clients. Which quality control objective would this be most likely to satisfy? A. Professional relationship.   B. Supervision.   C. Independence.   D. Advancement.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

 

29.

A basic objective of an audit firm is to provide professional services in conformance with professional standards. Reasonable assurance of achieving this basic objective is provided through: A. continuing professional education.   B. a system of quality control.   C. compliance with Australian Securities Exchange listing requirements.   D. a system of peer review.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs Topic: Quality control

 

30.	An auditor’s duty of care to a client would most likely be breached if the auditor failed to: A. meet their reporting deadline.   B. detect all of a client’s fraudulent activities.   C. conduct the audit for the most competitive price.   D. comply with all relevant auditing standards.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

31.	Due professional care does not require: A. critical review at every level of supervision of work done and judgment exercised.   B. good faith and integrity.   C. appointment of the auditor by the shareholders.   D. compliance with the auditing standards.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

32.	Common law requires that the auditor: A. guarantees their work.   B. performs their work with due care.   C. discovers all fraud.   D. checks all transactions.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

33.

When performing an audit, an auditor would most likely be considered negligent if they failed to: A. detect all of the client’s fraudulent activities.   B. include a negligence disclaimer in the client engagement letter.   C. warn the client of any known internal control weaknesses.   D. warn the client’s customers of embezzlement by the client’s employees.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

34.

Big Ltd wished to acquire the ordinary shares of Small Pty Ltd and engaged Albert & Associates to audit the financial report of Small Pty Ltd. Albert & Associates failed to discover a significant liability when performing the audit. In a common law action against Albert & Associates, Big Ltd, at a minimum, must prove: A. negligence on the part of Albert & Associates.   B. fraud on the part of Albert & Associates.   C. that Albert & Associates knew that the liability existed.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

35.

The court found that Roberts & Associates had performed a negligent audit of Pinnacle Ltd, but the plaintiff did not receive damages because the court found insufficient proof of causation. Causation means that: A. the auditor caused the misstatement of the financial report.   B. the auditor’s failure to perform a proper audit caused the damages.   C. the auditor was negligent, but the plaintiff suffered no real damages.   D. the plaintiff was an unforeseen third-party user of the financial report.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

 

36.

The Pacific Acceptance case established that: A. reasonable care and skill means following the auditing standards.   B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.   C. auditors are only liable for the proportion of damages attributable to their actions.   D. auditors have a duty of care only to the shareholders as a group.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence Topic: Reasonable care and skill, and negligence

 

37.	To which of the following parties does the auditor owe a duty of care under contract? A. The company itself.   B. The board of directors.   C. Shareholders as individuals.   D. Potential investors.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.07 Explain the auditor’s legal liability to clients Topic: Liability to clients

 

38.

The AWA case established that: A. reasonable care and skill means following the auditing standards.   B. auditors have a duty to closely supervise and review the work of inexperienced audit staff.   C. auditors are only liable for the proportion of damages attributable to their actions.   D. auditors have a duty of care only to the shareholders as a group.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.07 Explain the auditor’s legal liability to clients Topic: Liability to clients

 

39.

Contributory negligence: A. has always been available as a defence to the auditor.   B. indicates the auditor has played no part in the plaintiff’s loss.   C. will result in an apportionment of damages arising from the plaintiff’s loss between the defendant and the plaintiff.   D. is used to describe the causal relationship between the actions of the auditor and any loss suffered by a plaintiff.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.07 Explain the auditor’s legal liability to clients Topic: Liability to clients

 

40.	Cases that have allowed the auditor to use the defence of contributory negligence include: A. Kingston Cotton Mill.   B. Pacific Acceptance.   C. AWA.   D. None of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.07 Explain the auditor’s legal liability to clients Topic: Liability to clients

 

41.

ABC Ltd (ABC) engaged the accounting firm of Ace & King to perform its annual audit. Ace & King performed the audit in a competent, non-negligent manner and billed ABC for $30 000, the agreed fee. Shortly after delivery of the audited financial report, Sam Lloyd, the assistant controller, disappeared, taking with him $40 000 of ABC’s funds. It was then discovered that Sam had been engaged in a highly sophisticated, novel defalcation scheme during the past year. He had previously embezzled $50 000 of ABC’s funds. ABC has refused to pay the auditor’s fee and is seeking to recover the $90 000 that was stolen by Sam. Which of the following is correct? A. The auditor cannot recover the audit fee and is liable for $90 000.   B. The auditor is entitled to collect the audit fee and is not liable for $90 000.   C. ABC is entitled to recover the $40 000 defalcation of the current year and is not liable for the $30 000 fee.   D. ABC is entitled to rescind the audit contract and thus is not liable for the $30 000 fee, but it cannot recover damages.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.07 Explain the auditor’s legal liability to clients Topic: Liability to clients

 

42.

In the Caparo case, the court held that the auditor owes a duty of care to: A. all users of the published financial report.   B. only those parties specified in the engagement letter.   C. the shareholders as a body, but not individual shareholders or third parties.   D. all shareholders, but not third parties.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

 

43.	An auditor can be sued for damages under which of the following Acts? A. Crimes Act 1914.   B. ASIC Act 2001.   C. Corporations Act 2001.   D. None of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

44.	Privity letters are issued by auditors to: A. limit the auditor’s liability to a specified amount.   B. disclaim any liability.   C. establish proximity and foreseeability.   D. None of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

45.

Simpson & Associates issued an unmodified auditor’s opinion on the financial report of Ridge Ltd (Ridge). Simpson & Associates did not detect material misstatements in the financial report as a result of negligence in the performance of the audit. Based upon the financial report, Clark purchased shares in Ridge. Shortly afterwards, Ridge became insolvent, causing the price of the shares to decline drastically. Clark has commenced legal action against Simpson & Associates for damages. Simpson & Associates’ best defence to such an action would be that: A. Clark lacks a contractual relationship as a basis to sue.   B. the engagement letter specifically disclaimed all liability to third parties.   C. there is no proof of proximity.   D. there has been no subsequent sale of the shares for which a precise loss can be calculated.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

46.

A claim for a breach of duty of care might arise against an auditor if: A. an existing shareholder suffered losses because they increased their investment in the company based on figures in the audited financial report.   B. a bank made a loss due to a loan made to the company based on figures in an audited financial report commissioned by the bank.   C. a new investor suffered losses because they purchased shares in the company based on figures in the annual audited financial report.   D. a finance company made a loss due to a loan made to the entity based on figures in an audited financial report commissioned by the entity.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

47.

Harry & Joseph rendered an unmodified auditor’s opinion on the financial report of a company that sold shares in a public offering. Based on a false statement in the financial report, Harry & Joseph is being sued by an investor who purchased shares in this public offering. Which of the following represents a viable defence? A. The investor has not met the burden of proving fraud by Harry & Joseph.   B. The false statement is immaterial in the overall context of the financial report.   C. Detection that the statement was false occurred after the date of the auditor’s report.   D. The investor did not actually rely upon the false statement.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 02.08 Explain the auditor’s liability to third parties Topic: Liability to third parties

 

48.	The CLERP 9 reforms now provide for limitation of auditor’s liability through: A. a statutory cap.   B. proportionate liability.   C. incorporation.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.09 Describe alternative methods used to limit the auditor’s liability Topic: Limitation of liability

 

49.

Which of the following statements about the statutory cap on auditor’s liability is correct? A. The statutory cap covers the auditor for both fraud and negligence.   B. The statutory cap saves the auditor the cost of professional indemnity insurance.   C. The auditor must disclose the limit on their liability to clients.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.09 Describe alternative methods used to limit the auditor’s liability Topic: Limitation of liability

 

50.

Which of the following statements about proportionate liability is correct? A. Proportionate liability means that auditors are only responsible for the amount of any claim for which they are to blame.   B. Proportionate liability applies only when the auditor is an authorised audit company.   C. Proportionate liability applies only when the auditor has appropriate professional indemnity insurance.   D. All of the given answers are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 02.09 Describe alternative methods used to limit the auditor’s liability Topic: Limitation of liability

 

 

Chapter 02 TestbankSummary

Category	# of Questions
AACSB: Analytic	50
Difficulty: Easy	33
Difficulty: Medium	17
Learning Objective: 02.01 Identify the attributes of professional status and describe to what extent they exist in public accounting	2
Learning Objective: 02.02 Describe the regulation of auditing and its subject matter	10
Learning Objective: 02.03 Explain the impacts of internationalisation on auditing	4
Learning Objective: 02.04 Outline the characteristics of the professional bodies and accounting firms engaged in the auditing profession, and describe the internal structure of an audit firm	3
Learning Objective: 02.05 Identify the elements of quality control within audit firms, and explain practice monitoring programs	10
Learning Objective: 02.06 Explain the concepts of reasonable care and skill, and negligence	7
Learning Objective: 02.07 Explain the auditor’s legal liability to clients	5
Learning Objective: 02.08 Explain the auditor’s liability to third parties	6
Learning Objective: 02.09 Describe alternative methods used to limit the auditor’s liability	3
Topic: Internationalisation of auditing	4
Topic: Liability to clients	5
Topic: Liability to third parties	6
Topic: Limitation of liability	3
Topic: Professional status of the auditor	2
Topic: Profile of the auditing profession and of audit firms	3
Topic: Quality control	10
Topic: Reasonable care and skill, and negligence	7
Topic: Regulation of auditing and of the subject matter of audits	10

 

 

Chapter 04 Test Bank

Student: ___________________________________________________________________________

 

1.	Who is responsible for the preparation of the financial report? A. Auditor.   B. Management.   C. Both auditor and management.   D. None of the answers given are correct.

 

2.	Original accounting data comprises:   A. the basic data related to entity transactions.   B. information contained in the financial report.   C. depreciation and amortisation of the entity’s assets.   D. all entries made in an entity’s general ledger.

 

3.	Which of the following items is an example of professional scepticism? A. Determining a low level of materiality.   B. Determining a high level of risk.   C. Being alert to conditions that may indicate risks of fraud.   D. All of the answers given are correct.

 

4.

Which of the following tests would involve the exercising of professional judgment? A. Assessing the appropriateness of the estimate of the provision for doubtful debts.   B. Obtaining a bank confirmation to support the cash at bank figure.   C. Checking the calculations on a sales invoice.   D. All of the answers given are correct.

 

5.	Which audit assertion relates to ensuring that all recorded sales are valid? A. Existence.   B. Completeness.   C. Occurrence.   D. Accuracy.

 

6.

Which of the following audit objectives relates primarily to the financial report assertion of accuracy, valuation and allocation? A. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.   B. Inventory quantities include all products, materials and supplies owned by the company that are in transit.   C. Slow-moving and obsolete items included in inventories are properly identified.   D. Inventories exclude items billed to customers or owned by others.

 

7.	Which of the following is not a financial report assertion? A. Inspection.   B. Rights and obligations.   C. Accuracy, valuation and allocation.   D. Existence.

 

8.

Your audit client is a retailer that sells some of its own merchandise and a large proportion of merchandise held on consignment from suppliers. Which account balance assertion for inventory would this cause to be most at risk? A. Existence.   B. Completeness.   C. Rights and obligations.   D. Accuracy, valuation and allocation.

 

9.	Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for purchases is most at risk? A. Occurrence.   B. Completeness.   C. Classification.   D. Accuracy.

 

10.	As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done mainly to gain evidence about which assertion? A. Accuracy, valuation and allocation.   B. Rights and obligations.   C. Completeness.   D. Existence.

 

11.

This is your first audit of Storm Ltd. During the initial planning you have discovered that the client lacks receiving reports and a policy as to the timing within which to record purchases. You have also observed that there are many adjusting entries to accounts payable, which is a material balance. The audit assertion most at risk when auditing accounts payable is:   A.  existence.   B. accuracy, valuation and allocation.   C.  completeness.   D. rights and obligations.

 

12.

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness? A. Comparing a sample of shipping documents to related sales invoices.   B. Reviewing a standard bank confirmation.   C. Confirming a sample of recorded receivables by direct communication with the debtors.   D. Observing the client’s distribution of payroll cheques.

 

13.

Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations? A. Inventories are properly classified in the statement of financial position as current assets.   B. Inventories exclude items billed to customers or owned by others.   C. Slow-moving and obsolete items included in inventories are properly identified.   D. Inventory quantities include all products, materials and supplies owned by the company.

 

14.

Which of the following audit objectives relates primarily to the financial report assertion of classification? A. Inventories are included in the statement of financial position as current assets.   B. Inventories exclude items billed to customers or owned by others.   C. Inventories are included in the statement of financial position at the lower of cost and net realisable value.   D. Inventory quantities include all products, materials and supplies owned by the company that are in transit.

 

15.

Which of the following audit objectives does not relate primarily to the financial report assertion of completeness? A. Inventories are reduced when appropriate to net realisable value.   B. Inventory quantities include all products, materials and supplies on hand.   C. The totals of inventory listings are properly included in the inventory accounts.   D. Inventory quantities include all products, materials and supplies owned by the company that are in transit.

 

16.	When reviewing a loan agreement to ascertain whether the bank’s security over any of the client’s assets has been included in the financial report, the audit assertion being achieved is: A. accuracy, valuation and allocation.   B. existence.   C. rights and obligations.   D. completeness.

 

17.

In testing the existence assertion for an asset, an auditor ordinarily works from the: A. potentially unrecorded items to the financial report.   B. financial report to the potentially unrecorded items.   C. supporting evidence to the accounting records.   D. accounting records to the supporting evidence.

 

18.	Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock sheets helps address which of the following assertions in respect of inventory? A. Completeness.   B. Accuracy, valuation and allocation.   C. Existence.   D. Rights and obligations.

 

19.	Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence.   B. Completeness.   C. Cut-off.   D. Classification.

 

20.	Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence.   B. Completeness.   C. Authorisation.   D. Classification.

 

21.

You are concerned about whether all sales have occurred. The procedure that will be most effective in verifying this assertion is: A. selecting a sample of invoices and vouching them to delivery dockets.   B. selecting a sample of customers’ orders and tracing them to delivery dockets.   C. checking the sequence of delivery dockets.   D. selecting a sample of delivery dockets and tracing them to invoices.

 

22.

While undertaking the audit of the inventory balance, you use your audit software to extract, from the inventory master file, a report that shows those inventory items with a negative gross margin. The financial report assertion at which such a report is aimed is: A. accuracy, valuation and allocation.   B. existence.   C. cut-off.   D. rights and obligation.

 

23.

Which of the following audit procedures does not assist in the achievement of the assertion of existence in relation to an investment in listed shares? A. A review of share prices quoted at the financial year-end.   B. A confirmation of shares held on the client’s behalf.   C. An analytical review of rate of return on investments.   D. A test of details of transactions of share purchases and sales during the year.

 

24.	Auditors are most likely to use focused audit procedures to examine: A. routine transactions.   B. low-risk assertions.   C. only the rights and obligations assertion.   D. high-risk assertions.

 

25.	Your audit client is under intense pressure to meet an earnings target. Which audit procedure are you most likely to use when auditing purchases? A. Vouching.   B. Tracing.   C. Recalculation.   D. Confirmation.

 

26.

In the context of an audit of a financial report, substantive tests are audit procedures that: A. may be eliminated under certain conditions.   B. are designed to discover significant subsequent events.   C. may be either tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures.   D. will increase proportionately with the auditor’s reliance on internal control.

 

27.	Most of the independent auditor’s work in formulating an opinion on a financial report consists of: A. obtaining an understanding of the internal control.   B. obtaining and examining audit evidence.   C. examining cash transactions.   D. comparing recorded accounts with assets.

 

28.

In a financial report audit, which of the following procedures is a substantive test of transactions?   A. Testing for evidence of approval of invoices.   B. Testing recorded sales with supporting delivery dockets.   C.  Confirming debtors’ accounts.   D.  Comparing this year’s balance with the previous year.

 

29.	Which of the following is not an auditing procedure? A. Vouching.   B. Analytical procedures.   C. Disclosure.   D. Physical inspection.

 

30.

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must: A. be well documented and cross-referenced in the audit documents.   B. be based on sources that are considered reliable.   C. bear a direct relationship to the audit objective.   D. be of a large enough quantity to enable the auditor to form an opinion.

 

31.

Which of the following presumptions is correct about the reliability of audit evidence?   A.  Information obtained indirectly from outside sources is the most reliable audit evidence.   B.  To be reliable, audit evidence should be convincing rather than persuasive.   C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.   D. An effective internal control system provides more reliable audit evidence than does an ineffective internal control system.

 

32.

The following statements were made in a discussion of audit evidence between two auditors. Which statement is not valid concerning audit evidence? A. ‘I am seldom convinced beyond all doubt with respect to all aspects of the reports being examined.’   B. ‘I would not undertake that procedure because at best the results would only be persuasive and I’m looking for convincing evidence.’   C. ‘I evaluate the degree of risk involved in deciding the kind of evidence I will gather.’   D. ‘I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it.’

 

33.

Which of the following statements concerning evidence is correct? A. Appropriate evidence supporting management’s assertions must be convincing rather than merely persuasive.   B. A client’s accounting data cannot be considered sufficient audit evidence to support the financial report.   C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.   D. Effective internal control contributes little to the reliability of the evidence created within the entity.

 

34.

Which of the following is the least persuasive documentation in support of an auditor’s opinion? A. Schedules of details of physical inventory counts conducted by the client.   B. Documentation in the audit working papers of inferences drawn by the auditor from analytical ratios and trends.   C. Notation of experts’ conclusions documented in the auditor’s working papers.   D. Lists of negative confirmation requests for which the auditor received no response.

 

35.

Which of the following factors is most important in determining the appropriateness of audit evidence? A. The reliability of the evidence in meeting the audit objective.   B. The sampling method used by the auditor.   C. The quantity of the evidence obtained.   D. The objectivity of the auditor gathering the evidence.

 

36.	To be appropriate, evidence must be both: A. reliable and well documented.   B. reliable and relevant.   C. useful and independent.   D. extensive and timely.

 

37.	The weakest form of audit evidence among the following is: A. a letter of representation from management.   B. confirmation of an inter-company receivable from a related company.   C. a letter of representation from the client’s solicitors.   D. a bank statement.

 

38.	Evidence is reliable if it: A. signals the true state of an assertion.   B. applies to the period being audited.   C. relates to the audit objective being tested.   D. corroborates management’s assertions.

 

39.

An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of details usually is determined by the: A. availability of data aggregated at a high level.   B. relative effectiveness and efficiency of the tests.   C. timing of tests performed after the balance date.   D. auditor’s familiarity with industry trends.

 

40.

Which of the following statements relating to the appropriateness of audit evidence is always true? A. Evidence gathered by an auditor from outside an entity is reliable.   B. Accounting data developed under a satisfactory internal control system are more relevant than data developed under unsatisfactory internal control conditions.   C. Oral representations made by management are not valid evidence.   D. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

 

41.

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? A. Documents mailed by outsiders to the auditor.   B. Correspondence between the auditor and suppliers.   C. Sales invoices inspected by the auditor.   D. Calculations made by the auditor.

 

42.	The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist is: A. audit risk.   B. detection risk.   C. control risk.   D. inherent risk

 

43.	Auditors can eliminate engagement risk: A. under no circumstances.   B. by establishing policies for client acceptance and continuance.   C. by lowering audit risk.   D. by lowering materiality.

 

44.	The risk that, due to the application of an inappropriate audit procedure, an auditor will conclude that a material error does not exist in an account balance when, in fact, such error does exist is referred to as: A. sampling risk.   B. control risk.   C. non-sampling risk.   D. inherent risk.

 

45.

As the acceptable level of detection risk decreases, an auditor may change the: A. timing of substantive tests by performing them at an interim date rather than at balance date.   B. assessed level of inherent risk to a higher amount.   C. timing of tests of controls by performing them at several dates rather than at one time.   D. nature of substantive tests from a less effective to a more effective procedure.

 

46.

As the acceptable level of detection risk decreases, an auditor may change the: A. substantive tests of details to substantive analytical procedures.   B. nature of substantive tests from less effective to more effective procedures.   C. number of tests of controls.   D. assessed level of inherent risk to a higher amount.

 

47.	As the acceptable level of detection risk decreases, the assurance directly provided from: A. substantive tests should increase.   B. substantive tests should decrease.   C. tests of controls should increase.   D. tests of controls should decrease.

 

48.

As the acceptable level of detection risk increases, an auditor may change the: A. assessed level of control risk from less than high to high.   B. assurance provided by tests of controls by using a larger sample size than planned.   C. timing of substantive tests from year-end to an interim date.   D. nature of substantive tests from less effective to more effective procedures.

 

49.	The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. In regard to minimising this risk, the auditor primarily relies on: A. substantive tests.   B. tests of controls.   C. internal control.   D. statistical analysis.

 

50.	The situation and circumstances can dictate the level of certain risks no matter what the auditor does. However, the auditor is always able to decide to reduce one of the following risks: A. Control risk.   B. Risk of management fraud.   C. Detection risk.   D. Inherent risk.

 

51.	The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily: A. opposite.   B. inverse.   C. direct.   D. unequal.

 

52.

Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an audit client.   B. The risk that the auditor will provide an unmodified opinion on a materially misstated financial report.   C. The overall risk that a material misstatement exists in the financial report.   D. The risk that auditors use audit procedures that are inappropriate.

 

53.	Engagement risk is: A. the risk of issuing an incorrect auditor’s opinion.   B. the auditor’s risk of loss from events arising in connection with the financial report audited and reported upon.   C. the overall risk of material misstatements.   D. the risk of entity financial failure.

 

54.

Inherent risk and control risk differ from detection risk in that they: A. arise from the misapplication of auditing procedures.   B. may be assessed in either quantitative or non-quantitative terms.   C. exist independently of the financial report audit.   D. can be changed at the auditor’s discretion.

 

55.

Which of the following is not a qualitative factor that may affect an auditor’s establishment of materiality? A. Potential for fraud.   B. The entity is close to violating loan covenants.   C. Firm policy sets materiality at 5% of pre-tax income.   D. A small misstatement that would interrupt an earnings trend.

 

56.

Which of the following would an auditor be most likely to use in determining the preliminary judgment about materiality? A. The entity’s annualised interim financial statements.   B. The contents of the management representation letter.   C. The results of the internal control questionnaire.   D. The anticipated sample size of the planned substantive tests.

 

57.

Which one of the following statements is correct concerning the concept of materiality? A. Materiality is determined by reference to guidelines established by the Australian Securities and Investments Commission (ASIC).   B. Materiality depends only on the dollar amount of an item relative to other items in the financial report.   C. Materiality depends on the nature of an item rather than on the dollar amount.   D. Materiality is a matter of professional judgment.

 

58.

Which of the following relatively small misstatements would most likely have a material effect on an entity’s financial report? A. An illegal payment to a foreign official that was not recorded.   B. A piece of obsolete office equipment that was not retired.   C. A petty cash fund disbursement that was not properly authorised.   D. An uncollectible account receivable that was not written off.

 

59.

Your preliminary audit plan for Astro Ltd states that planning materiality is set at 1% of total assets. This planning materiality amount: A. will need to be used for evaluation at the end of the engagement to judge the overall presentation of the financial report, because that was the level used to set the scope of testing.   B. should not be revised in mid-audit.   C. may be revised based on the results of audit tests and new information as the audit progresses.   D. is appropriate for planning, but the evaluation materiality amount must be based on a percentage of revenue.

 

60.

When considering materiality for planning purposes, an auditor believes that misstatements aggregating $10 000 would have a material effect on an entity’s income statement, but that misstatements would have to aggregate $20 000 to materially affect the statement of financial position. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate: A. $10 000.   B. $15 000.   C. $20 000.   D. $30 000.

 

61.

Which of the following tests is intended to detect deviations from prescribed accounting department procedures? A. Substantive tests specified by a standardised audit program.   B. Tests of controls designed specifically for the client.   C. Analytical tests as designed in the industry audit guide.   D. Computerised analytical tests tailored for the configuration of IT equipment in use.

 

62.	Which of the following procedures would be least likely to be included in an auditor’s test of controls? A. Observation.   B. Enquiry.   C. Confirmation.   D. Inspection.

 

63.	All of the following auditing procedures are substantive tests except: A. analytical procedures.   B. tests of approvals on invoices.   C. vouching of sales transactions to delivery dockets.   D. confirmation of bank balances at year-end.

 

64.

‘Dual-purpose tests’ is a term used for: A. tests of controls that address both the design of the control procedures and their operating effectiveness.   B. tests of transactions that include substantive procedures as well as tests of controls.   C. tests that address both balances and transaction classes.   D. tests performed because of client expectations as well as for gathering audit evidence.

 

65.

Which of the following statements concerning the auditor’s use of the work of an expert is correct? A. If the auditor believes that the determinations made by the expert are unreasonable, only an adverse auditor’s opinion may be issued.   B. If the expert is related to the client, the auditor is not permitted to use the expert’s findings as corroborative evidence.   C. The expert should be identified in the auditor’s report if the auditor has relied on the expert in issuing an unmodified auditor’s opinion.   D. The expert should have an understanding of the auditor’s corroborative use of the expert’s findings.

 

66.	Audit documentation prepared on audits of publicly held clients is the property of the: A. shareholders.   B. auditor.   C. management of the entity being audited.   D. the Australian and Securities Investments Commission.

 

67.	All of the following documents are typically in the current file except: A. adjusting journal entries.   B. copies of the auditor’s report.   C. chart of accounts.   D. copies of minutes of important committee meetings.

 

68.

Audit documents record the results of the auditor’s evidence-gathering procedures. When preparing audit documents, the auditor should remember that: A. audit documents should be kept on the client’s premises so that the client can have access to them for reference purposes.   B. audit documents should be the primary support for the financial report being examined.   C. audit documents should be considered as a substitute for the client’s accounting records.   D. audit documents should be designed to meet the circumstances and the auditor’s needs on each engagement.

 

69.

Audit documents that record the procedures used by the auditor to gather evidence should be: A. considered the primary support for the financial report being examined.   B. viewed as the connecting link between the accounting records and the financial report.   C. designed to meet the circumstances of the particular engagement.   D. destroyed when the audited entity ceases to be a client.

 

70.	Audit documentation: A. must be in electronic form.   B. must be only in paper form.   C. is not required, but is strongly recommended.   D. may be in paper, electronic or some other form.

 

71.

Which of the following is not a factor affecting the independent auditor’s judgment as to the quantity, type and content of audit working papers? A. The need, in the particular circumstances, for supervision and review of the work performed by any assistants.   B. The nature and conditions of the client’s records and internal control.   C. The expertise of client personnel and their expected audit participation.   D. The type of financial report, schedules or other information upon which the auditor is reporting.

 

72.

In planning an audit engagement, which of the following is a factor that affects the independent auditor’s judgment as to the quantity, type and content of working papers? A. The estimated occurrence rate of attributes.   B. The preliminary evaluations based upon initial substantive testing.   C. The content of the client’s representation letter.   D. The anticipated nature of the auditor’s report.

 

73.

An auditor’s working papers will generally be least likely to include documentation showing how the:   A.  client’s schedules were prepared.   B. engagement had been planned.   C. client’sinternal control had been understood and the level of control risk assessed.   D.  unusual matters were resolved.

 

74.	The current file of an auditor’s working papers is most likely to include a copy of the: A. superannuation fund contract.   B. constitution.   C. flowcharts of the internal control activities.   D. bank reconciliation.

 

75.	Which of the following is not a primary purpose of audit working papers? A. To assist in preparation of the auditor’s report.   B. To support the financial report.   C. To provide evidence of the audit work performed.   D. To coordinate the audit.

 

76.

Which of the following factors will least affect the independent auditor’s judgment as to the quantity, type and content of working papers desirable for a particular engagement? A. Need for supervision and review.   B. Number of personnel assigned to the audit.   C. Nature of the auditor’s report.   D. Nature of the financial report or other information upon which the auditor is reporting.

 

 

 

Chapter 04 Test BankKey

1.	Who is responsible for the preparation of the financial report? A. Auditor.   B. Management.   C. Both auditor and management.   D. None of the answers given are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.01 Explain the difference between accounting and auditing and the importance of professional scepticism and professional judgment to auditing Topic: Accounting and auditing contrasted

 

2.	Original accounting data comprises:   A. the basic data related to entity transactions.   B. information contained in the financial report.   C. depreciation and amortisation of the entity’s assets.   D. all entries made in an entity’s general ledger.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.01 Explain the difference between accounting and auditing and the importance of professional scepticism and professional judgment to auditing Topic: Accounting and auditing contrasted

 

3.	Which of the following items is an example of professional scepticism? A. Determining a low level of materiality.   B. Determining a high level of risk.   C. Being alert to conditions that may indicate risks of fraud.   D. All of the answers given are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.01 Explain the difference between accounting and auditing and the importance of professional scepticism and professional judgment to auditing Topic: Accounting and auditing contrasted

 

 

 

4.

Which of the following tests would involve the exercising of professional judgment? A. Assessing the appropriateness of the estimate of the provision for doubtful debts.   B. Obtaining a bank confirmation to support the cash at bank figure.   C. Checking the calculations on a sales invoice.   D. All of the answers given are correct.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.01 Explain the difference between accounting and auditing and the importance of professional scepticism and professional judgment to auditing Topic: Accounting and auditing contrasted

 

5.	Which audit assertion relates to ensuring that all recorded sales are valid? A. Existence.   B. Completeness.   C. Occurrence.   D. Accuracy.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

6.

Which of the following audit objectives relates primarily to the financial report assertion of accuracy, valuation and allocation? A. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.   B. Inventory quantities include all products, materials and supplies owned by the company that are in transit.   C. Slow-moving and obsolete items included in inventories are properly identified.   D. Inventories exclude items billed to customers or owned by others.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

7.	Which of the following is not a financial report assertion? A. Inspection.   B. Rights and obligations.   C. Accuracy, valuation and allocation.   D. Existence.

 

AACSB: Analytic Difficulty: Easy Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

8.

Your audit client is a retailer that sells some of its own merchandise and a large proportion of merchandise held on consignment from suppliers. Which account balance assertion for inventory would this cause to be most at risk? A. Existence.   B. Completeness.   C. Rights and obligations.   D. Accuracy, valuation and allocation.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

9.	Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for purchases is most at risk? A. Occurrence.   B. Completeness.   C. Classification.   D. Accuracy.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

10.	As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done mainly to gain evidence about which assertion? A. Accuracy, valuation and allocation.   B. Rights and obligations.   C. Completeness.   D. Existence.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Learning Objective: 04.03 Explain the relationships between audit procedures and evidence, and describe common audit procedures used in an audit of a financial report Learning Objective: 04.04 Define sufficient appropriate audit evidence and its relationship to auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

11.

This is your first audit of Storm Ltd. During the initial planning you have discovered that the client lacks receiving reports and a policy as to the timing within which to record purchases. You have also observed that there are many adjusting entries to accounts payable, which is a material balance. The audit assertion most at risk when auditing accounts payable is:     A.  existence.   B. accuracy, valuation and allocation.   C.  completeness.   D. rights and obligations.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

12.

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness? A. Comparing a sample of shipping documents to related sales invoices.   B. Reviewing a standard bank confirmation.   C. Confirming a sample of recorded receivables by direct communication with the debtors.   D. Observing the client’s distribution of payroll cheques.

 

AACSB: Analytic Difficulty: Hard Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Learning Objective: 04.03 Explain the relationships between audit procedures and evidence, and describe common audit procedures used in an audit of a financial report Learning Objective: 04.04 Define sufficient appropriate audit evidence and its relationship to auditing procedures Topic: Financial report assertions and audit objectives and procedures

 

13.

Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations? A. Inventories are properly classified in the statement of financial position as current assets.   B. Inventories exclude items billed to customers or owned by others.   C. Slow-moving and obsolete items included in inventories are properly identified.   D. Inventory quantities include all products, materials and supplies owned by the company.

 

AACSB: Analytic Difficulty: Medium Learning Objective: 04.02 Outline the logical process of identifying financial report assertions, developing specific audit objectives and selecting auditing procedures Topic: Financial report assertions and audit objectives and procedures