CGA AU1 March'12 Practice Exam

EAU1M12 CGA-Canada, 2012 Page 1 of 6

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION March 2012

Marks Time: 3 Hours 30 Question 1

Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each a. The relevance and reliability of audit evidence refers to which of the following concepts?

1) Appropriateness 2) Sufficiency 3) Going concern 4) Professional skepticism b. Which of the following is true concerning Canadian Auditing Standards (CAS)?

1) CAS override the responsibilities of the auditor that exist in legislation in connection with the offering of securities to the public.

2) CAS do not impose responsibilities on management. 3) CAS require the auditor to obtain absolute assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error. 4) If an auditor follows CAS, it will not be necessary for the auditor to exercise professional

judgment. c. Which of the following statements about auditing is true?

1) The quantity of the audit evidence needed is affected by the auditors assessment of the risks of material misstatement and also by the quality of such audit evidence.

2) The quality of the audit evidence needed is affected by the quantity of such audit evidence. 3) The quantity of the audit evidence needed is affected by the auditors assessment of the risks of

material misstatement and also by the cost of obtaining such audit evidence. 4) The quality of the audit evidence needed is affected by the cost of obtaining such audit evidence. d. Which of the following best describes the concept of professional skepticism?

1) Being aware that management is always biased and possibly deceitful 2) Being alert to conditions of possible misstatement due to error or fraud and making a critical

assessment of audit evidence 3) Being trustful of management and obtaining persuasive audit evidence when managements

assertions seem unreasonable 4) Being alert to conditions of possible misstatement due to unadjusted errors from the previous

years financial statements

Continued...


e. Which party has a responsibility with respect to fraud in a companys financial statements?

1) Management has the responsibility for the prevention of fraud but the auditor has the responsibility to detect fraud.

2) Management should be reasonably confident that there is no fraud in the financial statements before the audit begins, and then the auditor takes responsibility for any fraud found once the audit starts.

3) The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement caused by fraud.

4) The auditor has the responsibility to design internal controls that will prevent fraud. f. Why is the auditor concerned with collusion?

1) Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false.

2) Collusion always exists, therefore the auditor must design audit procedures to detect it. 3) Management must disclose any collusion occurring in the year in the financial statements. 4) Management is not responsible for fraud if it is related to collusion. g. When does the auditor assess the risk of material misstatement in a clients financial statements?

1) The auditor has to determine the risk before accepting the audit. 2) The auditor sets the risk at the beginning of the audit and does not allow subsequent findings

during the audit to affect the assessment. 3) The auditors assessment of the risk of material misstatement may change during the audit as

more evidence is obtained. 4) The auditor determines the risk only at the conclusion of the audit, after considering all of the

audit evidence. h. How would an auditor use the critical cut-off percentage in an audit?

1) It allows the auditor to determine the correct percentage to use when determining materiality. 2) It allows the auditor to identify items that may not exceed materiality, but for which the

percentage change is so large that it indicates potential problems. 3) It identifies items that exceed the auditors materiality limit, and therefore indicates actual

problems. 4) It identifies deviation rates of internal controls as percentages for easier comparison. i. Abcom Ltd. had net income of $4,900,000 in 2010, which was $175,000 higher than the previous

year. The 2010 income included a loss of $400,000 due to uninsured damage to a factory building from a hurricane. The loss was not insured because the company has been in operation for 27 years and never experienced a hurricane before. Which of the following would be the best choice for materiality in the companys statements?

1) 5% to 10% of $4,325,000 2) 5% to 10% of $4,725,000 3) 5% to 10% of $4,900,000 4) 5% to 10% of $5,300,000 j. Which of the following is most likely to result from management optimism and bias?

1) A higher inherent risk of overstatement in revenue accounts 2) A higher inherent risk of overstatement in liability accounts 3) A lower inherent risk of overstatement in asset accounts 4) A lower inherent risk of overstatement of expense accounts

Continued...


k. How would an auditor make use of the audit risk (AR) formula?

1) The auditor measures the inherent risk (IR), control risk (CR), and detection risk (DR) and calculates the audit risk for the engagement.

2) The auditor measures the AR, IR, and CR and calculates the DR for the engagement. 3) The auditor measures the IR and CR and calculates the appropriate DR to achieve the desired AR. 4) The auditor measures the DR, IR, and AR and calculates the CR for the engagement. l. If IR = 0.30, CR = 0.40, and DR = 0.05, what would the risk of material misstatement (RMM) be?

1) 0.006 2) 0.120 3) 0.700 4) 0.750 m. Which of the following best describes the auditors business risk?

1) The risk that the auditor will be sued after completing the audit of financial statements. 2) The risk that the auditor will issue an incorrect audit opinion. 3) The risk that the auditor will fail to detect a material misstatement in the financial statements. 4) The risk that the auditee will suffer financial losses after the audit is completed and the financial

statements are published. n. What should the auditor do if the upper error limit (UEL) of the population of payables controls is 6%,

the tolerable deviation rate (TDR) is 5%, and the audit risk is 5%?

1) Accept the control as effective because the TDR is less than the UEL 2) Reject the control as ineffective because UEL exceeds TDR 3) Accept the control as effective as the UEL does not exceed the audit risk 4) Select a new sample as the UEL exceeds the audit risk o. Which of the following is an advantage of non-statistical sampling?

1) Random numbers can more easily be associated with population items in non-statistical sampling. 2) The results are easier to defend than for statistical sampling. 3) It allows more objective control of audit risks than statistical sampling. 4) It permits auditors to apply evaluation judgments based on factors in addition to the sample

evidence.

Continued...


12 Question 2 Roy is a CGA who started a sports equipment importing business. The business became very successful and he sold it to his neighbour. As part of the sale agreement, Roy agreed to perform an audit of the financial statements for the first year at no charge. Roy told the new owner that there would be no problem in issuing an unqualified opinion if the new owner operated the business without increasing the debt levels and kept inventory low. Roy also has been a partner in an audit firm for several years and to avoid any ethical problems, Roy arranged for other staff to do the audit. Roy only reviewed the work of the other auditors and did not do any of the audit planning or testing himself. The audit for the first year was free, and if the new owner wanted an audit for the second year, Roys firm would only charge 5% of the net income of the company. Roys firm found no material misstatements but the audit report noted a going-concern issue. The new owner took on extra debt from a private source, trying to expand the business too quickly. The excess debt caused the companys current ratio to fall below 1.8, which violated a covenant of the companys bank loan agreement. Under the terms of the lending agreement, the bank then called its loan and the new owner went into bankruptcy within 18 months. The new owner sued Roys audit firm for negligence, claiming that Roy had issued an audit report that ruined her business. Required

8 a. Explain the ethical issues in the above situation. Include at least four points. 4 b. Explain whether or not Roys audit firm could be found negligent by issuing the audit report that

harmed the clients business.

6 Question 3 Kai is considering whether to accept UTE Inc. as an audit client. UTE has had 3 different audit firms in the past 5 years. Kai decided to contact all 3 of the previous auditors and ask them if they had experienced any difficulty in collecting their audit fees from the client. The previous auditors all confirmed to Kai that the client paid the audit fees as billed, therefore Kai recommended that the firm accept UTE as a new client. Required Identify what other information Kai should have asked for when contacting the previous auditors. Give four examples.

12 Question 4 The auditors assessed the internal control during the interim audit (September 15 to September 30), using flowcharts, questionnaires, and narratives and decided to use a combined audit approach. The only changes recommended by the auditors were that that the accounting clerks each have their own user ID and password for access to the computer and that the duties of recording and authorization be separated. The auditors were otherwise satisfied with the effectiveness of the controls at that time. The auditors decided to use the combined audit approach when they returned to complete the audit at the end of the year. When the audit was completed in March of the following year, the auditors met with the client management and reviewed all of their audit findings, including their suggestions for the internal controls. Required Evaluate the auditors procedures assessing the clients internal controls. Include at least four points in your answer.

Continued...


8 Question 5 YTZ Inc. is in its third year of business and sells specialized clothing items for hiking and camping activities. All sales are on the Internet, and the company has approximately 70 different clothing items for sale. You have studied the controls that the company has in place and found the following:

An order is not accepted by the companys server unless the customers name, shipping address, and email address are entered.

An order is not accepted until payment is made by credit card, using the companys credit card processing system.

Once an order is accepted by the system, the companys sales journal is updated. The sales journal is linked to the companys inventory sub-system, and approved sales orders create a

shipping request that is sent to the companys warehouse. The warehouse prints a shipping label, selects the goods, and sends the goods by mail to the customer. The sales records are accessible only to head office staff as the warehouse staff receives a separate

shipping order, which is the only record they need. Software is updated by consultants when the company feels changes are needed. The IT manager at the

company used to be an accountant but now only works with IT issues. The company is not concerned about uncollectible accounts since a sale is not recorded nor shipped until it is paid for. Required Identify four concerns you would have as an auditor regarding the controls over the Internet sales.

10 Question 6 Juanitas CGA firm is conducting an external audit of TYY Inc.s financial statements (for the period ended December 31, 2010). The audit manager has assigned Juanita to analyze the replies for the confirmations sent to TYYs accounts receivables, and also to prepare the aging of the accounts receivables, segregating accounts into 30, 60, 90, and 120 days. Juanita reviewed the confirmations, which had asked customers to reply whether they agreed with the recorded amount or not, and compared the confirmation to the recorded amount. When the amounts agreed, Juanita concluded that the recorded amount was accurate. Juanita then used an approximation (found in last years audit working papers) of 1% of the 30-day group, 4% of the 60-day group, 6% of the 90-day group, and 30% of the 120-day group to determine collectability. Required

71/2 a. Explain three additional steps Juanita should take to determine the collectability of the accounts receivable.

21/2 b. Indicate whether the confirmations are positive or negative confirmations. Briefly explain your

answer.

Continued...


12 Question 7 Tai Inc. is an investment company that manages other peoples savings. The company is owned by one individual, Bernard. The company is so successful that Bernard only accepts clients that he knows personally or that have been referred by friends. Due to recent frauds in this industry, Bernard has decided to have the companys financial statements audited. He has asked you, a CGA, to do the audit of Tai. Bernard has been successful by investing only in interest-bearing investments. In a typical year, the company will buy and sell several investments. To help you get started, Bernard has prepared a schedule of investments, listing all investments, purchases, and sales for the year. Required

2 a. Explain one use of the schedule of investments provided to the auditor by Bernard. 4 b. Design two audit procedures to test the valuation assertion for the companys investment account. 6 c. Design three audit procedures to test the completeness assertion for the companys investment income

account.

10 Question 8 YCO Inc. is a privately-owned company that operates a childrens toy store. The owner, Sue, wants to expand the business by opening 2 more stores, and she approached her bank for a large loan. The loan would pay for construction of one of the stores (the other one will be rented) and provide operating funds for both of the new stores for the 3 years that the owner estimates it will take for the new stores to become established and profitable. One of the banks conditions for the new financing is that YCO provide audited financial statements for the year ended December 31, 2011. Sue hires John, a CGA, to conduct the audit. He does not have much auditing experience but is confident that if he follows generally accepted auditing standards (GAAS), there will be no problems. John started the audit on December 31, 2011 by attending the inventory count, as inventory is the largest current asset on YCOs balance sheet. YCO had 3 teams of employees counting inventory, and the count was completed in 2 hours. John walked through the inventory storage area, listening to the count teams as they did their work, and asking the staff if they had any problems. John told the employees that during the count, they were to report any problems to him, and to turn in their completed count sheets only to him. John was not concerned about count sheets that were not used (empty sheets) by the employees as he knows that the most important concern about inventory is to ensure it is not overstated. John then took a random sample of the inventory count sheets that the employees had used, and checked the counts himself. He found 12 errors where the counter had transposed numbers, and John corrected them all. He then adjusted the inventory account in the trial balance to agree with the count results and made the appropriate notes in his working papers for the adjusting entry. After the count was finished, the first thing John did was to review the inventory counting instructions prepared by Sue, to make sure they were effective. Required Explain five important mistakes that John has made in his audit of the inventory account.

END OF EXAMINATION 100

EXTERNAL AUDITING [AU1] EXAMINATION

AU1

Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 6 pages. There are 8 questions for a total of 100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.

Glossary of Assessment Terms

Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Calculate Mathematically determine the amount

or number, showing formulas used and steps taken. (Also Compute).

Compare Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned.

Contrast Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between)

Criticize Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons.

Define Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes.

Describe Provide detail on the relevant characteristics, qualities, or events.

Design Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information.

Determine Calculate or formulate a response that considers the relevant qualitative and quantitative factors.

Diagram Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw)

Discuss This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors.

Evaluate This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations.

Explain In explanatory answers you must clarify the cause(s), or reasons(s). State the how and why of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words.

Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario.

Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example.

Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it.

Justify Prove or give reasons for decisions or conclusions.

List Present an itemized series or tabulation. Be concise. Point form is often acceptable.

Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details.

Prove Establish that something is true by citing evidence or giving clear logical reasons.

Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario.

Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another.

Review Examine a subject critically, analyzing and commenting on the important statements to be made about it.

State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate)

Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations.

Trace In narrative form, describe progress, development, or historical events from some point of origin.

SAU1M12 CGA-Canada, 2012 Page 1 of 4

CGA-CANADA


SUGGESTED SOLUTIONS

Marks Time: 3 Hours

30 Question 1 Note:

2 marks each

Sources/Calculations:

a. 1) Topic 1.1 (Level 1)

b. 2) Topic 1.1 (Level 1)

c. 1) Topic 1.1 (Level 1)

d. 2) Topic 1.1 (Level 1)

e. 3) Topic 3.1 (Level 2)

f. 1) Topic 3.1 (Level 2)

g. 3) Topic 4.6 (Level 1)

h. 2) Topic 4.3 (Level 1)

i. 4) Topic 4.4 (Level 1)

Materiality = $4,900,000 + $400,000 = $5,300,000

j. 1) Topic 4.6 (Level 1)

k. 3) Topic 4.7 (Level 1)

l. 2) Topic 4.6 (Level 1)

RMM = IR CR = 0.30 0.40 = 0.120

m. 1) Topic 4.6 (Level 1)

n. 2) Topic 6.6 (Level 2)

o. 4) Topic 6.3 (Level 2)

Continued...


12 Question 2 8 a. Source: Topics 2.3 and 2.4 (Level 1)

A self-interest threat occurs when a member, firm, or member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client.

A self-review threat occurs when any product or judgment of a previous assurance engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement; or when members or a member of the assurance team was previously a director or officer of the assurance client or was an employee in a position to exert direct and significant influence over the subject matter of an assurance engagement.

A familiarity threat occurs when a member, firm, or member of the assurance team becomes too sympathetic to the clients interests, by virtue of a close relationship with an assurance client, its directors, officers, or employees.

Roy cannot promise or suggest an unqualified opinion before he obtains and reviews sufficient appropriate evidence to support the opinion.

Roy cannot accept an audit fee of zero or of a percentage of the clients net income. Note: 2 marks per bullet to a maximum of 8 marks

4 b. Source: Topic 2.6 (Level 1)

The audit firm is not negligent to issue the audit report if the audit evidence shows that the opinion issued is supported.

Roy had sufficient appropriate audit evidence that the bank loan was in default, therefore if this supported a going-concern comment in the report, the audit firm would not be negligent.

Note: 2 marks per bullet to a maximum of 4 marks

6 Question 3 Source: Topic 3.6 (Level 1) The information obtained from the predecessor auditor is very useful for deciding whether or not to accept the engagement. This information includes:

Any scope limitations imposed by the client Significant differences over applicability of accounting principles Indications of unethical management practices Managements attempt to influence the audit report (such as opinion shopping)

Note: 11/2 points per bullet to a maximum of 6 marks

Continued...


12 Question 4 Source: Topic 5.4 (Level 1)

The auditors assessed the controls without testing them (they did not proceed to the third stage in control evaluation).

The auditor must verify that internal control was in place and working (or not working) during the entire period of reliance (usually the year under audit).

The auditor must be careful not to reach an incorrect conclusion about internal control as a consequence of focusing on a limited period.

The deficiencies noted by the auditors at the interim audit appear quite serious. Therefore, control risk should likely have been assessed as high to maximum, and the combined approach should not be used.

The auditor has a responsibility to report internal control deficiencies to the appropriate level of management.

Note 3 marks per bullet to a maximum of 12 marks


There are no controls to detect or prevent duplicate orders. There are no controls to ensure correct pricing. There is no cancellation or modification procedure of a sale if the customer has made a mistake in

selecting merchandise online. There are no controls to ensure that the sale is shipped to the correct address; therefore, the company

may have to either re-ship the goods or refund the sale. There is no control to ensure that the companys records are backed up, or properly retained for the

auditor. There should be password control to restrict head office staff access to only those persons who need

access. There is no control over access to the software and only one IT person at the company, indicating that

the company may not have up-to-date systems. Note 2 marks per bullet to maximum of 8 marks

10 Question 6 71/2 a. Source: Topic 8.6 (Level 1)

For significant accounts receivable shown as outstanding for less than 60 days, Juanita should review TYYs related invoices and shipping documents to ensure that those amounts have not been receivable for a longer period.

Juanita should vouch the significant accounts receivable for which payments were received by TYY after year end and before the end of the audit to deposit slips and bank statements, to ensure that the payments received relate to the accounts receivable listed at year-end.

Juanita should test the accuracy of the approximation percentages by comparing them to last years actual results for TYYs receivables and for the industry.

Note 21/2 marks for each procedure to a maximum of 71/2 marks

21/2 b. Source: Topic 8.7 (Level 1)

The confirmations are positive confirmations because they request an answer whether or not the customer agrees with the recorded amount.

Continued...



2 a. The auditor should reconcile the schedule to the investment account and the investment income account in the general ledger (G/L).

4 b. Vouch the cost of the investments to brokers reports, contracts, and cancelled cheques.

Obtain market value of investments and compare to cost to calculate lower of cost or market (LCM), and prepare any necessary mark-downs.

Recalculate foreign exchange rates for foreign currency accounts and compare to investment income account.


6 c. Inspect the investments and any related documents, such as contracts, to determine interest rates; recalculate interest income; and compare to G/L recorded interest income.

Vouch recorded sales to brokers reports and bank deposits, and recalculate gains/losses and compare to investment income account in G/L.

Review deposits received after year end (cut-off tests) to verify income accrued in investment income account by adjusting entries.

Foot journals and reconcile to general ledger control accounts. Trace a sample of income receipts in the journals to ensure all are recorded in the general ledger

control account.



John should have reviewed the count instructions before the count, to ensure that he was satisfied that they would be adequate.

When he found errors, he should have tested more of the counts instead of just correcting the errors, possibly having the inventory re-counted.

John has to reconcile the count to the companys trial balance, not simply adjust the trial balance. If the trial balance is incorrect, there will likely be other misstatements associated with the inventory errors, such as payables, expenses, or even sales.

Management should control the inventory count, not the auditor. John should have collected all of the count sheets. John will not know if a sheet that was not turned in to

him actually had inventory counted on it, or was lost. John did not take any steps to test the quality of the inventory, such as obsolete or damaged goods. John did not follow any procedures to ensure that the inventory was valued at the lower of cost or

market (LCM). John should have ensured that the employees were adequately trained. Note: 2 marks per bullet to a maximum of 10 marks

END OF SOLUTIONS 100

AU1M12 CGA-Canada, 2012

CGA-CANADA


EXAMINERS COMMENTS

General Comments The overall performance of the students on this examination was very good. Students demonstrated a good awareness of reporting, fraud, management assertions, risk assessment, and materiality. In some cases, students answers did not address the required; for example, they provided answers that identified examples but did not explain how these related to the required, and therefore did not obtain full marks. When the required asks students to explain, they must clarify the reasons for their answer. Examination questions will typically allocate most of the marks for reasoning, not just for a conclusion.

Specific Comments Question 1 Multiple choice (Levels 1 and 2)

This question was answered very well. See specific comments below regarding problems noted. Several students chose an incorrect option on parts (b), (c), and (k). b. CASs do not address the responsibilities of the auditor that may exist in legislation, nor do the

standards require an auditor to obtain absolute assurance, nor do the standards replace the need for an auditor to exercise professional judgment. Therefore, options 1), 3), and 4) are incorrect. CAS are standards for auditors, not for managers, therefore option 2) is the best choice.

c. Evidence can be of various forms and the AU1 course discusses which types of evidence are more

reliable. Neither the quality nor the quantity of evidence that an auditor needs can ever be reduced simply due to the cost of obtaining such evidence; therefore, options 3) and 4) cannot be correct. Nor could the quality of evidence needed be reduced simply by the amount of evidence; therefore, option 2) cannot be correct. An auditor must assess the risks of material misstatement and the quality of evidence, and then determine the quantity of evidence needed. Therefore option 1) is the best choice.

k. There are many types of risk that an auditor must consider in conducting an audit of financial

statements, and only some are controllable. The auditor must determine the level of audit risk (AR) that is acceptable in a particular audit. The auditor reduces the level of AR to this level by first measuring the clients inherent risk and control risks, and then adjusting the detection risk accordingly. This is shown in the audit risk formula. Therefore options 1), 2), and 4) are incorrect and option 3) is the best choice.

Question 2 Professional ethics, legal liability, and ethical responsibility (Level 1)

a. This part was answered well by almost all students, with many obtaining full or almost full marks. Most students identified several ethical issues, but some students simply listed the issues or the examples and so could only obtain part marks. Full marks could only be awarded for an explanation, as stated in the required.

b. This part was answered satisfactorily by many students. Students who had difficulty tended to answer

in terms of the ethics issues from part (a) of the question, instead of answering the required, which addressed the question of whether the auditor was negligent by issuing the audit report.

Continued...

AU1M12 CGA-Canada, 2012

Question 3 Pre-engagement arrangements (Level 1) Question 3 was answered very well by almost all students, with many students obtaining either full or almost full marks. Some students thought that the auditor should ask the previous auditor for the clients financial statements and previous audit reports, when these would be readily provided either publicly or from the client directly.

Question 4 Evaluation of internal control (Level 1) Question 4 was answered satisfactorily. Some students overlooked the fact that internal controls must be assessed for the entire audit period, and the auditor must conduct sufficient tests of controls to support the assessment. A few students simply ignored the question situation altogether and simply provided a generic statement of how an auditor assesses the control risk in an audit. It is important to always relate the concepts in your answer to the fact situation in the question.

Question 5 Company operations and computer systems (Level 1) Question 5 was answered very well with almost all students obtaining full marks. No problems were noted.

Question 6 Accounts receivable Substantive procedures; Accounts receivable Confirmations (Level 1) a. This part was answered satisfactorily, but some students were unable to provide three additional steps

that the auditor could take in this situation. Some answers were simply too brief or too vague to be awarded full marks, for example, stating check cash received after the year end, which does not indicate how this would be done, nor what evidence this would provide, related to the collectability of the receivables. Students should not assume that a marker will complete their answer markers can only award marks for what students state in their answer booklet.

b. This part was answered very well with no overall problems noted, but a few students again simply

ignored the question situation altogether and simply provided a generic statement of positive and negative confirmations, without applying this knowledge to the facts of the question.

Question 7 Investments Substantive procedures (Level 2)

a. This part was not answered well. Many students answers indicated that they would take the schedule as given and use it without verifying it first. Students are reminded that both the form and the source of evidence must be considered when determining the quality of the evidence. Most students obtained part marks for this question.

b. This part was answered well by most students. Some students prepared audit procedures that did not

address the valuation assertion, or were too brief to obtain full marks. Most students obtained part marks for this question.

c. This part was answered well by most students. Some students prepared audit procedures that did not

address the completeness assertion, or were too brief to obtain full marks. Students are reminded that when testing for completeness, the direction of testing is critical, so, for example, tracing from the investment income account to the bank deposits could provide evidence for validity but could not provide any evidence for completeness.

Question 8 Inventory Observation (Level 1)

Question 8 was answered very well by most students. Students who obtained less than full marks tended to provide answers that were too brief, simply listing or identifying examples, instead of providing an explanation as was required.

QuestionsSolutionsExaminer's comments

Documents

CGA AU1 March'12 Practice Exam