CGA AU1 Sept'12 practice exam

EAU1S12 CGA-Canada, 2012 Page 1 of 6

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION September 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. What is the appropriate audit opinion when the auditor is unable to obtain sufficient appropriate audit

evidence, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive?

1) Unqualified opinion 2) Qualified opinion 3) Adverse opinion 4) Disclaimer of opinion b. On March 26, 2012, a CGA firm completed the audit of GHI Ltd.s 2011 financial statements

(December 31 fiscal year end). GHI is a public company listed on the Toronto stock exchange. On April 3, 2012, GHI made its yearly payment on a bank loan (a 10-year loan, with annual payments due on April 3 each year from 2011 to 2020). On April 7, 2012, GHIs board of directors approved the financial statements. On April 30, 2012, the financial statements were mailed to the shareholders.

What is the appropriate date for the independent auditors report in these circumstances?

1) March 26, 2012 2) April 3, 2012 3) April 7, 2012 4) April 30, 2012 c. What is the appropriate audit opinion when the auditor finds that the financial statements contain a

misstatement that is material and pervasive?

1) Unqualified opinion 2) Qualified opinion 3) Adverse opinion 4) Disclaimer of opinion d. WWW.CA Inc. is a public corporation listed on the Toronto stock exchange. As a publicly

accountable enterprise, what accounting standard is the company required to use in the preparation of its financial statements for the fiscal period ended December 31, 2011?

1) GAAP for either the United States or Canada 2) International Financial Reporting Standards (IFRS) 3) Canadian Accounting Standards for Private Enterprises (ASPE) 4) Differential accounting rules

Continued...


e. Lees audit firm has accepted the contract to audit TTT Inc.s financial statements for 2011. Lee worked at TTT when he was a student in the CGA program, before joining the audit firm. What is the likely ethical issue for Lee?

1) An advocacy threat 2) A self-review threat 3) A self-interest threat 4) An intimidation threat f. During the audit of DeepWell Mining Inc., the auditor discovered that the company had bribed a

member of the government in order to obtain the rights to explore a piece of property containing gold deposits. The bribe was illegal but the auditor was also aware that the Code of Ethical Principles and Rules of Conduct (CEPROC) has a rule concerning maintaining confidentiality of a clients affairs. The bribe was recorded in the clients board of directors minutes, and the client explained this was a normal business practice, and that most of its competitors also paid bribes. How should the auditor handle this situation?

1) Do nothing because the auditor must maintain the confidentiality of the clients information 2) Withdraw from the engagement (without an audit fee) without advising anyone of the issue 3) Obtain legal advice regarding this issue 4) Insist that the bribe be disclosed in the audit report if the client wants an unqualified audit opinion g. When the auditor for XYZ Diamonds Ltd. discussed hiring an expert to provide a valuation of the

companys inventory, the client threatened to withhold the audit fee and to sue the auditor for negligence for failing to maintain the confidentiality of the clients information. Which of the following is true?

1) The auditor must obtain an agreement from the expert to maintain the clients confidentiality. 2) The auditor may not hire an outside party to perform a valuation. 3) The auditor can hire the outside party without restriction, since the auditor has already guaranteed

the confidentiality of the clients records. 4) The auditor can hire the outside party only if the expert is also a CGA subject to CEPROC. h. Cleona is a partner in a CGA firm that has been asked to conduct an audit of GTE Inc.s financial

statements. Which of the following is true?

1) If Cleonas firm audited the client last year, this would likely create the appearance of bias and she would not be seen to be independent by the general public.

2) It would not affect her independence if a family member owned shares in GTE as long as Cleona does not own any shares in the company.

3) Cleona must consider whether there are any threats to her independence before accepting the audit engagement.

4) Cleona should assume that she has independence of GTE unless a threat to her independence arises.

i. Which of the following would provide the most assurance for an auditor seeking to verify the balance

of the accounts receivable in the general ledger control account?

1) Confirmation from the purchaser 2) Sales invoice prepared by the sales department 3) Shipping memo prepared by the shipping department 4) Payment recorded in the clients sub-ledger account for that customer

Continued...


j. How should confirmations of accounts receivable be handled in an audit?

1) Confirmation letters should be printed on the audit firms letterhead. 2) Confirmations should be controlled by the audit firm. 3) Responses should be sent directly to the client, for confidentiality reasons. 4) Responses should be requested to be handled by the management of the company that they are

being sent to. k. How is the audit procedure of vouching sales conducted?

1) An auditor selects a recorded sales invoice and works backward in the system to find the related source documentation, such as the shipping documents and customer purchase order.

2) An auditor reviews the recorded sales entries to look for anything that appears unusual, and then investigates the unusual entry further.

3) An auditor selects the sales shipping documents and works forward in the system to find the final recorded sale in the general ledger.

4) An auditor compares the recorded sales for the current year to the recorded sales for the prior year to find significant differences between the two amounts.

l. When the auditors risk assessment includes an expectation that controls at a service organization used

by the auditee are operating effectively, how should the auditor obtain audit evidence about the operating effectiveness of those controls?

1) Obtain a type 1 report 2) Ask the service organizations auditor to perform appropriate tests of controls 3) Use another auditor to perform tests of controls at the service organization on your behalf 4) Issue an unqualified audit report (assuming no material misstatements are found in the auditees

records), since you have no indication of any problem m. When a company changes audit firms, who owns the audit files from the previous years audit?

1) The previous auditor owns the audit files, until a new auditor is appointed, then ownership passes to the new audit firm.

2) The auditee always owns the audit files, since they contain confidential information. 3) Ownership is shared between the previous firm and any future firm as long as the previous years

audited information is included in the financial statements (as past years data). 4) The previous audit firm owns the files even though it is no longer auditing the company. n. What is the risk of incorrect acceptance if IR = 0.20, CR = 0.60, AR = 0.05, and the analytical

procedures risk = 0.80?

1) 0.006 2) 0.096 3) 0.521 4) 1.920 o. Which of the following is true concerning dollar-unit sampling?

1) It can only be used for sampling for tests of details of balances. 2) When testing accounts payable, each separate account payable would be a population unit. 3) It is an attribute sampling method. 4) All accounts have an equal chance of being selected in the sample, regardless of their balance.

Continued...


9 Question 2 JJJ Movers Ltd. is owned by Jacques. The company used to be profitable but several new small companies have started to compete with JJJ, offering very low prices that JJJ cannot match. Jacques thinks he can make his company profitable again if he eliminates his competitors, which will allow him to raise prices. He therefore decided to purchase one of his competitors each year for the next 4 years. The first company he bought was a proprietorship called Jerrys Trucking. Jacques has hired your CGA firm to review the accounting system and controls at Jerrys Trucking to see what changes are needed before he can integrate it into JJJ Movers. Jacques hopes there are not many problems. You interviewed the owner of Jerrys Trucking and the companys bank manager and learned the following information:

The company has customers in both Canada and in the United States, and the owner was not very knowledgeable about customs fees that must be paid and regulations that have to be followed when transporting goods across the borders. Also, the owner, Jerry, often simply took any cash that the business earned and spent it on personal items, instead of claiming a wage from the business. There is only one office staff besides Jerry: Jerrys cousin, who does all of the bookkeeping. His cousin is not an accountant but has taken some accounting courses. Jerry explained that control at Jerrys Trucking is strong because:

He can trust his cousin completely (having honest employees is important for effective control). Jerry personally checks all of the bookkeeping entries, making any corrections he feels are necessary. At the year end, Jerry takes the bookkeeping records to a tax preparer who prepares his tax return. Required Discuss the inherent risk at Jerrys Trucking based on the above information. Include six observations in your answer.

9 Question 3 LKL Inc. has been audited by the same CGA firm for the past 2 years, with unqualified audit reports issued both years. This year, some of the audit staff has changed at the CGA firm. Steve is a CGA and is responsible for the inventory account and the cost of goods sold calculation. Steve was satisfied with the inventory count procedures, including pre-numbered count sheets and experienced staff, and was confident that the staff followed the procedures. He now has the inventory count sheets and wants to reconcile the value of the count results to the trial balance. Steve looked at last years working papers for guidance and to make sure he did not miss anything. The working papers had the following notes:

Objectives for inventory count:

Verify count sheets are complete Look for fictitious adjustments to inventory account Find out about obsolete items Check cut-off Check assignment of inventory Required

71/2 a. Design one audit procedure for each of the objectives in the working paper. Do not use analytical procedures.

11/2 b. Design one additional audit procedure that should be performed to determine the accuracy of the

inventory records.

Continued...


10 Question 4 W-Air Ltd.s 2010 net income before audit adjustments was $2,100,000. Its income would have been $2,600,000, but the company had recorded a special development expense of $500,000. During the audit, however, the auditor discovered that the $500,000 was actually a fine for illegal activities. The treasurer had paid a $400,000 bribe to a government official to obtain confidential information about a new aircraft design. The $400,000 was hidden in several expense accounts, whose balances had been inflated to hide the payment. The auditor found one other misstatement, which was collusion between the treasurer and his assistant to record $2,500 in personal expenses for a vacation taken by the treasurer as business travel expenses. The $2,500 had been incorrectly recorded as a debit to business travel expenses. Required

8 a. Calculate the amount that you would consider to be appropriate for materiality for the company for 2010. Explain each factor in your calculation.

2 b. Explain how the vacation expense misstatement would be treated by the auditor in terms of

materiality.

12 Question 5 Small-M Stores Inc. operates department stores in smaller communities. The companys strategy is to locate stores in communities that are not within a 1 hour drive to larger cities. There are 21 stores in the chain and all accounting is handled in the companys head office. All purchases are handled by 3 buyers, who report to the purchasing manager, who authorizes all purchases. Stores place their orders through one of the buyers, and then the buyer submits a purchase order (PO) to the purchasing manager for approval. When a purchase is approved, the purchasing manager releases the PO by computer to the accounting system for recording. An accounting clerk checks the PO for authorization and then authorizes the system to enter the PO to the purchase journal. When goods are received, a receiving clerk checks the goods for quantity and updates the online inventory record. The goods are then moved to the inventory area of the warehouse, under the control of the warehouse supervisor. Each quarter, the inventory clerks count the inventory on hand and send this information to the accounting manager for reconciliation with the recorded inventory. Any adjustments to inventory above $1,500 per quarter are authorized by the controller. Required Identify the four kinds of segregation of responsibilities for the purchasing function at Small-M Stores. Using the case facts, include one example for each kind in your answer.

8 Question 6 XWA Chemicals Inc. appointed its auditors late in the year. The auditors were able to attend the year-end inventory count but could not test the controls during the year. To keep the audit costs down, they decided to use the test data approach for payroll to test samples of transactions for the year. You are a partner at the audit firm and have been asked to provide advice to the auditors designing the test data. Required Explain what advice you would provide to the auditors regarding the test data approach. Include at least four points in your answer.

Continued...


10 Question 7 DEF Inc. sells motors and parts to boat retailers and repair shops. DEF ships to many different areas in 3 Canadian provinces. A typical entry to record a sale for DEF is:

Accounts receivable .................................................................................................... 976 Sales ..................................................................................................................... 976 To record sales in sales journal DEFs sales journal records all sales details, including the sales date and the shipping date, and there is an automatic adjustment to the appropriate receivables sub-ledger account for whichever customer the sale was made to. Last year the company had more than 30,000 sales entries, of which only 150 exceeded $1,600. Most sales were under $1,000 (200 were under $600). Last year the auditor was curious about the increase in sales to smaller repair shops in northern Ontario, therefore she used a CAAT to identify all customers in that particular geographic area. Required Identify four other examples of how CAATs could be used in the audit of sales at DEF, using the above information. State briefly why the results of each CAAT you design would be relevant for the audit of sales or receivables.

12 Question 8 Easy Oil Inc. started as a proprietorship owned by Chen. When she found a large oil deposit in Argentina, South America, Chen incorporated, but she holds 60% of the issued and outstanding shares (the other 40% are held by various hedge funds). Chen acted as guarantor of the companys bank loan and the companys bank holds 50% of Chens shares as collateral (the loan is the largest liability on the companys balance sheet). Easys long-term plan is to develop the oil field and ship oil to the refineries off the coast of Texas. On the companys December 31, 2010, balance sheet, the South American oil field was valued at C$70 million and total assets were C$80 million. The company is audited by Hen Hao CGAs. The audit firm has two partners, Jing and Wan. The auditors in this case reported to Jing. Wan was not involved in the audit and has never met Chen. The audit firm completed the field work on the audit of the 2010 financial statements on February 28, 2011, and found no material misstatements. However, on March 1, 2011, the government of Argentina made a surprising announcement that it was nationalizing the oil field and taking ownership of the property. Chens company will be paid C$6 million. Chen was very surprised at this as she had always involved the local government in her plans and was expecting to receive favourable tax treatment in Argentina by creating at least 200 jobs locally. Required

3 a. Indicate whether the nationalization is a Type I or Type II subsequent event. Briefly explain your answer.

6 b. Assuming that the government nationalized the oil field on March 8, 2011 (1 week after the

announcement), explain in two points how this announcement should be handled by the auditor. 3 c. Indicate who should perform the independent review when the audit is completed. Explain your

answer.

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.

SAU1S12 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. 2) Topic 1.9 (Level 1) b. 3) Topic 1.8 (Level 1) c. 3) Topic 1.9 (Level 1) d. 2) Topic 1.8 (Level 1) e. 2) Topic 2.4 (Level 1) f. 3) Topic 2.3 (Level 1) g. 1) Topic 2.3 (Level 1) h. 3) Topic 2.4 (Level 1) i. 1) Topic 3.3 (Level 1) j. 2) Topic 3.4 (Level 1) k. 1) Topic 3.4 (Level 1) l. 3) Topic 3.4 (Level 1) m. 4) Topic 3.6 (Level 1) n. 3) Topic 6.7 (Level 2)

RIA = .

... = 0.521 o. 3) Topic 6.11 (Level 2)

Continued...


9 Question 2 Source: Topic 4.6 (Level 1)

The inherent risk at Jerrys Trucking is high. Integrity of management is doubtful, since Jerry simply takes cash and does not appear to report this in

the company income. The company has never been audited before. The accounting is done by one person, who is not a trained accountant. Jerry checks all of the bookkeeping entries, making any corrections he feels are necessary, but he is not

a trained accountant. Management is not knowledgeable about customs fees and regulations; therefore, mistakes will likely

occur. The company has transactions in Canada and the United States; therefore, there are foreign currency

complexities to deal with.

Note: 11/2 marks per bullet to a maximum of 9 marks


71/2 a. Verify count sheets are complete

Select a random sample of the count sheets and test them by a re-count Verify that all pre-numbered count sheets are included in the inventory reconciliation

Look for fictitious adjustments to inventory account

Scan the inventory entries in the ledger for unusual entries and amounts, and trace back to supporting documents

Find out about obsolete items

Enquire with management about the policy for identifying and writing down obsolete items Scan the inventory records for slow-moving items Review samples of inventory and look for damaged or shop-worn items

Check cut-off

Obtain the serial numbers of the last shipping and last receiving documents for the year Trace the last receiving document into the inventory account for the year Trace the goods from the last shipping document to ensure they were removed from the inventory

account for the year Trace subsequent shipping and receiving documents to ensure they were removed from or added to

next years inventory Check assignment of inventory

Review bank confirmations for indications of assignment Review board of directors minutes for authorization of assignment Review debt agreements for pledge of inventory

Note: 11/2 marks per bullet to a maximum of 71/2 marks

Continued...


11/2 b. Select a sample of inventory items and vouch unit prices to supporting invoices Select a sample of entries to inventory records and recalculate purchase invoice amounts Recalculate the journal extensions and footings for accuracy

Note: 11/2 marks for any reasonable procedure


8 a. Use 5% to 10% of normalized income from continuing operations (if income is used as a base, it should be adjusted for extraordinary or abnormal items)

$2,100,000 + $500,000 (the bribe is not a normal business item) $2,600,000 + $400,000 = $3,000,000 (the $400,000 is fraudulent) Therefore 5% to 10% = $150,000 to $300,000 The auditor would choose an amount in the above range, based on professional judgment.

Note: 2 marks per bullet to a maximum of 8 marks

2 b. The vacation expense misstatement was fraudulent, therefore qualitatively material, even though much less than the quantitative amount calculated by the auditor for materiality.

12 Question 5

Source: Topic 5.3 (Level 1) Segregation of responsibilities category:

Authorization of transactions Example: The purchase manager can authorize transactions, but cannot enter them to the general ledger

(G/L). Recording of transactions Example: The accounting department enters the PO to the G/L but cannot authorize a PO. Custody of goods Example: It is not clear how custody of inventory is maintained, but is stated to be under the control of

the warehouse supervisor, therefore separate from the other functions. Periodic reconciliation Example: There is a reconciliation done each quarter and any adjustments to the G/L account above

$1,500 are authorized by a separate person. Note: 1 mark each for the segregation of responsibilities plus 2 marks for each example to a maximum of 12 marks

Continued...



When using the test data approach:

The computer system being tested must be the same one the client used to process data for the entire period under review.

None of the test data can contaminate the clients records and files. The auditor must include both valid and invalid transaction data in order to test controls for invalid data. Examining only the output may miss offsetting errors in the computer processing. Without examining the internal processing logic of the computer systems, the auditor can only prove

that the computer system works correctly with the test data used.

Note: 2 marks per bullet to a maximum of 8 marks


Stratify sales by customer, or by amount (possible high-risk accounts) Scan the 30,000 sales for unusually large amounts, or for round numbers (possible fraud or error) Verify the numerical accuracy of sales to the general ledger sales account (accuracy) Scan for entries without shipping dates (fictitious sales) Scan for duplicated sales (validity of sales) Scan for shipping dates after year end (possible cut-off errors) Note: 11/2 marks for CAAT plus 1 mark for reason (21/2 marks per bullet) to a total of 10 marks

12 Question 8 3 a. Source: Topic 10.9 (Level 2)

This is a Type II event, because the cause and manifestation both occurred after year end.

6 b. Source: Topic 10.9 (Level 2)

The auditor will have to ensure proper and full disclosure, but there will not be any adjustment to the companys accounts and financial statements.

The amount is highly material, because the company is losing at least C$64 million and is also losing its largest asset. The value of the collateral held by the bank is now drastically reduced and the bank may call its loan.

The auditor should consider the risk of going concern. Note: 3 marks per bullet to a maximum of 6 marks

3 c. Source: Topic 10.11 (Level 2)

The independent review should be performed by Wan. She is from the same audit firm. She has had no experience on the engagement. She has not been biased by the ongoing relationship with the client.

Note: 1 mark per bullet to a maximum of 3 marks

END OF SOLUTIONS 100

AU1S12 CGA-Canada, 2012

CGA-CANADA


EXAMINERS COMMENTS

General Comments Overall performance on this examination was good. Students answers demonstrated a good awareness of the tested issues involved in internal control, inherent risk, materiality, inventory, audit risk, ethics, and reporting. The performance on the multiple-choice questions was good. However, it appears that some students may be focusing their study on past examinations rather than the course material. For example, some students had very little awareness of the test data approach, even though the module notes provide most of the material for the answers. These examinations do not repeat questions from old examinations, and all course material is examinable as indicated (Level 1, Level 2, or Level 3). There is also a blueprint provided to help guide students. Another problem was that some answers did not address the required; they cannot obtain a satisfactory mark. AU1 examinations are reviewed and designed to address the learning objectives of the course, with appropriate emphasis on Levels 1 and 2. Students should be sure to study the course materials for topics and the depth of detail. It is recommended that students underline the task in the required part of the question, to ensure that their answer addresses each point. When answering questions dealing with audit procedures, students should ensure that the procedure identifies what records or items will be selected and what actions will be taken. It is also helpful to think of what audit evidence is being sought and how this would be obtained.

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

This question was answered well. Parts (e), (l), and (o) were not answered satisfactorily.

e. Auditors independence Evaluate situations that may threaten independence (Level 1)

This question was not answered satisfactorily. An advocacy threat occurs when an auditor is promoting a clients position or opinion; a self-interest threat occurs when an auditor stands to benefit from an association or interest in a client; and an intimidation threat occurs when an auditor is deterred from acting objectively, by actual or perceived threats from a client. None of these situations is suggested by the fact that the auditor previously worked for the client as a student, therefore options 1), 3), and 4) are not reasonable. Option 2), however, is possible since the auditor may be reviewing his or her own work. Therefore option 2) is the best choice.

l. Evidence-gathering audit procedures (Level 1)

This question was not answered satisfactorily. CAS 402, Audit Considerations Relating to an Entity Using a Service Organization, which is a Level 1 required reading for Topic 3.4, discusses this topic. A Type 1 report is a report prepared by the service auditor on the description and design of the controls, but the given information states that the external auditor has already made a risk assessment and expects that controls are operating effectively. Therefore option 1) is not a reasonable choice. The auditor needs to obtain evidence concerning the operating effectiveness of the controls at the service organization, therefore the recommended procedure is to have another auditor (that is, independent) to perform tests of controls at the service organization on behalf of the external auditor. Therefore option 2) is not the best choice. Option 4) cannot be reasonable since the auditor still needs evidence. Option 3) is the best choice.

Continued...


o. Dollar-unit sampling (Level 2)

This question was not answered satisfactorily. The module notes point out that dollar-unit sampling (DUS) is an attribute sampling method that can be used for sampling for tests of controls and for sampling for tests of details of balances, and that the population in DUS is a pool of dollars not a pool of transactions, nor a pool of individual accounts. Therefore options 1), 2), and 4) are all incorrect, and option 3) is correct.

No particular problems were noted with the remaining multiple-choice questions.

Question 2 Inherent risk (Level 1) Overall performance on this question was excellent. Students who had difficulty with this question tended to discuss internal controls and control risk, when inherent risk is the risk that exists without considering the entitys internal controls. Most students obtained full marks or almost full marks.

Question 3 Audit procedures for inventory (Level 1) a. Overall performance on this question was excellent, but some students were unable to provide actual

audit procedures or assumed consignment instead of assignment of inventory. Particularly, answers dealing with cut-off tended to be vague, such as test the last few purchases to make sure they are recorded in the right period Such an answer is more of an objective than an audit procedure; it does not indicate how these purchases would be tested or how the auditor would determine that they were or were not recorded in the right period. Audit procedures are a major topic in the course, so students should expect this topic to be worth significant marks when tested.

b. Overall performance on this question was satisfactory. The question is not difficult and there are

several procedures one could use to determine accuracy. Relying on ratio analysis to compare results either to budgets or to prior years would not provide very good evidence for accuracy. The question asked students to determine the accuracy, not to see if the inventory numbers seemed reasonable or as expected; therefore ratio analysis would not be a satisfactory procedure in this case.

Question 4 Materiality (Level 1)

a. Overall performance on this question was excellent, but some students confused materiality with material misstatement and calculated which of the misstatements they would consider to be material. This problem results from not reading the required carefully. Students are reminded that their answer, even if it contains true statements, cannot be awarded full marks if it does not answer the question asked. Part (a) dealt with the quantitative aspect of materiality. There were marks for each factor considered in the answer, and most students obtained at least part marks.

b. Overall performance on this question was satisfactory. Most students identified the fraudulent nature

of the misstatement and its implications. Some students, however, simply stated that the error would be added to unadjusted errors to be considered at the end of the audit. While the amount itself was immaterial, misstatements involving fraud are always considered material. Again, the required part of the question has to be addressed. The question was not how would the auditor handle this misstatement for the audit, but how would it be treated in terms of materiality.

Question 5 Internal controls (Level 1)

Overall performance on this question was excellent. Most students achieved full or almost full marks. Students who had difficulty with this question tended to answer in terms of how to improve the internal control at the company, which may be an answer from a past examination. This question simply required analysis of the existing segregation of responsibilities. Some students were unaware of the four kinds of responsibilities that should be segregated for effective internal control. A few answers simply repeated the given information in the question with no indication of segregation of responsibilities.

Continued...


Question 6 Test data approach (Level 1) This question was not answered satisfactorily. Answers that did not address the test data approach could not obtain any marks. Although the topic is fully discussed in the module notes, many students appear to have very little knowledge of this topic. A typical answer simply offered one point that there could be offsetting errors but little more, or else explained general sampling issues, such as select a random sample, or suggested audit steps for the payroll account, such as check the time cards or verify the pay scale rate. These may be helpful to an auditor in a general sense, but are not related to the test data approach.

Question 7 Computer assisted audit techniques (Level 1) This question was answered satisfactorily, but some students lost marks by providing examples that were not related to auditing, such as select all sales to a particular product so that the company can determine which products are in high demand. This may be a useful strategy for the business itself, but is not related to auditing. These types of answers were awarded part marks for the use of the computer software to select files or transactions or accounts, but could not obtain full marks as they were not shown to be related to auditing of sales at the company. Answers that simply repeated the example in the given information about identifying customers in a particular geographic area were not awarded any marks as the question asked for four other examples.

Question 8 Subsequent events (Level 2) a. Part (a) was answered satisfactorily, but some students confused subsequent events with contingent

liabilities and answered based on the probability of the event and the materiality. However most students obtained at least high part marks for this question.

b. Part (b) was answered satisfactorily, with no problems noted other than a lack of detail in some

answers. The event was very significant and as such the disclosure should have been extensive. There were no other problems noted.

c. Part (c) was not answered satisfactorily. Many students answers suggested a lack of awareness of the

independent review at the end of the audit. Some students suggested that another audit firm be hired, or that the auditor partner, Jing, who was in charge of the audit do it. There are important reasons for the independent review, which should have suggested that the other partner, Wan, was the appropriate choice.

QuestionsSolutionsExaminer's comments

Documents

CGA AU1 Sept'12 practice exam