Knowledge Assurance QB(ICAEW) PDF

The Institute of Chartered Accountants of Bangladesh

ASSURANCEProfessional Stage Knowledge Level

www.icab.org.bd

Question Bank

For exams in 2009 and 2010

ii © The Institute of Chartered Accountants in England and Wales, March 2009

Assurance Question BankThe Institute of Chartered Accountants of Bangladesh Professional Stage

These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales

ISBN: 978-1-84152-813-7First edition 2009

All rights reserved. No part of this publication may be reproduced ortransmitted in any form or by any means or stored in any retrieval system, ortransmitted in, any form or by any means, electronic, mechanical, photocopying,recording or otherwise without prior permission of the publisher.

© The Institute of Chartered Accountants in England and Wales, March 2009 iii

Contents

Page

Title Question Answer

1. Concept of and need for assurance 3 79

2. Process of assurance: obtaining an engagement 7 81

3. Process of assurance: planning the assignment 11 83

4. Process of assurance: evidence and reporting 17 85

5. Introduction to internal control 23 87

6. Revenue system 29 89

7. Purchases system 33 91

8. Employee costs 37 93

9. Internal audit 41 95

10. Documentation 45 97

11. Evidence and sampling 47 99

12. Management representations 55 101

13. Substantive procedures – key financial statementfigures 59 103

14. Codes of professional ethics 67 107

15. Integrity, objectivity and independence 69 109

16. Confidentiality 75 111

iv © The Institute of Chartered Accountants in England and Wales, March 2009

© The Institute of Chartered Accountants in England and Wales, March 2009 1

Contents

Question Bank

2 © The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK


Chapter 1: Concept of and need for assurance

1 Which THREE of the following constitute possible subject matter which may be evaluated for thepurposes of an assurance engagement?

A Data

B Systems or processes

C Corporate governance

D BAS

2 Which TWO of the following describe the roles of the responsible party in any assuranceengagement?

A Setting the criteria of the assurance engagement

B Gathering evidence on the subject matter

C Issuing an opinion on the subject matter against the criteria set

D Preparing the subject matter

3 In a 'reasonable assurance engagement' how are the assurance provided and the conclusion given bestdescribed?

A Absolute and negative

B High and negative

C High and positive

D Low and positive

4 Which THREE of the following statements form part of the generally accepted definition of 'fair', in thecontext of 'a true and fair view'?

A The information is free from discrimination and bias

B The accounts have been correctly extracted from the company’s books and records

C The information complies with generally accepted accounting practice

D The accounts reflect the commercial substance of the company’s underlying transactions



5 Which TWO of the following statements are true with regards to Recognised Supervisory Bodies(RSBs)?

A RSBs offer professional qualifications

B RSBs are approved by Bangladesh Bank

C The Companies Act 1994 requires that accountants are members of RSBs

D RSBs are responsible for monitoring their members

6 With respect to the benefits of assurance engagements, for each of the following statements selectwhether they are true or false.

Assurance is an independent and professional activity that users value

A True

B False

The principal objective of assurance is to detect and correct fraud

C True

D False

Assurance assignments may take many forms

E True

F False

7 The following statements describe ways in which the assurance provider might be able to “close” theexpectations gap. For each statement select whether it is true or false.

By issuing an engagement letter setting out the work to be carried out and its limitations

A True

B False

By reducing the audit fee

C True

D False

By including a caveat in the assurance report

E True

F False

8 Which TWO of the following statements best describe the statutory audit?

A It leads to a certification of the correctness of the financial statements

B It is an independent examination

C It is an opinion on the truth and fairness of the financial statements

D It may be carried out by both external and internal auditors

QUESTION BANK


9 The following statements describe possible limitations of the provision of assurance. For eachstatement select whether it is a limitation or is not a limitation.

Sampling is part of the audit process

A Is a limitation

B Is not a limitation

The provision of assurance in itself can be a subjective process

C Is a limitation

D Is not a limitation

The auditors may be auditing that particular client for the first time

E Is a limitation

F Is not a limitation

10 Ilford Ltd is a large audit client of Smith & Co. Ilford Ltd has approached Smith & Co to request thatthey carry out a review of the inventory system in operation at the Brent branch and the extent towhich it operates in line with company policy.

With reference to the above review engagement, select which part of the review descriptionconstitutes the subject matter, which part the suitable criteria and which party is the responsible party.

The subject matter

A The Brent branch’s inventory system

B Ilford Ltd’s inventory system policies

The suitable criteria

C The Brent branch’s inventory system

D Ilford Ltd’s inventory system policies

The responsible party

E Ilford Ltd

F Smith & Co

11 The following is an extract from an independent auditor’s unmodified report.

'In our opinion, the financial statements prepared in accordance with Bangladesh Accounting Standards(BAS) give a true and fair view of the state of the company’s affairs as of 31 March 20X7, and of theresults of its operations and its cash flows for the year then ended and comply with applicable sectionsof the companies act 1994 and other applicable laws and regulations.'

Which of the following describes the type of assurance provided by this statement?

A Absolute assurance expressed positively

B High level of assurance expressed positively

C Limited level of assurance expressed positively

D Limited level of assurance expressed negatively



QUESTION BANK


Chapter 2: Process of assurance: obtaining an engagement

1 Which THREE of the following might indicate that an assurance client would be high risk?

A Strong internal controls

B Likely lack of finance

C Few unusual transactions

D Lack of experienced finance director

E Poor forecast performance

2 Marnie & Co, an audit firm, have been asked by Opportunity Ltd to accept appointment as auditor.Opportunity Ltd’s previous auditors were Kim & Co.

What action should Marnie & Co take if Opportunity Ltd refuse to give them permission to contactKim & Co?

A Contact Kim & Co in writing in any case and then accept the appointment

B Telephone Kim & Co in order to obtain the information sought and then accept the appointment

C Contact Kim & Co’s other clients to try and gain access to Kim & Co, and then accept theappointment

D Make no communication with Kim & Co or their other clients and decline the appointment

3 Under which THREE of the following circumstances MUST a firm decline an appointment as auditor toa company?

A The prospective client refuses to grant the firm permission to contact the previous auditor

B The prospective client refuses to grant permission to the previous auditor to communicate withthe firm

C The prospective client still owes audit fees to the previous auditor

D The client is one for which your firm is ethically barred from acting

4 In order to comply with the Companies Act 1994, for how many years should a company keeprecords of its accounting transactions?

A For a minimum of six years

B For a minimum of nine years

C For a minimum of twelve years

D There is no specific requirement



5 For each of the following statements about engagement letters select whether they are true or false.

The engagement letter provides an opportunity for management to set out in writing their opinion onsubjective areas in the financial statements

A True

B False

The engagement letter clarifies the role and responsibilities of auditors and directors

C True

D False

The engagement letter contains documentation on the preliminary client risk assessment

E True

F False

The engagement letter contains the auditor’s opinion on the financial statements

G True

H False

6 Which of the following is not a right that an auditor has under the Companies Act 1994?

A The right of access to the company’s accounting records

B The right to receive all necessary information and explanations

C The right to see all minutes of management and shareholders’ meetings

D The right to disclose confidential information in every circumstance without the permission ofthe client

7 The following sentence is taken from an engagement letter.

'The responsibility for safeguarding the assets of the company and for the prevention and detection offraud, error and non-compliance rests with yourselves.'

Which THREE of the following are reasons for the inclusion of the above sentence?

A It clearly sets out the directors’ responsibilities in order to avoid any misunderstandings

B It goes some way to closing the expectations gap

C It clarifies the directors’ legal responsibilities

D It absolves the auditor from all responsibilities relating to the audit

QUESTION BANK


8 For each of the following factors at separate prospective clients, select whether that factor indicatesthat inherent risk is likely to be high or low.

The client is experiencing financial difficulties

A High risk

B Low risk

Three firms of auditors have resigned from the client in the past five years

C High risk

D Low risk

The company carries out very few unusual transactions

E High risk

F Low risk



QUESTION BANK


Chapter 3: Process of assurance: planning the assignment

1 Which THREE of the following would be found in the overall audit strategy document?

A Detailed plan of audit procedures

B Calculation of preliminary materiality thresholds

C Budget and fee

D Timetable

2 According to BSA 315, which THREE of the following are reasons why the auditor should obtain anunderstanding of the entity and its environment?

A To identify and assess the risks of material misstatements

B To be in a position to design and perform audit procedures

C To be better able to assess the risks of fraud

D To obtain information for other future assignments with the same client

3 Which THREE of the following describe analytical procedures?

A Comparing a cash book balance with a bank balance and identifying reconciling items

B Comparing actual results with forecast results

C Comparing company ratios with industry averages

D Comparing budgeted with actual results

4 Seal Ltd has the following results for 20X6 as compared with the results for 20X5.

20X5 20X6CU’000 CU’000

Revenue 5,890 6,050Cost of sales 4,440 4,200Salaries 550 560Distribution costs 230 650Insurance expenses 90 180Other expenses 50 54

Which THREE of the following areas would you be MOST LIKELY to investigate as a result of carryingout analytical procedures?

A Revenue

B Cost of sales

C Salaries

D Distribution costs

E Insurance expenses



5 For each of the following statements concerning materiality, select whether they are true or false.

Materiality should be determined at the beginning of an audit and should not be changed during thecourse of an audit

A True

B False

Materiality always relates to monetary amounts

C True

D False

Materiality is calculated using the same formula for all audit clients

E True

F False

6 Where both control and inherent risks are low, what are the implications for the audit strategy?

A Rely on controls, limited substantive procedures necessary

B Rely on controls, no substantive procedures necessary

C Rely on controls, extensive substantive procedures necessary

D No reliance on controls, extensive substantive procedures necessary

7 Which of the following is an implication of purchase invoices not being authorised?

A Unauthorised purchases will be made

B Purchases will be made from unauthorised suppliers

C Unauthorised payments will be made

D Purchases will not be made at the best possible price

8 When using directional testing, what does an auditor normally test for?

A Assets are overstated and liabilities are understated

B Assets are understated and liabilities are overstated

C Both assets and liabilities are understated

D Both assets and liabilities are overstated

9 Which of the following THREE procedures could be used to identify audit risks?

A Computation

B Verification

C Inquiry

D Observation

E Analytical procedures

QUESTION BANK


10 Audit risk can be split into three components: inherent risk, control risk and detection risk.

For each of the following examples select the type of risk illustrated.

This is the first year of the audit

A Inherent risk

B Control risk

C Detection risk

The client entity has an internal audit function

D Inherent risk

E Control risk

F Detection risk

The client entity is intending to list on the stock exchange within two years

G Inherent risk

H Control risk

I Detection risk

11 Audit risk can be split into three components: inherent risk, control risk and detection risk.

For each of the following examples select the type of risk illustrated.

The client entity operates in an industry where the auditor has no previous experience

A Inherent risk

B Control risk

C Detection risk

Purchase invoices at the client entity are not authorised prior to payment

D Inherent risk

E Control risk

F Detection risk

Management of the client entity is rewarded under a profit-related scheme

G Inherent risk

H Control risk

I Detection risk

12 Which of the following describes control risk?

A The susceptibility of an account balance or class of transactions to material misstatements,assuming there are no related controls

B The risk that the auditor’s procedures do not detect material misstatements

C The risk that a material misstatement would not be prevented, detected or corrected by theaccounting and internal control system

D The risk that a material misstatement is caused by external pressures faced by the company



13 Which of the following best describes an attitude of professional scepticism?

A Disbelieving everything the client says

B Asking the client a number of times the same question to see if the answer is the same

C Making management sign off all evidence provided to the auditor

D Forming a critical assessment and bringing into question the reliability of audit evidence

14 As part of his analytical procedures on the financial statements of Nails Ltd, Peter has identified thatthe current ratio has decreased from 1.7 to 1.3. All purchases of inventory are currently made forcash and all sales are credit sales.

Which TWO of the following could be a valid explanation for this decrease?

A The company has increased its credit policy to customers from 30 to 50 days

B The company has shifted its reliance from long-term debt to short-term debt

C The company has decided to adopt a just in time inventory system (whereby the supplier willdeliver direct to its stores, eliminating the need for a distribution centre)

D The company has recently offered special discounts to customers to attract more sales

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

Which TWO of the following could be a valid explanation for this decrease?

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

B The price of raw materials has increased and this increase has been passed on to customersthrough increased sales prices

C The recent increase in competition has resulted in sales prices having to be reduced

D There has been a significant change in the sales mix

16 Which TWO of the following would increase inherent risk?

A The company operates in a fast-moving industry

B The company does not provide IT training to its employees

C The company does not authorise sales orders prior to sales being made

D The company has a number of legal claims against it which threaten its future

QUESTION BANK


17 For each of the following situations, select the MOST appropriate approach which should be used bythe assurance firm in the given circumstance.

The audit of an existing client, with established internal controls

A Tests of control only

B Substantive procedures only

C A mix of tests of control and substantive procedures

The review of a company’s balance sheet in a limited assurance engagement

D Tests of control only

E Substantive procedures only

F A mix of tests of control and substantive procedures



QUESTION BANK


Chapter 4: Process of assurance: evidence and reporting

1 For each of the following statements in respect of audit evidence select whether they are true or false.

Original documents are more reliable than photocopies

A True

B False

Oral representations are more reliable than written forms of evidence

C True

D False

External documents obtained from external sources are more reliable than external documents fromclient sources

E True

F False

2 To what does 'sufficiency' of audit evidence relate?

A The quality of audit evidence

B The reliability of audit evidence

C The quantity of audit evidence

D The relevance of audit evidence

3 For each of the following forms of evidence select from 1 to 3 in order to rank them in terms of theirreliability (where 1 is the most reliable and 3 is the least reliable).

Schedule of aged receivables obtained from the client

A 1

B 2

C 3

Bank statement obtained from the client

D 1

E 2

F 3

Bank statement obtained directly from the bank

G 1

H 2

I 3



4 Which THREE of the following relate to assertions about account balances at the period end?

A Occurrence

B Completeness

C Existence

D Valuation

E Accuracy

5 Which THREE of the following relate to assertions about classes of transactions for the period underaudit?

A Occurrence

B Completeness

C Existence

D Valuation

E Accuracy

6 Which of the following describes the meaning of 'financial statement assertions'?

A The assertions made by management that are embodied in the financial statements

B The assertions made by the auditor on the financial statements that are embodied in the auditreport

C The assertions made by the auditor that are embodied in the financial statements

D The assertions made by management in the management representation letter

7 Which TWO of the following approaches could the auditor use when gathering audit evidence?

A Tests of control only

B Substantive procedures only

C Both tests of control and substantive procedures

D Analytical procedures only

8 In carrying out tests of control, which THREE of the following types of procedures can be used?

A Inquiry

B Analytical procedures

C Computation

D Inspection

E Reperformance

QUESTION BANK


9 With regards to substantive procedures, select whether the following statements are true or false.

The auditor must always carry out substantive procedures on material items

A True

B False

Substantive procedures are made up of tests of detail only

C True

D False

Substantive procedures are carried out as part of the overall review of the financial statements

E True

F False

10 'In our opinion, the financial statements do not give a true and fair view of the financial position of thecompany as of 31 December 20X4 and of the results of its operations and its cash flows for the yearthen ended in accordance with Bangladesh Accounting Standards (BAS)'

Which of the following describes the type of opinion and assurance provided by the above?

A Unqualified opinion, negative assurance

B Unqualified opinion, positive assurance

C Qualified opinion, negative assurance

D Qualified opinion, positive assurance

11 Which THREE of the following are only reported on by exception in an audit report?

A Proper books of accounts have been kept

B Proper returns adequate for the audit have been received from branches not visited

C The information given in the directors’ report is consistent with the financial statements

D Details of directors’ remunerations have been correctly disclosed in the financial statements

E In respect of the company’s profit or loss for the period, the financial statements give a true andfair view

12 Attending a period-end inventory count provides assurance primarily on which financial statementassertion?

A Existence

B Valuation

C Rights and obligations

D Classification



13 Sending external confirmations to receivables is not helpful for ascertaining which of the following?

A The collectability of the receivables balance

B The existence of the receivables balance

C Whether the receivables balance belongs to the client entity

D The accuracy of the receivables balance

14 For each of the following statements select whether they are true or false.

Reviewing supplier statement reconciliations selected on the basis of purchases turnover in the yearhelps to confirm the completeness of the accounts payable balance

A True

B False

Recalculating the depreciation charge helps in verifying the rights and obligations assertion for non-current assets

C True

D False

Reviewing post balance sheet inventory movements helps verify the valuation of inventory

E True

F False

15 The following are types of test that might be carried out by an auditor. For each example, select thefinancial statement assertion that is being tested.

A sample of purchases taken from throughout the year are checked against supplier invoices

A Cut-off

B Existence

C Occurrence

Insurance expenses are compared year on year

D Rights and obligations

E Existence

F Accuracy

QUESTION BANK


16 Two types of procedures used in gathering evidence are tests of controls and substantive procedures.Sometimes, a specific procedure can serve as both a test of control and substantive procedure.

For each of the following examples, select the type of procedure(s) illustrated.

The year end bank reconciliation is reviewed

A Test of control

B Substantive procedure

C Both a test of control and a substantive procedure

Sales for the year are compared to budget

D Test of control

E Substantive procedure

F Both a test of control and a substantive procedure



QUESTION BANK


Chapter 5: Introduction to internal control

1 'To ensure that purchases are made at the best possible price.'

Which of the following best describes the above statement?

A A risk

B A control objective

C A control procedure

D A test of control

2 The following statements relate to small companies and their internal control systems.

For each statement select whether it is true or false.

Small companies have no need for internal control systems

A True

B False

Small companies can use unsophisticated methods of control to compensate for the lack of formalcontrols

C True

D False

Small companies have difficulty with implementing segregation of duties controls

E True

F False

3 With regards to the following control procedures, select whether they are PRIMARILY preventativeor detective controls.

Bank reconciliations are prepared on a monthly basis

A Preventative

B Detective

Management accounts are compared on a monthly basis against budget.

C Preventative

D Detective

Supplier statements are reconciled with trade payables balances

E Preventative

F Detective



4 Which THREE of the following are likely roles of the audit committee?

A To review the working papers of the external audit firm

B To monitor the independence of the external auditor

C To monitor the effectiveness of the company’s internal audit department

D To make recommendations to the board in relation to the external auditor

5 The following are descriptions of internal controls in operation at Lilly Ltd. For each description selectthe type of control activity which it illustrates.

Only authorised staff may access the inventories storeroom

A Performance review

B Information processing

C Physical control

The despatch note signed by the customer is agreed to the authorised sales order

D Performance review

E Information processing

F Physical control

6 Controls in an IT system are classified as general controls or application controls. For each of thefollowing controls select whether they are general controls or application controls.

Training of staff in use of computer programs

A General

B Application

Password protection of computer programs

C General

D Application

One-for-one checking of processed output to source documents

E General

F Application

7 Controls in an IT system are classified as general controls or application controls. For each of thefollowing select whether they are general controls or application controls.

Cyclical review of master files

A General

B Application

Back-up power sources

C General

D Application

QUESTION BANK


Computer maintenance agreements and insurance

E General

F Application

8 Which of the following methods of recording internal controls is generally regarded as the mosteffective?

A Flowcharts

B Family trees

C Narrative notes

D Questionnaires

9 Which THREE of the following are components of a system of internal controls?

A The control environment

B The entity’s strategy-devising process

C The entity’s risk assessment process

D Control activities

10 BSA 315 states that an internal control system in an organisation consists of five components: thecontrol environment, the entity’s risk assessment process, the information system, control activitiesand monitoring of controls.

For each of the following examples, select the component which it illustrates.

The preparation of a reconciliation between the payables ledger and the payables ledger controlaccount

A Control environment

B Information system

C Control activities

The authorising of all credit notes prior to being issued to customers for returns made

D Control environment

E Information system

F Control activities



11 The following statements refer to possible limitations of an internal control system. For eachstatement, select whether it is true or false.

Internal controls are ineffective if staff collude to override them

A True

B False

Internal controls are designed to deal with all types of transactions, both routine and non-routine

C True

D False

Senior management staff may be in a position to ignore internal controls

E True

F False

12 The following are examples of internal controls which operate at Willow Ltd. For each example, selectthe type of control activity which it illustrates.

The inventory count is carried out by two teams – one team performs the count and the other teamchecks the counting



C Segregation of duties

The aged inventory list is reviewed on a monthly basis in order to decide on the level of inventoryprovisions and write-offs



F Segregation of duties

13 For each of the following statements select whether they are true or false in respect of business risk.

Inherent and control risks are components of audit risk

A True

B False

Auditors should provide suggestions for companies to overcome business risks

C True

D False

Identifying business risks is part of the company’s risk assessment processes

E True

F False

QUESTION BANK


14 Which TWO of the following are reasons why segregation of duties is important in an internal controlsystem?

A It improves efficiency

B It helps to prevent fraud

C It improves the rate of detection of errors

D It is way of assigning roles within a large organisation



QUESTION BANK


Chapter 6: Revenue system

1 The following weaknesses have been identified at Cog Ltd. For each weakness select the MOSTLIKELY consequence.

Credit checks are not made for new customers

A Increased risk of bad debts

B Company may process loss-making sales orders

C Entries are not recorded correctly in the receivables ledger leading to errors in the financialstatements

Invoices are not matched to sales order and despatch note prior to being raised

D Increased risk of bad debts

E Company may process loss-making sales orders

F Entries are not recorded correctly in the receivables ledger leading to errors in the financialstatements

2 The following weaknesses have been identified at Smart Ltd. For each weakness select the most likelyconsequence.

Sales discounts are not authorised prior to being given

A Increased risk of client dissatisfaction

B Company may process loss-making sales orders

C Cash receipts are not recorded correctly in the cashbook

Invoices are not checked for arithmetic accuracy prior to being issued to customers

D Increased risk of client dissatisfaction

E Company may process loss-making sales orders

F Cash receipts are not recorded correctly in the cashbook

3 Which of the following does not present a risk at the sales order stage?

A Orders cannot be fulfilled

B Prices authorised are not on the official price list

C Goods despatched are not of the quality and quantity ordered

D The customer is not in a position to pay



4 Which one of the following controls is LEAST LIKELY to address the risk that money received is notbanked?

A Matching cash receipts with invoices

B Monthly bank reconciliations

C Prompt bank payments

D Investigation of shortages and surpluses of cash in the business

5 The following describes processes which form part of the sales system at Blue Ltd, where all sales aremade on credit.

For each process, select whether it represents a strength or a weakness in the system.

Customers are not requested to sign as evidence of receipt of goods

A Strength

B Weakness

Sales orders are accepted by fax and are processed directly into the system without further action

C Strength

D Weakness

All sales orders are sequentially numbered within the computer system

E Strength

F Weakness

6 Claret Ltd operates a number of control procedures in its sales system. Assuming all controls operateeffectively, which of the following procedures is most likely to ensure that only goods ordered aredelivered?

A Despatch notes are matched with sales orders

B Invoices are matched with despatch notes

C Invoices are matched with sales orders

D Payment receipts are matched with invoices

7 Hammers Ltd operates a number of control procedures in its sales system. Assuming all controlsoperate effectively, which one of the following procedures will help to ensure that invoices arecorrectly and accurately prepared?

A Sales orders are matched with despatch notes

B Invoices are matched with despatch notes

C Invoices are matched with sales orders

D Payment receipts are matched with invoices

QUESTION BANK


8 Which TWO of the following weaknesses could result in the misstatement of trade receivables?

A Signed despatch notes are not agreed to sales invoices raised

B Sales discounts are not always authorised

C Customers normally pay within 40 days instead of the 30 day credit period

D The receivables ledger is not reconciled to the receivables ledger control account

9 Which TWO of the following documents assist in testing sales cut-off?

A Sales orders

B Despatch notes

C Sales invoices

D Remittance advices

10 Which TWO of the following would assist in testing for the overstatement of revenue?

A Gross profit margin

B Debt/equity ratio

C Trade accounts receivable days

D Inventory days

11 The following weaknesses have been identified at Ring Ltd. For each weakness select the most likelyconsequence.

Suppliers are not approved prior to being added to the official suppliers listing

A Goods ordered are of an inferior quality

B Goods received do not satisfy internal purchase requirements

Goods received are not checked against the order made

C Goods ordered are of an inferior quality

D Goods received do not satisfy internal purchase requirements



QUESTION BANK


Chapter 7: Purchases system

1 Why are purchase order forms prenumbered?

A To ensure that all orders authorised are subsequently processed

B To ensure the completeness of the payables balance

C To ensure the correctness of the amounts paid to suppliers

D To maintain supplier relations

2 The following weaknesses have been identified at Till Ltd. For each weakness select the most likelyconsequence which might arise as a result of that weakness.

Purchase orders are not authorised prior to being placed

A Goods may be misappropriated for personal use

B The company may not purchase goods on the most advantageous terms

C There are errors in the financial statements

Invoices are not always recorded

D Goods may be misappropriated for personal use

E The company may not purchase goods on the most advantageous terms

F There are errors in the financial statements

3 On recording goods inwards on goods received notes, copies of the signed goods received notesshould then be sent to which TWO departments?

A Human resources

B Sales

C Buying

D Accounts

4 The directors of Park Ltd have just discovered a fraud carried out by one of their suppliers. Thesupplier would deliver products that were not ordered to Park Ltd and then subsequently invoice ParkLtd for these goods.

Which of the following controls would have prevented this fraud?

A All orders are authorised by the purchases director

B All purchase orders are kept in a locked box in the purchases department office

C All goods received are agreed to purchase orders

D All invoices received are agreed to goods received notes



5 The following are descriptions of internal controls in operation at Flash Ltd. For each descriptionselect the type of control activity which it illustrates.

All goods received are stored in a secure storeroom with limited access



C Physical control

The payables ledger is reconciled to the payables ledger control account on a monthly basis



F Physical control

6 The following describes processes which form part of the purchases system in operation at Green Ltd.

For each process select whether it represents a strength or a weakness in the system.

All orders are placed directly with suppliers by the production department

A Strength

B Weakness

All supplier invoices are matched against purchase orders and goods received notes prior to beingentered into the accounting system

C Strength

D Weakness

7 Mary prepares the reconciliation between supplier statements and payables ledger accounts.

Which TWO of the following functions should Mary not be involved with?

A Depositing cash receipts

B Preparing the annual budget

C Making purchase orders

D Handling cash payments to suppliers

8 Numerical sequence should not necessarily be applied to which of the following types ofdocumentation?

A Goods received notes

B Purchase orders

C Supplier statements

D Purchase requisition notes

QUESTION BANK


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

A Goods received notes

B Purchase requisition notes

C Supplier invoices

D Purchase orders

10 Staple Ltd, which makes all of its sales on credit, has seen a fall in trade receivable days from 45 to 30days in the past year.

Which TWO of the following are plausible reasons for this fall?

A There has been a decrease in the volume of sales

B Discounts for early settlement have been introduced

C The company has tightened credit terms extended to customers

D There has been a change in sales mix towards more expensive goods being sold

11 Twist Ltd is a large IT company that sells computer hardware and provides consultancy services.

Which TWO of the following internal controls will BEST ENSURE that computers are notstolen/taken for the private purposes of employees?

A All inventories are counted once a month and agreed to the inventory records

B Inventories leave the storeroom only once there is an approved sales order

C Sales invoices are matched against customer-signed despatch notes

D Sales invoices are checked for accuracy prior to being posted

12 The organisational structure at Washy Ltd (a manufacturer and retailer of electrical goods) is asfollows. The sales department is headed by Olivia Jones and her assistant is Mary Smith. Olivia Jonesreports to the managing director John Waters. There are several other departments (production,accounting, purchasing, HR and internal audit).

Which of the following statements reflects the most effective segregation/allocation of duties withregards to sales ordering?

A All sales orders should be recorded by Mary Smith and approved by Olivia Jones

B Mary Smith should record the sales orders, Olivia Jones should review them and John Watersshould give the final approval

C Both Mary Smith and Olivia Jones can approve the sales orders

D It is not necessary for Olivia Jones to become involved in the recording and approval of salesorders



QUESTION BANK


Chapter 8: Employee costs

1 The following system of time recording operates at Green Ltd.

Staff clock in and out of work using a swipe card. There is no supervision of this practice but there is acontrol in place ensuring that only current employees have a swipecard in their possession.

Which of the following might be a consequence of the above?

A Employees are paid at an inappropriate rate

B Employee deductions are inappropriate

C Employees are paid for more than the hours worked

D Fictional employees may be set up

2 The auditors of Pink Ltd have performed analytical procedures on the salaries figures in the financialstatements and the salary per head appears to have increased by 10% from the previous year.

Assuming there are no errors in the salaries figure, which of the following explains this movement?

A An increase in staff numbers along all staff levels

B An increase in general inflation

C An increase in the number of low-skilled staff

D An increase in the number of highly-skilled staff

3 At Blue Ltd, the payroll department is responsible for both processing salaries and for maintaining allstaff records and contracts.

Which TWO of the following represent risks in this system arising from the above responsibilities?

A Fictitious employees are easily created

B Salary deductions are miscalculated

C Salaries are paid at the wrong time

D Changes in employee circumstances are not updated on the payroll

4 In a system where wages are paid in cash, which THREE of the following duties should be segregated?

A Preparing the payroll summary

B Requesting each employee to sign for his pay packet

C Filing of pay packets

D Distribution of wages

E Requesting verification of employees’ identity



5 The following describes certain processes of the payroll system in operation at Orange Ltd.

For each process select whether it represents a strength or a weaknesses in the system.

There is no separate personnel department

A Strength

B Weakness

Only selected payroll staff have access to standing information on staff

C Strength

D Weakness

All changes in salary rates are approved by the head of human resources

E Strength

F Weakness

6 The following are descriptions of internal controls in operation at Josh Ltd.

For each description select the type of control activity which it illustrates.

Payroll information is agreed to personnel files prior to processing



C Physical control

Budgeted salaries are compared to actual salaries on a monthly basis



F Physical control

7 Maryland Ltd employs 150 employees and has very high annual staff turnover.

Which of the following controls would BEST ENSURE that only existing employees are paid and thatleavers do not continue to be paid?

A Staff records are maintained for each member of staff

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

C Monthly comparisons are made between staff records held by the human resources manager andthe payroll office

D Staff are paid by direct transfers to their bank accounts

QUESTION BANK


8 Picture Ltd maintains a computerised payroll system. All employees are paid by BACS directly intotheir bank account.

Which TWO of the following controls will be most effective in ensuring that accurate payments aremade to employees?

A Authorisation of overtime worked

B A sample of calculations performed by the payroll package are manually reperformed each month

C The autopay list is reviewed by the chief accountant together with supporting payrolldocumentation

D The print out from the bank is agreed to the autopay list and any discrepancies investigated

9 Hill Ltd operates a number of controls over its payroll. For the following three controls, selectwhether they are preventative or detective controls.

All staff records are maintained by the human resources manager. Any changes in these records arepromptly communicated to the payroll department

A Preventative

B Detective

Payroll costs are compared to budget on a monthly basis

C Preventative

D Detective

All employees who are paid weekly by cash, must show evidence of their identification prior toreceiving their wages.

E Preventative

F Detective



QUESTION BANK


Chapter 9: Internal audit

1 The scope and objectives of internal auditing vary widely and depend on the size and structure of theentity and the requirements of its management.

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

A Evaluating corporate objectives

B Performing operational audits

C Monitoring controls

D Authorising transactions

2 The following statements relate to the differences between internal and external auditors.

For each statement select whether it is true or false.

Internal auditors should not co-operate with external auditors

A True

B False

Statutory audits are carried out by external auditors only

C True

D False

The internal audit department forms part of the overall internal control system

E True

F False


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

A Advising on the implementation of accounting and operational standards

B Liaising with external auditors

C Recommending improvements in operations

D Voting on decisions that involve external audit matters

4 Why should the internal audit function not get involved with operational matters?

A For reasons of confidentiality

B To preserve their integrity

C Internal auditors do not possess the skills to handle operational matters

D To preserve their independence



5 In order to preserve their independence, the internal audit function should report directly to which ofthe following?

A The chief accountant

B The finance director

C The audit committee

D The non-executive directors

6 Smarter Supermarkets operates a chain of fifteen supermarkets across London. At head office, there isan internal audit department which carries out audits and investigations on the individual supermarketsin the chain.

Which THREE of the following could the internal audit department carry out?

A Tests of the controls at the Westminster supermarket as part of a routine internal audit cycle

B Temporarily filling the role of the Lewisham supermarket manager while she is on sick leave

C Identification of risks at the proposed Waterloo supermarket, which is due to open next year

D Investigation into the physical controls at all the supermarkets

7 Internal and external auditors provide a variety of services to companies.

For each of the following examples select whether it is a service which would be provided by internalauditors only, by external auditors only or by either.

Preparation of a report on the effectiveness of internal controls

A Internal auditors

B External auditors

C Either

Investigation into a material fraud committed in the entity

D Internal auditors

E External auditors

F Either

8 Many of the procedures undertaken by the internal auditor are very similar to those performed by theexternal auditor.

Which of the following procedures will NOT normally performed by the external auditor?

A Testing internal controls

B Making recommendations regarding improvements to controls

C Making recommendations on the overall operational effectiveness of the entity

D Examining and testing financial information

QUESTION BANK



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

A Preparation of reconciliations between the payables ledger and the payables ledger controlaccount

B Approving annual budgets

C Reviewing accounting systems and related controls

D Examining financial and operational information for management



QUESTION BANK


Chapter 10: Documentation

1 For each of the following statements concerning documentation, select whether they are true or falsein accordance with BSA 230 Audit Documentation.

The preparation of documentation is a legal requirement

A True

B False

Documentation assists team members to direct and supervise work done

C True

D False

Documentation may be in paper or electronic form

E True

F False

2 Which THREE of the following documents would be found on a permanent, as opposed to a current,audit file?

A Accounts checklist

B Company memorandum and articles of association

C Details of client company history

D Legal documents such as lease agreements and title deeds

3 Which THREE of the following documents would be found on a current, as opposed to a permanent,audit file?

A Management accounts

B Summary of unadjusted errors

C Letter of representation

D Engagement letter

4 For how many years does the ICAB require firms to retain their audit documentation after the end ofthe accounting period to which the documentation relates?

A Six years

B Sufficient period of time

C Eight years

D Ten years



5 James & Co are the auditors of Eye Ltd. Eye Ltd has asked to have a look at James & Co’s workingpapers in respect of itself. In accordance with ethical guidelines, what should the response of James &Co be?

A Refuse, as the working papers belong to James & Co and are not part of Eye Ltd’s records

B Refuse but agree to show Eye Ltd any working papers they request only once the audit iscomplete

C Show Eye Ltd whatever working papers they request

D Show Eye Ltd the working papers only at James & Co’s discretion and only those documents thatwill not prejudice the audit

6 Select whether the following statements are true or false in respect of the reasons for preparing auditdocumentation.

To enable an experienced auditor to carry out quality control reviews

A True

B False

To provide evidence of audit work carried out in the event of a legal dispute

C True

D False

To retain a record of matters of continuing significance to future audits

E True

F False

7 With regards to auditors’ working papers, select whether the following statements are true or false.

Working papers belong to the auditor

A True

B False

Auditors prepare working papers on a voluntary basis

C True

D False

There are no circumstances under which auditors’ working papers should be given to a third partywithout the permission of the client

E True

F False

QUESTION BANK


Chapter 11: Evidence and sampling

1 For each of the following statements concerning the use of test data and audit software select whetherthey are true or false.

Test data involves the use of the assurance provider’s own software

A True

B False

Test data can test the operation of the client’s system and so ascertain whether certain controls are inoperation

C True

D False

Audit software can be installed on a client’s system to reperform calculations relating to year-endbalances

E True

F False

2 For each of the following statements concerning analytical procedures select whether they are true orfalse.

Analytical procedures can be used in tests of controls

A True

B False

Analytical procedures are only helpful where the integrity of the underlying data is high

C True

D False

Analytical procedures must be carried out by senior audit personnel only

E True

F False

3 There are a number of factors that the auditor should consider when using analytical procedures.These include suitability and reliability factors.

Which THREE of the following factors relate to reliability?

A The source of the information

B The materiality of the items involved

C The relevance of the information available

D The comparability of the information available



4 Which of the following describes sampling risk?

A The risk that the sample cannot be tested due to a lack of source documentation

B The risk that the sample chosen is not representative of the population

C The risk that the auditor’s testing techniques cannot be applied to the sample chosen

D The risk that the underlying population is incomplete

5 The gross margin at West Ltd has increased from the previous year.

Assuming there are no errors in the financial statements, which of the following explains this increase?

A Sales volume has increased

B Administrative costs have increased

C The cost of raw materials has increased without an effect on the sales price

D The company now employs more efficient production techniques

6 Which of the following describes how an assurance provider would check the completeness assertionfor non-current assets?

A Trace an entry in the non-current asset register to the physical item

B Trace the physical item to a figure in the financial statements

C Trace the physical item to an entry in the non-current asset register

D Trace an entry in the financial statements to the physical item

7 Which of the following sources of evidence would assist in verifying the existence of the tradereceivables balance?

A Trade receivables confirmations

B Sales orders

C Analytical procedures over the trade receivables balance

D Recalculations of the individual receivable balances

8 In testing for the completeness of liabilities, which THREE of the following sources of documentationwould be helpful?

A Board minutes

B Correspondence with client solicitors

C Bank statements

D Bank letter

QUESTION BANK


9 Which THREE of the following are the reasons why a bank letter is sent to all the client’s banks?

A Bank statements held by the client may have been tampered with

B The bank statements may be less accurate

C The bank letter contains other information which may be helpful in the audit

D The bank letter is sent directly to the auditor and is therefore more reliable

10 When auditing a provision which TWO of the following methods are MOST LIKELY to detectunderstatement of the provision?

A Test the process used by management to estimate the amount

B Use an independent estimate

C Review subsequent events

D Reperform the calculation of the provision

11 Which of the following best describes random selection in audit testing?

A Testing 100% of a population

B Testing all items in a population with a particular characteristic

C Testing items in a population that appear unusual or suspicious

D Testing less than 100% of a population where each item in the population has an equal chance ofselection

12 For each of the following statements concerning statistical and non-statistical sampling select whetherthey are true or false.

Non-statistical sampling involves an element of subjectivity

A True

B False

Statistical sampling involves the random selection of a sample

C True

D False

Statistical sampling requires the auditor to input a required confidence level

E True

F False



13 In testing the authorisation of sales orders select whether each of the following factors would cause anincrease in the sample size, a decrease in the sample size or would have no effect on the sample size.

An increase in the level of tolerable error

A Increase

B Decrease

C No effect

An increase in the number of sampling units

D Increase

E Decrease

F No effect

Detection risk is increased

G Increase

H Decrease

I No effect

14 In testing whether all goods received notes are matched with purchase orders, select whether each ofthe following factors would cause an increase in the sample size, a decrease in the sample size orwould have no effect on the sample size.

An increase in the level of expected error

A Increase

B Decrease

C No effect

An increase in the auditor’s required confidence level

D Increase

E Decrease

F No effect

15 In testing the valuation assertion for non-current assets, select whether each of the following factorswould cause an increase in the sample size, a decrease in the sample size or would have no effect onthe sample size.

An increase in the use of other substantive procedures directed at the same assertion

A Increase

B Decrease

C No effect

Stratification of the population

D Increase

E Decrease

F No effect

QUESTION BANK


16 In testing the valuation assertion for trade receivables, select whether each of the following factorswould cause an increase in the sample size, a decrease in the sample size or would have no effect onthe sample size.

An increase in the level of tolerable error

A Increase

B Decrease

C No effect

An increase in the auditor’s assessment of audit risk in this area

D Increase

E Decrease

F No effect

17 With regards to tolerable error and sampling risk, select whether the following statements are true orfalse.

Tolerable error is the minimum error that the auditor would be willing to accept

A True

B False

Tolerable error is used by management as a guide to the extent of errors they can make

C True

D False

Sampling risk is the risk that the actual errors found in a sample will exceed the expected errors

E True

F False

18 For each of the following descriptions relating to sample selection select whether they describerandom selection, haphazard selection or systematic selection.

Mark is selecting a sample of sales invoices to carry out a directional test. He uses a computerisedgenerator to identify the items to be selected

A Random

B Haphazard

C Systematic

John is selecting a sample from a list of accounts payable. He makes his selection by choosing every15th balance

D Random

E Haphazard

F Systematic



19 Inspecting board minutes is an important test of detail that can assist in evidence gathering for manyaccount balances and disclosures.

Which THREE of the following account balances are supported by the evidence likely to be providedby board minutes?

A Contingent liabilities

B Company commitments

C Sundry expenses

D Additions to significant tangible non-current assets

E Utility expenses

20 When may block sampling be appropriate?

A When checking that controls were in operation throughout the year

B When testing whether certain transactions have been allocated to the correct accounting period

C When testing for understatement of assets

D When testing for understatement of liabilities

21 When is monetary unit sampling most appropriate?

A When testing for understatement of assets

B When testing for overstatement of assets

C When testing for understatement of liabilities

D When testing for understatement of expenses

22 In respect of an assurance engagement which of the following is the LEAST persuasive method ofgathering evidence?

A Reperformance of a depreciation calculation

B Inspection of a supplier's invoice

C Inspection of an internally-generated order for the purchase of a non-current asset

D Communicating with a third party to confirm ownership of a non-current asset

23 All methods of obtaining evidence have weaknesses. These are listed below in the options presented.

For each method of obtaining evidence, select the weakness that is most likely to be present.

Analytical procedures

A Limited to the point in time it takes place

B Limited by underlying accounting system

Observation of a procedure

C Limited to the point in time it takes place

D Limited by underlying accounting system

QUESTION BANK


Direct confirmation of a payables balance

E A balance which is understated may be agreed because it favours the respondent

F A balance which is overstated may be agreed because it favours the respondent

24 Auditors obtain evidence using procedures set out in BSA 500 Audit Evidence.

For each of the following tests select the type of procedure which is being used.

The auditor examines a title deed to confirm that the company has ownership of a plot of land

A Inspection

B Observation

C Confirmation

The auditor is present while a sales order is being processed to test if the controls are carried out

D Inspection

E Observation

F Confirmation



QUESTION BANK


Chapter 12: Management representations

1 Which THREE of the following are purposes of a management representation letter?

A Confirmation that the financial statements are free of material misstatements

B Confirmation that management acknowledges its responsibility for the preparation of the financialstatements

C Confirmation that management acknowledges the terms of the engagement

D Confirmation that management acknowledges its responsibility for the design and implementationof internal control

2 For each of the following statements in respect of management representations select whether theyare true or false.

Management representation letters act as a substitute for other audit evidence

A True

B False

Management representation letters contain confirmation that the effects of uncorrected misstatementsare immaterial

C True

D False

Management representation letters contain the statement that management has disclosed all relevantsubsequent events to the auditors

E True

F False

3 For each of the following, select in which letter issued by the auditor they are referred to.

Details of any frauds or irregularities in the internal control system or confirmation that no suchfrauds or irregularities have taken place

A Letter of representation

B Engagement letter

C Management letter

Weaknesses in the internal control system

D Letter of representation

E Engagement letter

F Management letter



4 When should the management representation letter be signed?

A Before the audit is commenced

B During the course of the audit

C Just prior to the signing of the audit report

D After the audit report is signed

5 Who normally drafts and signs the management representation letter?

A Auditor drafts and signs

B Auditor drafts, senior management sign

C Senior management draft and sign

D Senior management draft, auditor signs

6 Which of the following issues would be likely to be included in a management representation letter?

A Completeness of liabilities

B Completeness of trade accounts receivable

C Existence of non-current assets

D Accuracy of prepayments

7 Which of the following statements is an accurate description of a management representation letter?

A It confirms the scope of the engagement

B It sets out material weaknesses in internal controls

C It confirms matters management have said to audit staff as evidence towards the audit opinion

D It sets out matters arising during the engagement which are of interest to management

8 Which TWO of the following situations would be referred to in the management representationletter?

A Management has refused the auditor permission to contact a major customer

B Management has confirmed its belief that the ongoing litigation with a former employee will notresult in the company having to pay compensation

C Management has confirmed that it believes that a defaulting customer will pay its debts in duecourse

D Management believes that no fraud has been committed by senior management in the period

QUESTION BANK


9 Which TWO of the following matters are management required to confirm in writing in a letter ofrepresentation?

A That management are responsible for the preparation of the financial statements

B That management are responsible for protecting the interests of the shareholders

C That management are responsible for the design and implementation of internal control

D That the audit fee will be paid in full within three months of the signing of the audit report



QUESTION BANK


Chapter 13: Substantive procedures – key financialstatement figures

1 For each of the following substantive procedures carried out on a schedule of non-current assetswhich agrees to the financial statements, select which financial statement assertion will be addressed.

Tracing items from the non-current asset register to the schedule

A Completeness

B Valuation

C Existence

Confirming whether the casts on the schedule are correct

D Completeness

E Valuation

F Existence

2 For each of the following substantive procedures on non-current assets, select which financialstatement assertion will be addressed.

Checking a sample of non-current assets to purchase invoices

A Completeness

B Valuation

C Existence

Selecting a sample of assets on the non-current asset register and confirming that they are physicallypresent

D Completeness

E Valuation

F Existence

3 When testing the rights and obligations assertion for a sample of plant and machinery, which of thefollowing sources of evidence would be most helpful?

A The client’s asset register

B Physical verification of the assets

C Purchase invoices

D Recalculation of the depreciation charge

Chapter 13: Substantive procedures – key financial statement figures


4 For each of the following risks of misstatement in respect of intangible non-current assets select thefinancial statement assertion which is directly affected.

Intangible assets are not tested for impairment on an annual basis

A Completeness

B Valuation

C Existence

Expenses are inappropriately capitalised as intangible assets

D Completeness

E Valuation

F Existence

5 For each of the following audit tests on inventory select which financial statement assertion would besupported.

Enquiries about possible obsolete or slow-moving inventory

A Completeness

B Valuation

C Cut-off

Taking the last 10 goods received notes of the period and the first 10 goods received notes of thenext period and checking that they have been allocated to the correct period

D Completeness

E Valuation

F Cut-off

6 By attending the inventory count on which THREE of the following is the auditor gaining assurance?

A The quantity of inventory

B The existence of inventory

C The rights and obligations over the inventory

D The effectiveness of the company’s controls over the inventory count

7 When reviewing the instructions for the inventory count in respect of the organisation of the count,which would cause concern to the auditor?

A All inventory is to be tidied and organised into sections for counting

B The count will be supervised by the stores manager

C There are restrictions on the movement of inventories while the count is underway

D Third party inventory is placed in a separate area and marked as belonging to the third party

QUESTION BANK


8 For each of the following statements in respect of perpetual inventory counts select whether they aretrue or false.

Management do not need to ensure that inventory lines are counted at least once a year

A True

B False

Management should ensure that all material differences that arise from the inventory counts areinvestigated and corrected

C True

D False

The inventory count should be organised so there is minimal movement of inventories at the time ofthe count

E True

F False

9 Which THREE of the following are MOST LIKELY to indicate that the net realisable value of inventoryis lower than its cost?

A There is physical deterioration of the inventory

B There has been an increase in selling price

C Newer models are now available

D There has been a marketing decision to offer small discounts during a sale period

E There has been a significant unforeseen increase in production costs which cannot be passed onto the customer

10 There are a number of ways that the auditor can test whether inventories are stated at the lower ofcost and net realisable value.

Which TWO of the following procedures will assist the auditor in this?

A Corresponding with suppliers

B Reviewing post year-end sales

C Comparing sales prices to cost

D Sending receivables confirmations

11 Direct confirmation with customers assists in supporting which THREE of the following assertions?

A Existence

B Rights and obligations

C Valuation

D Cut-off



12 The following statements relate to the types of confirmations which may be sought from receivables.For each statement select whether it is true or false.

Under the negative method, the customer is requested to confirm the accuracy of the balance shownor state his disagreement

A True

B False

Under one of the options available for the positive method of direct confirmation, the customer maybe requested to provide the balance owed

C True

D False

Positive confirmations must be used where there are a large number of balances

E True

F False

13 In which TWO circumstances might it be permissible to use the negative method of receivablesconfirmation?

A The assessed risk of material misstatement is high

B A small number of large balances is involved

C A substantial number of errors is not expected

D The auditor has no reason to believe that customers will disregard the request

14 If the client refuses permission for the auditor to communicate with customers for the purposes ofconfirming their trade accounts receivable balances, the auditor should do which of the following?

A Seek evidence from the invoices sent to customers

B Seek evidence from post year-end payments from customers

C Consider it a limitation on the scope of the audit

D Rely on analytical procedures

15 The following statements relate to the selection of a sample of customers from whom directconfirmation of balances will be sought. For each statement select whether it is true or false.

Samples should be selected giving each customer an equal chance of being selected. There should beno further considerations.

A True

B False

The sample of customers should include accounts that are old, unpaid, written off and with creditbalances

C True

D False

QUESTION BANK


Customers with whom it is difficult to communicate should be avoided

E True

F False

16 For each of the following audit tests on trade receivables select which financial statement assertionwould be supported.

Comparing the method of calculating the provision against trade receivables against other entities inthe same industry

A Completeness

B Valuation

C Existence

Obtain and review an analysis of aged receivables at the period end for amounts outstanding for morethan the allowed credit period

D Completeness

E Valuation

F Existence

17 During the course of the audit of Ham Ltd, Mary receives 24 replies out of the 27 direct customerconfirmation letters. Mary has already communicated with the three outstanding responders on atleast four occasions.

What action should Mary now take?

A No action is necessary as 24 out of 27 responses is sufficient

B Mary should pass on the details of the outstanding responses to an independent company officialfor chasing

C Mary should continue her efforts to contact the customers

D Mary should deem that they are fictitious customers

18 For each of the following risks of misstatement in respect of the bank and cash balance select thefinancial statement assertion to which they relate.

Not all the client’s bank balances being disclosed

A Completeness

B Existence

C Valuation

Reconciliation differences between the bank balance and the cash book balance are not investigatedand resolved by management

D Completeness

E Existence

F Valuation



19 Keeping the cash book open to take credit for remittances received after the year end, is one way ofwindow dressing.

How can the auditor address this risk?

A By checking the cheque payment slips to ensure that outstanding payments really relate to thecurrent period end

B By checking the bank paying in slips of outstanding lodgements to ensure they belong to thecurrent year end

C By confirming with customers the date of their payment to the client

D By confirming with suppliers the date of receipt of the client’s payment

20 Which THREE of the following items will be included in a bank letter from a specific bank?

A Details of all standing orders with the bank

B The bank balance on each account with the specific bank

C Any guarantees made by the client

D Any titles or other assets held for safe custody by the bank

21 Direct confirmations from supplier are not always used by auditors. Under which TWO of thefollowing circumstances are supplier confirmations necessary?

A Where supplier invoices and supplier statements are available and part of the standarddocumentation of a purchases cycle

B Where there is a pressure on the auditor to complete his audit on time

C Where the auditor suspects that the client is deliberately trying to understate payables

D Where the client refuses to provide supplier statements to the auditor

22 An important control within the payables cycle is the comparison between supplier statements and thepayables ledger accounts.

Which of the following assertions is most supported by this control procedure?

A Existence

B Completeness

C Rights and obligations

D Presentation

23 Which of the following sources of information will not be helpful for auditing non-current liabilities?

A Loan agreements

B Bank letters

C Share certificates

D Board minutes

QUESTION BANK


24 The results of substantive tests on trade payables at Waltham Ltd are set out below. The materialitythreshold set for these tests was CU12,000.

For each of the following results, select the action which should be taken by the audit senior.

Of the 15 supplier confirmations sent, only 10 were returned

A Draw conclusion

B Refer to senior colleague

C Extend sample

In a sample of 30 supplier invoices out of approximately 300, representing 5% of the payables balances,errors were found on the payables ledger concerning the recording of liabilities from 8 invoicestotalling CU200

D Draw conclusion

E Refer to senior colleague

F Extend sample

25 Which THREE of the following are the more significant risks in relation to a non-current asset balancein the financial statements?

A Non-current assets exist and have been included in the financial statements but belong to a thirdparty

B Non-current assets have not been depreciated

C Expenses unrelated to non-current assets have been included in the non-current asset balance

D Non-current assets have not been disclosed properly in the financial statements

26 For each of the following circumstances in respect of inventory, select which financial statementassertion would be affected.

Differences identified at the inventory count have not been adjusted in the inventory records

A Completeness

B Valuation

C Cut-off

Inventory in transit at the end of the year has not been taken into account

D Completeness

E Existence

F Cut-off

27 The auditor of Ilford Ltd carried out a receivables circularisation at the year end to confirm theaccuracy of total trade receivables in the balance sheet at that date. Two of the replies to thecircularisation disagreed the balance.

For each of these two disagreements, select whether the disagreement would be considered an erroror would not be considered an error for the purposes of evaluating the accuracy of total tradereceivables in the balance sheet at the year end.



Colchester Ltd disagreed the balance stating that the amount owed was CU11,100 and not CU15,600as was written on the confirmation letter. On investigation, the auditor discovered that invoicenumber SI 8976 for a total of CU1,600 had been recorded by Ilford Ltd as CU6,100

A Error

B Not error

Rainham Ltd disagreed the balance because their records had cancelled invoice number SI 11493. Thiswas because Rainham Ltd had returned some goods three days prior to the year end. The auditor hasverified that the goods have been returned and that cut-off with inventory is correct

C Error

D Not error

28 Marianne has obtained a list of items which make up the cash balance CU15,350 in the financialstatements of Browns Ltd. Materiality has been set at CU7,000.

For each item select whether or not Marianne should test the item.

Current account balance CU14,100

A Test

B Not test

Petty cash float CU250

C Test

D Not test

Special directors’ cash account CU1,000

E Test

F Not test

29 Two types of procedures used in gathering evidence are tests of controls and substantive procedures.

For each of the following examples select the type of procedure illustrated.

Carrying out analytical procedures on the income statement

A Test of control

B Substantive procedure

Reviewing board minutes for evidence of authorisation of major additions to non-current assets

C Test of control

D Substantive procedure

Reperforming only the year-end bank reconciliation

E Test of control

F Substantive procedure

QUESTION BANK


Chapter 14: Codes of professional ethics

1 For each of the following statements in relation to guidance on professional ethics select whether theyare true or false.

It is in the public interest for accountants to follow a professional ethics framework

A True

B False

Ethical guidance from the ICAB is in the form of rules rather than principles

C True

D False

Rules-based codes offer a more straightforward ethical framework, as they cover specific situations

E True

F False

2 Select which of the following statements are true or false.

A principles-based ethical framework encourages auditors to apply general principles to their specificsituation

A True

B False

A principles-based ethical framework takes the form of a checklist of forbidden items which auditorscan efficiently check off

C True

D False

A principles-based ethical framework can more effectively accommodate a fast-changing environment

E True

F False

3 Which of the following is not one of the stated fundamental principles of the IFAC code?

A Integrity

B Courtesy

C Objectivity

D Confidentiality



4 Smith & Co audit firm has been approached to audit Tube Ltd, a listed company. A partner in Smith &Co has shares in Tube Ltd and another partner’s sister is the managing director of Tube Ltd.

What types of threats would taking on the audit of Tube Ltd present?

A Advocacy and intimidation threats

B Advocacy and self-interest threats

C Self-review and self-interest threats

D Familiarity and self-interest threats

5 Marr & Co are the auditors of Dreams Ltd. Dreams Ltd, a listed company, has approached Marr & Coto help it design and implement a new IT system.

Which of the following threats is created if Marr & Co accept this assignment?

A Intimidation threat

B Advocacy threat

C Familiarity threat

D Management threat

6 Bubbles Ltd, an audit client of Johnson & Co, is unhappy with the way the audit is being carried outand has threatened to replace Johnson & Co if the firm does not issue the opinion Bubbles Ltd wants.

Which of the following threats is created by this situation?

A Intimidation

B Advocacy

C Familiarity

D Management

7 Whitely & Co are the auditors of East Ltd. East Ltd has approached Whitely & Co to carry out sharedealings on its behalf.

Which threat to independence is created by this?

A Intimidation

B Advocacy

C Familiarity

D Self-interest

QUESTION BANK


Chapter 15: Integrity, objectivity and independence

1 Flyby Ltd is a publicly listed airline. Because Flyby Ltd are so happy with their audit firm, March & Co,they have offered two free flights for every member of the audit team.

What should the response to this offer be from March & Co?

A Accept the offer as it is part of auditor-client relations

B Request that the offer be directed to all the staff of the assurance firm and not just the auditteam

C Accept the offer but emphasise to the management of Flyby Ltd that this will not prejudice anyfuture audits

D Reject the offer as it is not of insignificant value

2 Jude & Co is about to commence the audit of its client, Merry Ltd. However, Merry Ltd still owes feesto Jude & Co for last year’s audit.

Which of the following should be Jude & Co’s course of action?

A Continue to act with safeguards

B Threaten to issue a qualified audit opinion if Merry Ltd do not pay

C Consider whether it is necessary to resign

D Accept shares in Merry Ltd to the value of the audit fee

3 A partner in Estelle & Co has just inherited a large number of shares in one of the firm’s audit clients.

What course of action should Estelle & Co take?

A The partner should dispose immediately of the shares

B The partner does not need to dispose of the shares but can transfer them to his wife

C The partner can transfer the shares into the name of the audit firm

D The partner may keep the shares but must have no involvement in the audit of that particularclient

4 James Smith is a partner at the assurance firm of Jones & Co. His clients include Purple Ltd, a globallisted company. Purple Ltd have been very impressed with James Smith’s abilities and have offered himemployment as part of their senior management team.

What action should James Smith take, assuming that he wishes to accept the offer if at all possible?

A Accept the offer provided Jones & Co apply appropriate safeguards to the audit

B Reject the offer

C Accept the offer on the condition that he is placed in a different country

D Accept the offer with the condition that an amount is paid to Jones & Co by way ofcompensation



5 Harry Price has been offered a loan at a commercial rate of interest from a high street bank thathappens to be his audit client.

What action should Harry take?

A Accept the offer

B Reject the offer

C Accept the offer after two years have elapsed from the conclusion of the audit

D Accept the offer with the condition that this transaction is disclosed in the audit report

6 Duncan & Co regularly receives a large proportion of its fee income from the audit of Lilac Ltd.

Which two measures might Duncan & Co take with regards to the audit of Lilac Ltd?

A Obtain an external quality control review

B Involve others in the audit, such as independent experts

C Resign from the audit of Lilac Ltd

D Discuss the matter with the audit committee

7 Patricia & Co regularly receives large amount of its fee income from the audit of Karen Ltd.

What two measures might Patricia Smith & Co take with regards to the audits of Karen Ltd?

A Monitor and implement quality control of assurance

B Rotate the partner

C Involve an additional professional accountant to review the work

D Obtain an external quality control review

8 For each of the following situations involving an auditor and his clients select the action the auditorshould take: accept the offer/request with no safeguards, accept with safeguards or reject theoffer/request.

A client has offered the auditor an audit fee based on a percentage of reported profits

A Accept with no safeguards

B Accept with safeguards

C Reject

An audit client has requested that the audit partner serve on the board of directors

D Accept with no safeguards

E Accept with safeguards

F Reject

QUESTION BANK


9 For each of the following situations involving an auditor and his clients, select the action the auditorshould take: accept the offer with no safeguards, accept the offer with safeguards or reject the offer.

A listed company audit client requests that the auditor prepare its accounts on an ongoing basis

A Accept with no safeguards

B Accept with safeguards

C Reject

A private company audit client requests that the auditor prepares its accounts on an ongoing basis

D Accept with no safeguards

E Accept with safeguards

F Reject

10 A client has requested that its auditor prepares a valuation for a material portfolio of shares includedin the balance sheet.

Which set of threats may arise if the auditor agrees to take on this assignment?

A Self-review and advocacy threats

B Advocacy and familiarity threats

C Advocacy and management threats

D Self-review and management threats

11 What are the key threats to an external auditor who also provides internal audit services?

A Self-review and management

B Management and advocacy

C Management and familiarity

D Self-review and familiarity

12 Julie & Co’s client, Beige Ltd, a listed company, has asked the firm, in its capacity as an accountant andexternal auditor, to act as an expert witness in a court case.

What should Julie & Co’s response be?

A Accept the appointment without implementing safeguards

B Accept the appointment but consult the audit committee throughout the course of theappointment

C Seek the permission of the audit committee and then accept or refuse the appointment

D Refuse the appointment



13 Which THREE of the following are examples of when a familiarity threat might arise?

A The auditor is being sued by the client

B There are family relationships between the auditor and the client

C There are personal relationships between the auditor and the client

D The auditor is involved in making recruitment decisions on behalf of his client

14 In order to address the familiarity threat that arises from the long association of the key audit partnerwith a client which is a listed company, what action, if any, is required?

A The key audit partner should serve for no longer than five continuous years before being rotatedoff the client

B The key audit partner should serve for no longer than six continuous years before being rotatedoff the client

C The key audit partner should serve for no longer than seven continuous years before beingrotated off the client

D There are no restrictions as to the number of years the key audit partner can serve on his auditclient

15 Verity is a trainee in the audit department of Jones & Co. For her first client, she has been assigned theaudit of cash and part of the work is to review the year-end bank reconciliation. Verity has nevercarried out this review before but she has last year’s file and has covered bank reconciliations in herstudies. Although Verity is currently alone at the client, she can call the audit manager at any time.

What action should Verity take?

A Perform the work, consulting the audit manager with any queries

B Refer the matter to her engagement partner

C Contact ICAB technical department

D Take legal advice

16 Geoff is a trainee in the audit department of Dickens & Co. For his first client, he has been sentunsupervised to a small investment bank. He has been assigned the planning and performance of theaudit of the bank and has a deadline to report to the partner in two weeks’ time. Geoff’s only guidanceis the prior year audit files.

What initial action should Geoff take?

A Perform the work

B Refer the matter to his training partner

C Contact ICAB technical department

D Take legal advice

QUESTION BANK


17 Alison is a qualified accountant working for Harry Ltd, a listed company. Harry Ltd has set someambitious profit targets for the current year. The board of directors of Harry Ltd has asked Alison tofind creative ways so that the company can meet its targets. Alison is aware that she will need towindow dress the financial statements in order for the targets to be met.

What action should Alison initially take?

A Seek advice from the ICAB technical department

B Report her concerns to Harry Ltd’s audit committee

C Consult the stock exchange

D Take legal advice

18 Long association with an audit client could lead to which of the following threats?

A Self-review

B Intimidation

C Familiarity

D Advocacy

19 The following are examples of situations in which Meryll & Co, an audit firm with over 200 listed andnon-listed clients in a wide range of industries, might need to implement safeguards in order to protect itsindependence.

For each situation select the most appropriate safeguard or state that there are no safeguards which couldreduce the risk to an acceptable level.

One of Meryll & Co’s clients has requested that the audit firm provide additional tax services on anongoing basis

A Separate personnel

B Fee threshold not exceeded

C No safeguards possible

Meryll & Co has been asked to step in and prepare the financial statements of a listed client as thefinancial controller has been taken ill

D Separate personnel

E Fee threshold not exceeded

F No safeguards possible



QUESTION BANK


Chapter 16: Confidentiality

1 Which TWO of the following are correct with regard to the disclosure of confidential clientinformation?

A Disclosure can be made to third parties at the discretion of the auditor

B Disclosure can be made to third parties only where the client has provided consent

C Disclosure can be made to third parties where there is a public duty to disclose

D Disclosure can be made to third parties where there is a legal duty to disclose

2 In certain circumstances, auditors have a legal duty to disclose confidential client information to thirdparties.

Which TWO of the following describe such circumstances?

A When the client is involved in terrorist activities

B When the auditor is corresponding with tax authorities

C When the client has breached regulations of the Companies Act 1994

D When there is a suspicion of corruption

3 During the audit of Turquoise Ltd, the auditor comes across a number of unusual transactions thatleads him to suspect that the client is involved in money laundering.

What should the auditor’s next course of action be?

A Consult with his firm’s Lawyer

B Contact the Anti-corruption commission

C Consult the client and inform them of his suspicion

D Contact the local police for immediate arrest of the client

4 Meek & Co has recently been approached to carry out the audit of Yellow Ltd. Yellow Ltd is themajor competitor of Meek & Co’s existing client, Green Ltd.

What should Meek & Co’s initial course of action be?

A Resign from Green Ltd

B Resign from both Green Ltd and Yellow Ltd

C Inform both Green Ltd and Yellow Ltd about the situation

D Do nothing



5 Within an audit firm, a number of security measures should be put into place to ensure that accidentaldisclosure of confidential client information is prevented.

Which THREE of the following would be appropriate measures?

A Not discussing client matters in public places

B Not discussing client matters at the assurance firm’s premises

C Not discussing client matters with any party outside the assurance firm

D Not leaving working papers unattended at the client’s premises

E Not taking working papers off the assurance firm’s premises

6 Auditors need to take particular care in the steps taken where conflicts of interest arise. For each ofthe following cases select whether they constitute a conflict of interest or not.

The auditor has been approached to provide audit services to a key competitor of an existing client

A Conflict of interest

B Not a conflict of interest

The auditor has been asked to advise a company wishing to acquire a client company

C Conflict of interest

D Not a conflict of interest

The auditor has been approached to carry out a review assignment on the interim financial statementsof an existing client

E Conflict of interest

F Not a conflict of interest

© The Institute of Chartered Accountants in England and Wales, March 2009

77

Answer Bank


ANSWER BANK



1 A,B,C

BAS constitutes possible criteria whereas the remaining three are subject matter.

2 A,D The practitioner is responsible for gathering evidence and issuing an opinion on the subject matter.

3 C For reasonable assurance, the assurance provided is high (never absolute nor is it low). Theopinion provided is also positive. A negative opinion is provided in a limited assuranceengagement.

4 A,C,D

That the accounts have been correctly extracted from the company’s books and records formspart of the definition of “true”, whereas options A, C and D form part of the definition of “fair”.

5 A,D It is RSBs that offer professional qualifications and RSBs that are responsible for monitoring theirmembers.

6 A,D,E

The principle objective of assurance is to provide an opinion on specific subject matter againstpredetermined criteria, which will then be reported on to the users. The principle objectivehence is not the detection and correction of fraud. Assurance engagements may take many formsfrom reviews of financial statements to reviews of internal control systems.

7 A,D,E

Reducing the audit fee will not close the expectations gap as it is not part of the problem thatconstitutes the expectations gap. However, issuing an engagement letter and including a caveat inan assurance report do go some way to address the expectations gap.

8 B,C The statutory audit does not lead to a certification of financial statement correctness, butreasonable assurance is provided as to the truth and fairness of the financial statements. Thestatutory audit can only be carried out by external auditors, which preserves the independenceof the process.

9 A,C,F

The fact that auditors are involved on the client for the first time, and hence may initially lackclient-specific knowledge constitutes a detection risk which the auditors will need to address aspart of their overall audit strategy. The remaining cases do constitute limitations of the provisionof assurance as sampling is inherently risky (there is a risk that the sample does not represent thepopulation tested) and judgment is used in the audit process. Judgment is subjective and oneauditor’s judgment may differ from another auditor’s.

10 A,D,E

The subject matter which is under review is the branch’s inventory system, which is to beassessed against the company policy (hence the suitable criteria). The party responsible is theclient, Ilford Ltd, with Smith & Co being the practitioners.

11 B The assurance provided is not absolute given the limitations of an audit. However, the assuranceprovided is high and not limited due to the auditor’s obligation to gather sufficient appropriateaudit evidence. The external audit leads to a positive opinion where a high level of assurance isprovided.



ANSWER BANK



1 B,D,E

Strong internal controls and few unusual transactions would not indicate a high risk prospectiveaudit client.

2 D No communication should be made with the previous auditor without the potential client’spermission, therefore Marnie & Co should decline the appointment immediately. The fact thatOpportunity Ltd has denied permission to communicate is suspicious and a reason not tocontinue the business relationship.

3 A,B,D

The above options are situations where a firm must decline appointment as auditor. The answeris not C as, although this might be a valid business reason for declining the appointment, the firmis not required to decline in this situation.

4 B According to Companies Act 1994, The books of accounts of every company should be retainedfor at least twelve years.

5 B,C,F,H

It is the management representation letter (see later chapter) that provides an opportunity tomanagement to provide in writing their judgments on subjective areas in the financial statements.It is the planning documentation that will contain the preliminary risk assessment. It is theauditor’s report that contains the audit opinion.

6 D The right to publicly disclose confidential information in every circumstance without thepermission of the client is not an auditor’s right under the Companies Act 1994. It is only inparticular circumstances where the auditor has a legal duty to disclose confidential information,e.g. where terrorist or corruption activities are suspected. Options A, B and C represent therights that an auditor does have under the Companies Act 1994.

7 A,B,C

The auditor is not absolved from his audit responsibilities with the inclusion of the statement, butthe statement does emphasise the role and responsibilities of management which may help withan understanding of the auditor’s role (which is to audit the financial statements and providereasonable assurance that they are free from material misstatement).

8 A,C,F

If the client is experiencing financial difficulties, this is a high risk indicator as the client has anincentive to present healthier financial statements than actually exist. In the case where threefirms of auditors have resigned from a particular client in the past five years, this is also a high riskfactor as it may indicate problems in the client-auditor relationship. Where a company carriesout very few unusual transactions, this is a low risk indicator as the auditor will be in a betterposition to identify material fraud and error than if the number of unusual transactions issignificant.



ANSWER BANK



1 B,C,D

The detailed plain of audit procedures will be found in the more detailed audit plan and not in theaudit strategy document.

2 A,B,C

Obtaining information for other future assignments with the same client (option D) is not areason provided by BSA 315 for understanding an entity and its environment. BSA 315 providesguidance as to how an understanding of the entity and its environment should be obtained for thepurposes of the external audit process.

3 B,C,D

Option A describes the preparation of a bank reconciliation. This does not constitute analyticalprocedures but is an internal control procedure carried out by the company. Options B, C and Ddescribe analytical procedures, where balances and ratios are compared in order to gain aninsight into the reasonableness of the balances.

4 B,D,E

Revenue and salaries do not appear to have had significant year on year fluctuations andtherefore are less likely to warrant further investigation. However, cost of sales appears to havedecreased whilst sales have increased. Furthermore, there appears to be the possibility of amisposting of expenses between cost of sales and distribution cost/insurance expenses.

5 B,D,F

Materiality is a measure that may change throughout the audit depending on the ongoingassessment of audit risk.

Materiality relates to qualitative matters (such as the absolute accuracy of directors’ emoluments)and is not restricted to being a monetary measure.

A monetary materiality measure may be calculated in different ways for different clients (forexample, for a loss-making company, a percentage of revenues may be appropriate as opposed toa percentage of profits (i.e. losses)).

6 A Even where control and inherent risks are low, some substantive procedures should still becarried out and cannot be avoided altogether.

7 C Purchase invoices not being authorised has implications for the payments made and does notaffect the ordering stage of the purchases cycle.

8 A Auditors usually test assets for overstatement and liabilities for understatement.

9 C,D,E

Computation and verification are procedures used in substantive procedures.

10 C,E,G

The first year of the audit presents a detection risk to the auditors as they will need to invest theappropriate amount of time and effort gaining knowledge on the entity.

The internal audit function has a positive effect on control risk.

The client’s intention to list on the stock exchange presents inherent risks as the company ismore susceptible to fraud or error at the company level.



11 C,E,G

No prior knowledge of a specific industry creates a detection risk to the auditor.

No authorisation of purchase invoices presents a control risk.

The existence of a profit-related scheme for management presents inherent risks as the companyis more susceptible to fraud or error at the company level.

12 C A is the definition of an inherent risk, B describes detection risk, and D is another aspect ofinherent risk.

13 D Forming a critical assessment and bringing into question the reliability of audit evidence is themost appropriate description. The others go too far.

14 B,C For the current ratio (the ratio of current assets to current liabilities) to decease either currentassets must have decreased or current liabilities must have increased. By shifting its reliance fromlong-term to short-term debt, the current ratio is decreased as current liabilities increase. Byadopting a just-in-time inventory policy inventory levels will fall, causing a decrease in currentassets and hence a decease in the current ratio. The answer is not A, as if customer credit isextended, then trade receivables increase but cash decreases accordingly (i.e. there is a change inthe mix of current assets). The answer is not D, as an increase in sales will cause an increase intrade receivables causing the current ratio to increase instead.

15 A,D A reduction in the discounts given to customers increases the selling price causing an increase inthe gross margin. A significant change in the sales mix towards more profitable items being soldwould also cause an increase in the gross margin. The answer is not B, as if the increased cost ofraw materials is passed on to customers, this will not affect the gross margin. The answer is notC as sales prices being reduced will decrease the gross margin.

16 A,D The fact that the company operates in a fast moving industry makes it more susceptible tomaterial error (e.g. from miscalculating the extent of inventory obsolescence). If the company’sfuture is threatened as described in D, this fact causes the financial statements as a whole to besusceptible to material error (as management may try to present a healthier picture than is thecase). Options B and C would increase control risk.

17 C,E A mix of tests of control and substantive procedures would be most appropriate in an audit of aclient where some reliance could be placed on the internal control systems. Option A wouldnever be a viable solution even if the perfect internal control system were in place – somesubstantive procedures, even if limited, should always be carried out. For the limited assuranceengagement, substantive procedures only are used, usually in the form of analytical procedures.

ANSWER BANK



1 A,D,E

Written forms of evidence are more reliable than oral forms. The other two statements are true.

2 C Sufficiency relates to the quantity of evidence. Reliability, quality and relevance relate to theappropriateness of audit evidence.

3 C,E,G

External documents obtained from external sources are more reliable than when obtained fromclient sources. External documents are more reliable than documents prepared internally by theclient.

4 B,C,D

Occurrence and accuracy relate to classes of transactions.

5 A,B,E

Existence and valuation relate to account balances at the year end.

6 A Financial statement assertions are those assertions made by management that are embodied inthe financial statements. These assertions are then audited by the auditor as part of the auditprocess.

7 B,C The auditor could use substantive procedures only (where no reliance can be placed on internalcontrols). Both tests of control and substantive procedures are used as means of gathering auditevidence where some reliance can be placed on internal control systems. Option A is notacceptable because some substantive procedures must always be carried out. Option D is notacceptable as some tests of detail (such as agreeing the financial statements to the underlyingaccounting records and examining material year-end journal entries) must always be carried out.

8 A,D,E

Analytical procedures and computation are used in carrying out substantive procedures.

9 A,D,E

Substantive procedures are made up of tests of detail and analytical procedures. Analyticalprocedures (a type of substantive procedure) are carried out at the overall review of the financialstatements stage, so as to ensure that the final accounts are reasonable and make sense.

10 D The audit opinion is qualified, but positive assurance is still provided.

11 B,C,D

Opinions as to whether the directors’ report is consistent with the financial statements andwhether the profit or loss of the period gives a true and fair view are given explicitly.

12 A Existence is the key financial statement assertion supported by attendance at the inventory count.Although some insight may gained as to the condition of the inventory, it is not enough tosupport the valuation assertion. Attendance at the count cannot be a means of verifying rightsand obligations as although the auditor can ascertain the physical existence of the inventory hecannot be sure who it belongs to.

13 A Sending confirmations to receivables will not provide evidence as to the collectability of thereceivables balance as the customers will confirm whether or not they owe the amounts, notwhether they will/are able to pay them.

14 A,D,E

Reviewing supplier statements from a reciprocal population (purchases turnover) will help tosupport the completeness assertion.



Recalculating the depreciation charge will support the valuation and accuracy assertions in relationto non-current assets, not the rights and obligations assertion. Reviewing post balance sheetinventory movements will help to provide evidence as to the valuation of the inventory at balancesheet date (i.e. whether it is stated at the lower of cost and net realisable value).

15 C,F Both cases relate to classes of transactions and not to account balances. As such the answerscannot be options B, D or E. Option A is also incorrect as cut-off testing is specific to ensuringthat transactions and events have been recorded in the proper accounting period and testing willtherefore be focused around the year-end, not throughout the year.

16 C,E Reviewing the year-end bank reconciliation is both a substantive procedure (as it confirms theyear-end balance in the balance sheet) and a test of control. Analytical procedures are a form ofsubstantive procedure.

ANSWER BANK



1 B As the statement is to ensure a certain outcome, it constitutes a control objective

2 B,C,E

Both small and large companies have a need for internal control systems, however basic they maybe for small companies. Small companies can use less sophisticated methods for compensatingcontrols like greater management intervention and some limited segregation of duties controls inkey areas of the business. Given the limited number of employees, the extent to whichsegregation of duties controls can practically be implemented is limited.

3 B,D,F

Preparing monthly bank reconciliations, reviewing accounts against budget and reconcilingsupplier statements are all detective controls, as they take place after the transactions have takenplace.

4 B,C,D

The audit committee’s role is to act in a monitoring capacity over the entity’s audit activities andmake recommendations to the board with regards to audit matters. The audit committee wouldnot review the external auditor’s working papers as these are the external auditor’s property.

5 C,E

Securing access to the storeroom is a physical control. Agreement of key documents within acycle is part of the information processing.

6 A,C,F

Both staff training and password protection are general controls, relating to all applications. Thefinal case will relate to a single application and hence is an application control.

7 B,C,E

Cyclical review of master files will relate to a single application and hence is an applicationcontrol.

Having backup power sources and computer maintenance agreements and insurance are generalcontrols, as they affect policies and procedures that support the effective function of allapplications.

8 A Flowcharting is regarded as the most effective way of recording internal controls as the user canvisually evaluate the system in operation and see which controls are carried out at which stages.

9 A,C,D

The entity’s strategy-devising process is not a function of the internal control system but wouldbe a function of the board of directors.

10 C,F Both are control activities (of different types). The authorising of the credit notes is a specificauthorisation control activity and the preparation of the reconciliation between the payablesledger and the payables ledger control account is an information processing control activity.

11 A,D,E

Should staff collude to override internal controls, those controls are rendered ineffective.Internal controls are largely designed to deal with routine transactions. Senior management maybe in a position to ignore internal controls should they wish to do so.

12 C,D Duties are segregated at the inventory count to ensure the count is carried out as accurately aspossible. Reviewing the inventory ageing list is part of the performance review of the company.



13 A,D,E

Inherent and control risk are the two components of audit risk. Auditors are not obliged toprovide suggestions to overcome all business risks. However, if controls are tested, amanagement letter is usually issued, which will highlight the key control risks and measures thatshould be taken to address them.

14 B,C Segregation of duties helps to ensure that fraud and error are prevented, detected andcorrected. Options A and D are not the reasons for the existence of segregation of duties in thecontext of an internal control system.

ANSWER BANK



1 A,F Credit checks not being made increases the risk of bad debts. Where invoices are not matchedto the sales order and dispatch note prior to being raised could lead to invoice being incorrectlycalculated and therefore errors being made in the entries to the receivables ledger.

2 B,D Sales discounts not being authorised may lead to sales being made at a loss to the company.Invoices not being checked for arithmetic accuracy may lead to customer dissatisfaction.

3 C Goods being dispatched does not relate to the ordering stage but to the dispatch stage.

4 D An investigation into shortages and surpluses is least likely to ensure that monies received on aday to day basis are banked.

5 B,D,E

Where customers are not requested to sign as evidence of delivery, then the company cannot becertain that the customer has received the order. Sales orders should be confirmed with thecustomer, the customer checked for ability to pay and the storeroom checked for the availabilityof goods. The fact that sales orders are sequentially numbered means that there is a control onthe completeness of these orders recorded, which will in turn prevent orders being missed.

6 A Where dispatch notes are matched with sales orders, then the company can ascertain that onlygoods ordered have been dispatched.

7 B Matching invoices with dispatch notes will ensure that the customer is invoiced for goodsdelivered (which is part of ensuring that invoices are correctly and accurately prepared).

8 A,D Not authorising sales discounts and customers generally delaying payment will not lead directlyto the misstatement of trade receivables. The other two options could.

9 B,C It is the dispatch notes and the sales invoices that are the key documents in determining correctcut-off. Remittance advices are slips received together with payments from customers and, assuch, would not play a role in determining the cut-off of sales (which are accounted for on anaccrual and not on a cash basis).

10 A,C The debt/equity ratio and inventory days relate to balance sheet items and will not help in theaudit of revenue.

11 A,D Where suppliers are not pre-approved, this may lead to an unsatisfactory quality of goods beingordered. Where goods received are not checked against the order made, it is possible that thewrong goods are delivered, not satisfying the internal purchasing requirements.



ANSWER BANK



1 A Prenumbering assists in ensuring that all orders authorised are processed.

2 B,F Purchase orders not being authorised prior to being made may lead to purchases that are not onthe most advantageous terms. Not recording invoices may lead to errors in the financialstatements.

3 C,D Copies of the signed goods received notes should be sent to the accounts and buyingdepartments for acknowledgment that the order has been processed (buying) and for futurematching with the supplier invoice (accounts).

4 C In order to avoid suppliers dumping their goods and then invoicing for them the entity shouldcheck goods received against orders made to ensure that the goods were in fact ordered.

5 C,E Limited access to a secure storeroom as a physical control. The payables ledger being reconciledto the payables ledger control account is an information processing control.

6 B,C There is no control over the orders going from the production department to suppliers. This is aproblem as the production department may make inappropriate orders which will go uncheckedas orders are not authorized first. Where there is a matching of documents in the purchasescycle, this helps to ensure the completeness and accuracy of the balances recorded.

7 C,D Mary should not be involved with making orders and handling supplier payments as she is in aposition to commit a fraud making an order for own personal purposes and then organisingpayment. Mary is also more susceptible to making errors as by making the order and thenorganising the payment, any error made at the order stage may continue to the payment stage.

8 C The supplier statement does not necessarily need to be a pre-numbered document, unlike theother documents which created internally or usually received (supplier invoices) in the purchasescycle. Documents are pre-numbered to enable them to be easily identified and to be checked forcompleteness. Given that supplier statements are not always sent by the supplier, there wouldnot be much point creating a pre-numbering system.

9 A,C Goods received notes and supplier invoices assist in testing for cut-off of purchases as they showwhen goods have been received (and so a liability has been automatically created).

10 B,C Reducing the number of days credit and offering early settlement discounts will help to explainthe reasons for the fall in the number of trade receivable days. A decrease in the volume of saleswill not help to explain this change nor will a change in mix towards more expensive items beingsold.

11 A,B Checking the accuracy of sales invoices and matching signed despatch notes to sales invoices, willnot prevent computers being stolen/taken for private use (though the latter might detect this).

12 A Duties should be segregated in the sales department with regards to the recording and approvalof sales orders. However, it is not necessary for the managing director to be involved in theapproval of daily routine transactions.

Chapter 7


ANSWER BANK



1 C Employees clocking in and out without supervision could lead to their being paid more hoursthan worked – e.g. if staff clock each other in and out. Option A is not correct as the rate of payis found on staff contracts and so it is a matter for the payroll and HR department to ensurethese rates are correctly transferred. Option B is also incorrect as deductions are calculated bythe payroll department. Option D is incorrect as the question states that there is a control inplace ensuring that only current employees have a swipecard in their possession.

2 D An increase in the number of highly-skilled staff is likely to have created this significant increaseper head. Option A will not have lead to a relative increase in salaries per head and option B isunlikely to have caused such a significant rise. Option C would have had a downward effect onthe salaries per head figure.

3 A,D Not having a separate personnel department to act as a check on payroll (and vice versa) maylead to fictitious employees being created and any changes in employee circumstances not beingupdated on the payroll. The other two risks are risks in any payroll system but they do not arisefrom the joint responsibility for both processing salaries and for maintaining all staff records andcontracts.

4 A,C,D

The acts of requesting each employee to sign the wage packets and requesting verification ofemployee’s identity are not critical duties that require segregation in the process of cash wagesbeing paid. The other three are.

5 B,C,E

There being no separate personnel department is a weakness in the wages system as there is noindependent source of personnel information which can be used as an internal check on thepayroll. Limiting access to standing payroll information and having all changes in salary ratesapproved are strengths in the system.

6 B,D Payroll information being agreed to personnel files and then being processed is part ofinformation processing.

Comparing actual to budgeted salaries is part of the performance review process.

7 C Maintaining staff records per se would not prevent leavers remaining on the payroll (option A).Staff submitting work schedules directly to the payroll department would also not avoid thiseventuality as there is no evidence of review or authorisation of these work schedules prior tobeing processed (option B). The fact that staff are paid directly into their bank accounts wouldalso not avert leavers being paid (option D).

8 B,C Reperforming some of the calculations on the payroll and the review of the autopay list by thechief accountant against the payroll prior to payment are controls that will help ensure accuratepayments are made to employees. Option A is not correct as authorisation of overtime is theauthorisation of specific hours worked and, as such, will not ensure that accurate payments aremade. Option D is also not correct, as by agreeing the autopay list to the bank print out, there isno check that the autopay list itself is correct. This can only be done by checking the autopay listagainst the underlying payroll records.

9 A,D,E

With the human resources manager updating the payroll department for any changes as theyoccur, errors are prevented from taking place. Comparing payroll costs against budget on amonthly basis is a detective control as it takes place after the related transactions have occurred.By seeking evidence of identification, employees are prevented from taking another employee’swage packet.



ANSWER BANK



1 A,B,C

Internal audit should not be involved with operations. Authorising transactions is an operationalactivity.

2 B, C, E

It is expected and often constructive for internal auditors to cooperate with external auditors onmany levels. The existence of a well-resourced and effective internal audit departmentcontributes positively to an entity’s internal control system.

3 A,B,C

Internal audit should not participate in the voting of (option D) and the execution of decisionsalthough may help in making recommendations on the decision-making process, onimprovements in operations (option C) and advising on how to implement standards (option A).Internal audit constitutes a support function to the business. There is often scope for liaison andcooperation between internal and external auditors which may lead to a more efficient externalaudit and may contribute towards the internal audit process (via the recommendations made bythe external auditors).

4 D Internal auditors do not get involved with operations to preserve their independence. The othersreasons cited are not valid.

5 C Reporting directly to the audit committee/board of directors will help to preserve theindependence of the internal audit function.

6 A,C,D

Option B would not be acceptable as it involves the internal auditor in operational matters.Option C appears to be a special assignment and therefore not operational.

7 C,F Both internal and external auditors could prepare a report on the effectiveness of internalcontrols as part of their work (the external auditors’ report is the “management letter”). Bothinternal and external auditors would be interested in investigating a material fraud (though animmaterial fraud may not be relevant to the external auditors).

8 C Communicating recommendations on the overall operational effectiveness of the entity is notusually carried out by the external auditor for the purposes of his external audit. Where tests ofcontrol are carried out by the external auditor, some internal control issues may be picked upand communicated via a management letter but this differs from recommendations on overalleffectiveness. The remaining options are activities that are carried out by both types of auditorsin their separate work.

9 C,D Options A and B are operational in nature and should not have the involvement of internal audit.



ANSWER BANK



1 B, C, E

Documentation preparation in the form required by BSA 230 is a professional, not a legal,requirement.

2 B, C, D

An accounts checklist would be found on a current file.

3 A, B, C

The engagement letter would be found on the permanent file.

4 B According to BSA 230, Para 13, auditors “should retain working papers for a period sufficient tomeet the needs of the practice.”.

5 D Care must be taken to show only those documents that will not prejudice the audit. The workingpapers belong to the auditor and, as such, are shown only at the auditor’s discretion (unlessthere is a legal or public duty to do so otherwise).

6 A, C, E

All statements are true with regards to the preparation of audit documentation: for effectivequality control, adequate documentation is required; in case of a legal dispute, documentationprovides evidence of the work carried out and the approach taken and finally, documentationprovides an opportunity to retain a record of matters that may be of continuing significance (e.g.details of assets held under lease arrangements).

7 A, D, F

It is not on a voluntary basis that working papers are prepared, but it is a professionalrequirement of BSA 230. The final statement is also false, as there are particular circumstanceswhere the auditor has a legal obligation to disclose information about his client without theclient’s permission (e.g. if the client is involved in terrorist or corruption activities).



ANSWER BANK



1 B,C,E

The first statement is false as test data does not use the auditor’s software but is data that is usedto test the client’s system/software.

2 B,C,F

Analytical procedures are only as helpful as the integrity of the underlying data. Analyticalprocedures do not need necessarily to be carried out by senior audit personnel. However, aswith all audit work carried out, it should be supervised and reviewed by a more senior member.

3 A,C,D

The materiality of items involved (as per option B) is a suitability factor when deciding to useanalytical procedures.

4 B The risk the sample chosen is not representative of the population is a definition of sampling risk,which in itself is an element of detection risk.

5 D The company is now more efficient, reducing its production cost and therefore increasing itsgross margin. Option A is not correct as an increase in sales volume will see cost of sales riseproportionately. Option B does not apply as administrative expenses are not part of the grossmargin calculation. Option C would cause the gross margin to fall.

6 C The direction of testing when testing the completeness assertion will be from the physical itemto the accounting records (i.e. the non-current asset register). (The answer is not B as thefinancial statements will not contain the analysis required for this test.)

7 A Trade receivables confirmations would assist in confirming their existence. Options C and Dwould assist in verifying the valuation assertion. Option B would have no bearing necessarily onthe trade receivables balance, as some sales orders may have been sales for cash, others mayhave led to goods being returned, and others may have been cancelled prior to delivery.

8 A,B,D

Bank statements would not assist in testing for completeness of liabilities. The other sourcesmentioned may provide insights as to liabilities that have been omitted.

9 A,C,D

The bank letter issued by the bank should agree to the bank statement so the bank letter will beno more accurate (so Option B is not a reason) – but the bank letter may contain moreinformation (Option C).

10 B,C Reperforming the calculation of the provision is not a testing directed towards understatementbut may equally pick up any overstatement. Testing the process used by management to estimatethe process is not a substantive procedure and contributes less to the detection ofunderstatement than options B and C do.

11 D A random sample is less than 100% and represents the characteristics of the population.

12 A,C,E

Subjectivity is involved with non-statistical sampling as the choice of the sample is made via aseries of decisions taken by the auditor. Statistical sampling requires the auditor to input anumber of sampling parameters of which the required confidence level is one.



13 B,F,G

An increase in the level of tolerable error will cause a decrease in the sample size as the numberof errors the auditor regards as acceptable has increased and therefore he needs to test lessitems. An increase in the number of sampling units will have no effect on sample size. An increasein detection risk will lead to an increase in sample size to address the additional risk faced.

14 A,D Increases in both expected error and the auditor’s required confidence level will lead to anincrease in sample size.

15 B,E Both an increase in the use of other substantive procedures and stratifying the population willlead to a decrease in sample size.

16 B,D An increase in the level of the error that is tolerable will decrease sample size, whereas anincrease in the assessment of audit risk will lead to an increase in the work required, and hencethe sample size.

17 B,D,F

Tolerable is the maximum acceptable error that an auditor (and not management) can accept andstill conclude that the financial statements show a true and fair view. Sampling risk is the risk thatthe sample chosen does not represent the population under examination.

18 A,F The use of the computerised generator will ensure the random selection of the sample.

19 A,B,D

Sundry and utility expenses are unlikely to be mentioned in the board minutes.

20 B Block sampling may be appropriate for cut-off testing which is what option B describes.

21 B Monetary unit sampling tends to focus on high value items in a population. As such it is mosthelpful for testing the overstatement of assets.

22 C Auditor-generated evidence (per option A) is more reliable than the client’s presentations henceoption C provides the least persuasive evidence. Third party evidence (options B and D:supplier’s invoice or third party correspondence) is more reliable than internally/client-generatedevidence.

23 B, C, F

Analytical procedures are limited by the integrity of the underlying accounting system.Observation of a procedure is limited to the point in time it takes place as what takes placeunder the observation of the auditor may not take place any other time. Direct confirmation of apayables balance is limited by the fact that should the payables balance be overstated, it might stillbe agreed as it favours the supplier (the respondent).

24 A,E A title deed is inspected for the purpose of checking ownership details. By being present for partof the sales cycle, the assurance provider is taking the opportunity to observe the process andthe controls applied.

ANSWER BANK



1 A,B,D

The answer is not option C as acknowledgement as to the terms of engagement is sought in theengagement letter.

2 B,C,E

Management representation letters can not act as a substitute for other audit evidence where itis expected to be available. The representation letter contains a statement of management’s beliefthat the financial statements are free from material error.

3 A,F Details of the occurrence of any frauds or the confirmation of no such occurrence is found in themanagement representation letter. Any weaknesses in the internal control system found in thecourse of the audit are reported to management in the management letter.

4 C The management representation letter should be signed by management just prior to the signingof the audit report to ensure all areas are covered up to that point.

5 B It is usually the auditor who drafts (then discusses with management) and senior managementwho sign off the representation letter.

6 A Knowledge of completeness of liabilities is an area that rests with management and otherevidence may not be available.

7 C Option A refers to the engagement letter. Option B refers to the management letter. There is noparticular letter as is referred to in option D, although some of these issues could possiblycovered in the management letter.

8 B,C Matters where knowledge is confined to management are amongst the representations made bymanagement. Option A is not correct as this would constitute a limitation of scope and would bereferred to in the audit report. Option D is not correct as a more general statement is made bymanagement with regards to fraud and irregularities (not one that covers management fraudsonly).

9 A,C Options B and D are not required in a representation letter.



ANSWER BANK


Chapter 13: Substantive procedures – key financialstatement figures

1 A,E Tracing items from the non-current asset register to the schedule of non-current assets is a testsupporting the completeness assertion, as all balances should be carried over. Confirming thecasts on the schedule are correct will support the valuation assertion.

2 B,F Checking against invoices is one procedure that supports the valuation assertion (by checkingoriginal cost). Confirming recorded assets are physically present supports the existenceassertion.

3 C For the rights and obligations assertion evidence is needed that the plant belongs to the cliententity. The purchase invoice should have the client entity’s name on it.

4 B,E Lack of impairment testing means that potentially the intangibles are overvalued. Whereexpenses are inappropriately capitalised, the same threat of overvaluation exists.

5 B,F Enquiries of possible obsolete or slow-moving inventory is a test of the valuation of inventory.Testing the allocation of transactions around the period end supports the cut-off assertion.

6 A,B,D

Attending the inventory count does not support the rights and obligations assertion as theauditor cannot be sure to whom the inventory belongs.

7 B Having the count supervised by the stores manager constitutes a lack of independence in theinventory counting process and is therefore a weakness which would be of concern to theauditor.

8 B,C,E

Where there are perpetual counts, management should ensure that inventory lines are countedat least once a year.

9 A,C,E

Increasing the selling price or offering small discounts during a sale period do not indicate thatNRV is lower than cost (provided there was already a large enough profit margin to cover the“small” discounts). With newer models being available, existing inventory is likely to be obsolete.The significant unforeseen increase in production costs which cannot be passed on to thecustomer is likely to push the product cost over the NRV.

10 B,C Corresponding with suppliers and sending receivables confirmations are not means of testingwhether inventories are stated at the lower of cost and NRV.

11 A,B,D

Receivables confirmations do not assist in confirming the collectability of the amounts owed.

12 B,C,F

Under the negative method, the customer is requested to respond only in cases of disagreement.The third statement is false as there is no such requirement to use positive confirmations wherethere are a large number of balances. Further, it is more appropriate in this situation to usenegative rather than positive confirmations.

13 C,D Where the assessed risk of material misstatement is high or there are a small number of largebalances involved, then the positive method should be used.

14 C Refusal to cooperate with the auditor would lead to a limitation of scope on the audit.



15 B,C,F

The sample of trade receivables circulated should include unusual accounts also e.g. nil balances,credit balances. Customers who are difficult to find should not be avoided but special effortsshould be made to locate them in order to get the confirmation required.

16 B,E Comparing provision methods against industry and reviewing the trade receivables ageing analysishelp to support the valuation assertion.

17 B Outstanding responses should be passed on to an independent company official for chasing as allpositive (which this seems to be) requests must be followed up.

18 A,F Non-disclosure of bank balances affects the completeness assertion as assets/liabilities areunderstated. Unresolved errors in the bank reconciliation will affect the valuation assertion.

19 B Checking the paying in slips to ensure that remittances relate to before the year end will addressthe risk that credit is taken for remittances received after the year end. Cheque slips for payment(per option A) would not lead to increased remittances being recognised. Confirming dates ofpayments with customers would also not assist in addressing the risk as there is a timingdifference between the time the customer pays and the time the client receives the payment(option C). The same applies to confirming with suppliers date of receipt from the client (optionD).

20 B,C,D

Standing order details (option A) will not be included in the bank letter.

21 C,D Supplier confirmations are recommended where supplier statements are incomplete orunavailable. Where the purchases cycle contains all the documentation and there is no particularsuspicion that management are trying to understate payables, then supplier confirmations are notnecessary (option A). Option B is not correct as the process surrounding supplier confirmationsis likely to be more time consuming than the alternative procedures available.

22 B Reconciling payables ledger accounts with supplier statements most supports the completenessassertion.

23 C Share certificates support investments (assets) not non-current liabilities.

24 B,D Supplier confirmations not being returned should be referred to a senior colleague so thatfurther action may be planned. With regards to the second test, given the extrapolated error iswell below the materiality threshold (CU200 X 10 is CU2,000), the assurance provider shoulddraw a conclusion.

25 A,B,C

The disclosure requirements that relate to non-current assets are not so onerous as toconstitute as great a risk as those presented in options A, B and C.

26 B,F

Unadjusted inventory differences identified at the inventory count affect the valuation assertion.Not taking into account inventory in transit at the year end affects the cut-off assertion.

27 A,D

The difference found constitutes an error (of transposition) which, if material, will need to beadjusted in the financial statements. The second case is a timing difference, not an error, whichdoes not require an adjustment to the financial statements, provided that cut-off is correct.

28 A,D,E

Whereas the current account is tested as it is over the materiality threshold (hence the reasonwhy the petty cash balance is not tested), the special directors’ cash account is also testeddespite the fact that it is below the quantitative materiality threshold. This is because thedisclosure of directors’ emoluments is a legal requirement to which no monetary materialitythreshold is applied.

ANSWER BANK


29 B,C,F

Analytical procedures are a type of substantive procedure. Reviewing board minutes for evidenceof authorisation tests an authorisation control. Reperforming the year-end bank reconciliation isa substantive procedure, performed as part of the process to verify the year-end bank balance.



ANSWER BANK



1 A,C,E

Guidance from the ICAB is in the form of rules. Although rules-based codes are morestraightforward, they are more open to manipulation.

2 A,D,E

A framework does not take the form of a checklist of forbidden items to tick off – that smacksmore of a rules-based approach.

3 B Courtesy is not one of the stated fundamental principles of the IFAC code.

4 D A familiarity threat is created due to the fact that a partner’s sister is the MD of Tube Ltd.Independence could be threatened by the MD’s influence over the sister and, in turn, herinfluence over the partner. A self-interest threat is created by the fact that another partner hasshares in Tube Ltd. This partner could be motivated to influence the outcome of the audit ifthere might otherwise be a detrimental affect on the value of Tube Ltd (and hence the shares).

5 D Helping Dreams Ltd design and implement a new IT system constitutes a management threat asthe auditor may be taking on a management role.

6 A Threatening to replace Johnson & Co if it does not deliver the desirable outcome constitutes anintimidation threat.

7 B An advocacy threat is created as Whitely & Co will be promoting the client’s position in itsinvestment dealings.



ANSWER BANK



1 D The offer must be rejected as it is not of insignificant value.

2 C If the client does not pay overdue fees then a loan relationship is automatically created which is athreat to independence. As such, where the overdue fees involve an amount that cannot beregarded as trivial, the audit engagement partner, in consultation with another partner orpartners, should consider whether the firm can continue to act as auditors or whether it isnecessary to resign.

3 A On inheriting the shares, the partner should dispose of them at the first available opportunity.

4 A As per IFAC Ethics, where a partner leaves a firm and is appointed as director or in a keymanagement position in a company where he had acted as key engagement partner, the firmshould apply safeguards, such as using different audit methods, approach and using a differentaudit team, partner for the audit.

5 A Taking a loan from a high street bank at a commercial rate is not prohibited as there is nofavourable treatment.

6 A,D Safeguards should be implemented. The firm might discuss the matter with the audit committee,and also use external quality control review.

7 A,C Safeguards should be implemented. Which might include monitoring and implementing qualitycontrol of assurance and also involve an additional professional accountant to review the work.

8 C,F The auditor must reject a proposition of contingent fees and also reject the offer to serve on theboard of directors. Both are prohibited.

9 C,E The auditor must not prepare the accounts of a listed company, unless it is an emergencysituation. The auditor may prepare the accounts of a private company, provided safeguards areimplemented (e.g. allocating different teams to accounts preparation and the audit).

10 D Valuing a portfolio of shares leads to self-review and management threats. This is because theauditor will then come to audit the valuation of the same portfolio. Also the responsibility for thevaluation should be taken by management.

11 A In providing both the internal and external audits, there are both self-review and managementthreats. The auditor is carrying out work which should be the responsibility of management(management threat) and he will then audit own his work (self-review threat).

12 D Acting as an expert witness constitutes an insurmountable advocacy threat.

13 B,C,D

A familiarity threat relates to a threat coming from a family, close personal relationship or longassociation with the client. The threat also arises where the auditor is making recruitmentdecisions on behalf of his clients. The answer is not option A as this would give rise to anintimidation threat.

14 C The Code of Ethics requires that rotation should take place after seven years of continuousservice.

15 A Perform the work as support is available and the level of work is appropriate.

16 B In this case, Geoff is unsupervised with a task in excess of his capabilities. The most appropriatecourse of action would be to refer to the Dickens & Co engagement partner. If this provesineffective then option C would be the next step.

17 B Alison should initially report her concerns to the audit committee. Other options may thenprove necessary.

18 C Long client association would lead to a familiarity threat being created.



19 A,D Providing additional taxation services on an ongoing basis should involve an additional team toavoid the threat of self-review. Stepping in to prepare the financial statements in an emergencysituation for a listed client is acceptable provided safeguards are taken, of which separatepersonnel is one (to avoid the self-review threat).

ANSWER BANK



1 C,D It is not the case that disclosure of client confidential information can be made to third partiessolely at the discretion of the auditor (option A), and there are occasions where the auditor doesnot need client consent to make disclosure (option B), as is the case where a public or legal dutyexists.

2 A,D There is no legal duty when corresponding with tax authorities (option B), or to disclose thenon-compliance of CA 94 to third parties other than including that in the report.

3 A The first course of action should be to consult the firm lawyer.

4 C Where two clients are in direct competition with each other, they should both be made aware ofthe fact and informed consent obtained.

5 A,C,D

Not discussing client matters at the assurance firm’s premises and not being allowed to takeworking papers off the premises would be unreasonable (and impracticable) measures.

6 A,C,F

Auditing competing clients creates a conflict of interest but is permissible provided both clientsare aware and accept the situation and safeguards are in place (e.g. separate teams are placed oneach client). The second case also presents a conflict of interest there is a threat toindependence arising from the conflict between acting as advisor to one client company possiblyagainst the interests of another client company (quite apart from the advocacy threat presented).Carrying out a limited assurance engagement should not create a conflict of interest with theexternal audit assignment.



REVIEW FORM – ASSURANCE QUESTION BANK

Your ratings, comments and suggestions would be appreciated on the following areas ofthis Question Bank:

Very useful Useful Not usefulNumber of questions/answersStandard of answers

Excellent Good Adequate PoorOverall opinion of thisQuestion Bank

Please add further comments below:

Please return to:

Deputy Director, Learning & Professional Development

Email: [email protected]

ICABICAB Bhaban100 Kazi Nazrul Islam Ave., Kawran BazarDhaka 1215www.icab.org.bd

mailto:[email protected]

http://www.icab.org.bd

REVIEW FORM (continued)

TELL US WHAT YOU THINK

Please note any further comments and suggestions/errors below.