Deck 10: Materiality and Audit Evidence

Question 1

Which of the following would not be considered underlying accounting data?

A) sales invoices.
B) the general ledger.
C) books of original entry.
D) related accounting manuals.

Answer 1

A

Question 2

An auditor has obtained an understanding of the internal control structure and has decided that the appropriate controls are ineffective. The most appropriate audit strategy is:

A) the lower assessed level of control risk approach.
B) the predominantly substantive approach.
C) a combination of the lower assessed level of control risk approach and the predominantly substantive approach.
D) the analytical procedures approach.

Answer 2

B

Question 3

Which of the following is not a course of action an auditor may take if they discover material misstatements in the accounts?

A) consider issuing an unqualified audit opinion.
B) consider issuing a qualified audit opinion.
C) perform additional audit procedures.
D) ask management to correct the errors.

Answer 3

A

Question 4

On each engagement, the specific audit objectives will normally be:

A) the same for all clients in the same industry.
B) equal to the number of categories of management's financial report assertions.
C) similar for all clients in the same industry.
D) tailored to fit the individual client.

Question 5

In making judgements about materiality at the account balance level, the auditor must consider the relationship between it and overall materiality. This should lead the auditor to plan the audit to detect misstatements that:

A) are individually material to the statements taken as a whole.
B) are individually immaterial to the statements taken as a whole.
C) bring the cumulative total of known misstatements to the level of materiality established by management.
D) may be immaterial individually, but may aggregate with misstatements in other accounts to a material level.

Question 6

During the audit of XYZ Ltd the auditor found a misstatement that equated to 7% of the base amount. According to the guidelines provided by AASB 1031.this amount is deemed to be:

A) material.
B) not material.
C) a matter of professional judgement whether it is considered material.
D) none of the above.

Question 7

The completeness assertion would be violated if:

A) the allowance for doubtful accounts was understated.
B) unbilled shipments had occurred during the period.
C) the balance of accounts payable was overstated.
D) all of the above would violate the completeness assertion

Question 8

The recorded balance in an account generally represents:

A) the lower limit on the amount by which it may be overstated.
B) the upper limit on the amount by which it may be overstated.
C) the lower limit on the amount by which it may be understated.
D) the upper limit on the amount by which it may be understated.

Question 9

"Tolerable error" (or tolerable misstatement) is the term used to indicate materiality at the:

A) balance sheet level.
B) income statement level.
C) account balance level.
D) transactions level.

Question 10

In determining the sufficiency of evidential matter, which of the following would not normally be a factor?

A) materiality of the account.
B) audit risk.
C) the sampling technique used.
D) the size of the population.

Question 11

Which of these would not be considered corroborating information?

A) the accountant's work sheet.
B) cancelled cheques held by the client.
C) confirmation from vendors.
D) oral evidence obtained from client personnel.

Question 12

All else being equal, as the level of materiality decreases, the amount of evidence required will:

A) increase.
B) decrease.
C) remain the same.
D) change in an unpredictable fashion.

Question 13

The presentation and disclosure assertion often includes all of the following aspects except:

A) classification and understandability
B) occurrence, rights and obligations.
C) completeness.
D) existence

Question 14

In planning the audit, the auditor should assess materiality at two levels:

A) the preliminary level and the final level.
B) the company level and the divisional level.
C) the financial report level and the account balance level.
D) the account balance level and the transaction level.

Question 15

In general, as an account balance decreases, the amount of evidence required will:

A) increase.
B) decrease.
C) remain the same.
D) change in an unpredictable fashion.

Question 16

Use of the auditing procedure 'confirmation' would normally involve all of the following except:

A) direct evidence being obtained from outsiders.
B) auditor control of the mailing.
C) written request and an oral response.
D) a high degree of reliability

Question 17

Which of these would generally be considered the least appropriate form of evidence?

A) the auditor's computation of earnings per share
B) pre-numbered sales invoices prepared by the accounts receivable clerk
C) the auditor's inspection of new machinery acquisitions for the current year where the client is a computer manufacturer
D) correspondence from the client's solicitor concerning litigation

Question 18

The concept of materiality is defined in AASB 1031.in terms of the:

A) auditor.
B) preparer.
C) CPA Australia/ICAA members.
D) users of financial reports

Question 19

The auditor has determined that, as the assessment of control risk is high, the audit strategy adopted will be the predominantly substantive approach. What is the cost of this audit likely to be?

A) low.
B) moderate.
C) high.
D) cannot be determined.

Question 20

If the bank reconciliation is incorrect the assertion violated would be:

A) existence
B) completeness.
C) valuation and allocation.
D) rights and obligations.

Question 21

Which of these is not a substantive procedure?

A) tests of controls.
B) analytical procedures.
C) tests of details of transactions.
D) all are substantive procedures

Question 22

From the following descriptions, determine what type of auditing procedure is being conducted:
1.the auditor watched two employees open the safe with their respective codes.
2.the amount of depreciation on the company vehicles was recalculated.
3.the auditor confirmed the journal and ledger entries for a purchases receipt were correctly made.
4.The auditor went to the entity's warehouse to examine the existence and condition of inventory.
5.The auditor took a stocktake of inventory on the shelf.
6.The auditor used the computer to randomly select a sample of accounts receivable for confirmation.
7.The auditor receives a letter from the entity's lawyers regarding the total legal fees charged for the period.
8.The auditor sent a letter to the entity's bank asking about the entity's debt covenants.
9.The auditor found the sales invoice and then sales order for an entry made in the accounts receivable ledger.
10. Expected wages expense was determined by proportionately adjusting the previous year's wages upwards by the increase in sales and then this was confirmed with the current period's figure for wages expense.

Question 23

i. Define materiality as described in ASA320.
ii. Identify the two levels of materiality that are important in audit planning and indicate the reason for each level.

Question 24

An auditor contacts an accounts receivable of the client directly in order to confirm the balance owing. This is an example of:

A) analytical procedure.
B) test of control.
C) test of details of balances.
D) tests of details of transactions.

Question 25

List and define four types of corroborating evidence.

Question 26

Identify and explain each of the four broad categories of management's assertions about account balances.

Question 27

Identify the three general classes of auditing procedures that pertain to obtaining audit evidence and indicate the primary purpose of each class.

Question 28

Indicate an appropriate base amount that could be used in determining materiality for the following items:
1.accounts receivable
2.inventory
3.accounts payable
4.wages expense
5.cash inflow from the sales of property, plant and equipment
6.cash outflow from borrowing redemption
7.asset revaluation reserve
8.cash
9.interest revenue
10. cash outflow from employee expenses

Question 29

The auditor has determined that there is a preponderance of persuasive evidence for each financial statement assertion that is material, and therefore a reasonable basis for their opinion. Which of the following would not be a possible opinion that the auditor could issue?

A) an unqualified opinion.
B) an 'except for' opinion.
C) an adverse opinion.
D) an inability to form an opinion.

Question 30

The subject of the auditing procedure 'observation' is least likely to be:

A) physical assets.
B) procedures.
C) processes.
D) inventory taking.

Question 31

OPQ Audit Firm was planning the audit for its existing client, Alpha & Beta Corp. The audit partner was trying to determine the best audit strategy to use. Alpha & Beta Corp. is a small retailing company that does not have any warehousing facilities as all stock is kept on the premises. Being small, they only have a small team of staff, which makes the separation of duties principle difficult to achieve. The preliminary tests of controls found that the internal control procedures are well designed, but not always observed due to the small amount of staff. Previous experience with this client also showed that controls were not always observed. Despite this, OPQ has never discovered a material misstatement in the accounts.
Required: Determine what audit strategy should be used and justify your answer.

Question 32

What is the purpose of tests of control?

A) to obtain an understanding of the control over assets
B) to provide evidence as to the fairness of management's financial statement assertions.
C) to provide evidence about the effectiveness of the internal control structure, policies and procedures.
D) none of the above.

Question 33

For each of the following combinations of audit evidence, rank the items in terms of their reliability:
1.
A. Bank statement from the entity's records
B. Bank statement sent directly to the auditor
C. Cash at bank ledger
2.
D. Audit firm conducts the physical count of inventory
E. Internal audit reports on the physical count of inventory
F. Auditor supervises internal audit conducting the physical count of inventory
3.
G .Management provides a representation letter on the accuracy of valuations
H. The auditor receives a letter from the agent who conducted the valuation confirming its accuracy
I. The auditor hires an independent agent to confirm the valuation
4.
J. The auditor conducted an inventory count two months before reporting date
K. Internal audit conducted an inventory count 3.days before reporting date
L .Internal audit conducted a supervised inventory count on reporting date
5.
M. Management assured the auditor of the probable outcome of a pending court case
N .The entity's lawyers assured the auditor of the probable outcome of a pending court case
O. The auditor received a representation from the entity's lawyers regarding the probable outcome of a pending court case

Question 34

The statement that is most accurate about the procedures that can be performed by computer-assisted audit techniques is:

A) they can physically check the quantity of inventory on hand.
B) they can check for the existence of non-current assets.
C) they can observe the operation of control procedures throughout the period under audit.
D) they can re-perform a variety of calculations and perform calculations and comparisons used for analytical procedures.

Question 35

The auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion' - ASA 500 (ISA 500). Identify the factors that may affect the sufficiency and appropriateness of audit evidence and briefly explain how they impact on these criteria.