Question 1

An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Accepted Answer

A)  Unrecorded sales.
B)  Merchandise purchases charged to selling and general expense.
C)  Fictitious sales.
D)  Unrecorded purchases. A

Question 2

When an auditor is approached to perform an audit for the first time, the auditor should make enquiries of the previous auditor.This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:

Accepted Answer

A)  whether the predecessor's work should be utilised.
B)  whether the company follows the policy of rotating its auditors.
C)  whether the predecessor's assessment of control risk has been high.
D)  whether the engagement should be accepted. D

Question 3

Analytical procedures that are required in all audits of financial reports are analytical procedures:

Accepted Answer

A)  relevant to achieving important audit objectives related to particular assertions.
B)  expected to be efficient and effective in the circumstances.
C)  based on available and reliable financial data.
D)  used in the planning and overall review stages. D

Question 4

Significant unexpected differences identified by analytical procedures will usually necessitate:

Accepted Answer

A)  a review of internal control.
B)  an explanation in the representation letter.
C)  investigation by the auditor.
D)  addition of an 'emphasis of matter' paragraph to the auditor's report.

Question 5

In assessing whether to accept a client for an audit engagement, an auditor should consider the:

Accepted Answer

A)  entity's business risk.
B)  auditor's engagement risk.
C)  integrity of management.
D)  All the given answers are correct.

Question 6

The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

Accepted Answer

A)  retained profits.
B)  income statement items.
C)  statement of financial position items.
D)  cash flows.

Question 7

An auditor obtains knowledge about a new client's business and its industry in order to:

Accepted Answer

A)  make constructive suggestions concerning improvements to the client's internal control.
B)  develop an attitude of professional scepticism concerning management's financial report assertions.
C)  evaluate whether the aggregation of known misstatements causes the financial report taken as a whole to be materially misstated.
D)  understand the events and transactions that may have an effect on the client's financial report.

Question 8

The scope and nature of an auditor's contractual obligation to a client ordinarily is established in the:

Accepted Answer

A)  engagement letter.
B)  Corporations Act 2001.
C)  management letter.
D)  client's constitution.

Question 9

Which of the following situations would most likely require special audit planning by the auditor?

Accepted Answer

A)  Some items of factory and office equipment do not bear identification numbers.
B)  Depreciation methods used for the client's tax return differ from those used for the accounting records.
C)  Assets costing less than $500 are expensed even though the expected life exceeds one year.
D)  Inventory is comprised of precious gemstones.

Question 10

Which of the following is not a benefit of analytical procedures?

Accepted Answer

A)  Assists in understanding a client's business and identifying areas of potential risk.
B)  Enables the auditor to review the financial and non-financial information of a client.
C)  May reduce the level of detailed audit testing if the control system surrounding the reliability of the information is strong.
D)  Provides adjustments to error levels during tests of control.

Question 11

An example of an analytical procedure is the comparison of:

Accepted Answer

A)  recorded amounts of major disbursements with appropriate invoices.
B)  results of a statistical sample with the expected characteristics of the actual population.
C)  computer-generated data with similar data generated by a manual accounting system.
D)  financial information with similar information regarding the industry in which the entity operates.

Question 12

In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

Accepted Answer

A)  judgment by the auditor.
B)  participation by senior audit team members.
C)  understanding of complex models.
D)  advanced training in plausibility formulation.

Question 13

Which of the following is a nonfinancial performance measure?

Accepted Answer

A)  Warranty rates.
B)  Return on investment.
C)  Net profit.
D)  Sales.

Question 14

Which of the following forms of advertising is permissible?

Accepted Answer

A)  Advertising that indicates the auditor's educational and professional attainments.
B)  Advertising that offers discounted prices.
C)  Advertising that explains deficiencies in competitors' services.
D)  All of the given answers are correct.

Question 15

Time budgets on audit engagements are not used for which of the following reasons?

Accepted Answer

A)  To monitor actual audit hours worked by staff on an engagement.
B)  To ensure that adequate time is allocated to significant areas of the audit.
C)  To estimate an appropriate fee for the engagement.
D)  To ensure that audit staff working on the engagement are paid the correct amount.

Question 16

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Accepted Answer

A)  Relationships involving statement of financial position accounts.
B)  Transactions subject to management discretion.
C)  Relationships involving income statement accounts.
D)  Data subject to audit testing in the prior year.

Question 17

Audit planning:

Accepted Answer

A)  is the same irrespective of the size or complexity of the entity.
B)  requires confidentiality.
C)  requires an understanding of the entity.
D)  is necessary so that management can be advised of what the auditor intends to test.

Question 18

Which of the following items is not an important consideration in an auditor's evaluation of an entity's business risk?

Accepted Answer

A)  The specific business risks that an entity faces may result in financial report errors and fraud.
B)  Business risk factors affect the ability of an entity to be profitable and survive.
C)  Auditing standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements.
D)  Auditing standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability.

Question 19

An audit firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:

Accepted Answer

A)  enquiry of management as to whether disagreements between the previous auditor and the prospective client were resolved satisfactorily.
B)  confirmation of the prospective client's bank accounts.
C)  enquiry of third parties, such as the prospective client's bankers and solicitors, about information regarding the prospective client and its management.
D)  consideration of whether the internal control is sufficiently effective to permit a reduction in the extent of required substantive tests.

Question 20

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

Accepted Answer

A)  engage financial experts familiar with the nature of the business entity.
B)  obtain knowledge of matters that relate to the nature of the entity's business.
C)  refer a substantial portion of the audit to another auditor, who will act as the principal auditor.
D)  first inform management that an unmodified auditor's opinion cannot be issued.

Exam 5: Planning, Understanding the Entity and Assessing Business Risk