aaa practice exam
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AAA PRACTICE EXAM 1
Question 1
Section A: Multiple Choice Questions – Single Option
This section has 89 questions worth 1 mark each (total of 89 marks)
Which of the following relating to limited assurance engagements is correct?
A. A review engagement would result in limited assurance being provided.
B. Tests of detail are generally performed in limited assurance engagements.
C. Limited assurance is only relevant for half year reviews of financial statements.
D. The opinion is expressed in a negative manner as basic analytical procedures are not performed.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is correct as limited assurance engagements (e.g. reviews) result in limited assurance.
The second option is incorrect as test of details are generally performed in a reasonable assurance
engagement (e.g. an audit) and not a limited assurance engagement (e.g. a review).
The third option is incorrect as a limited level of assurance can be provided on
other type of engagements, not just reviews of half year financial statements.
The fourth option is incorrect as basic analytical procedures are performed in
a limited assurance engagement.
Question 2
You are a senior accountant of XYZ Auditors, a small boutique audit firm in
Brisbane. Their major audit client, PQR Manufacturers, wishes to obtain your
firm’s assistance in implementing a new system of internal control over their
finished goods inventory.
It is expected that this new system of internal control will greatly reduce the
need for the audit team to perform substantive testing procedures in current
and future audits.
The total fee for the engagement to develop the new system is $11,000,
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which consists of 7 billable hours for yourself, and 2 billable hours for your
manager to review your work.
In the prior year, XYZ Auditors provided 9 hours of consultancy and advisory
services to PQR Manufacturers.
Would the above engagement be permitted in terms of Division 3 of
the Corporations Act 2001 (Cwlth)?
A. Yes, because the billed hours do not exceed the maximum of 10 hours of non-audit services allowed
by the Act in the current year.
B. Yes, because although the total billed hours would exceed the 10 hours permitted by the Act, it is less
than 20 hours over a 24 month period.
C. No, because the billed hours in the current year plus the hours billed in the prior year exceeds the
maximum of 10 hours of non- audit services allowed by the Act.
D. No, unless the audit work performed on the new system of internal control was performed and
reviewed by audit staff other than yourself and your manager.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
A is correct because the guidance included in the Corporations Act is based on
maximum hours test, whereby a maximum of 10 hours of non-audit services
can be provided during the period to which the audit relates. A further 10
hours of non-audit services can be provided in the 12 months immediately
prior to the period to which the audit relates.
Module 2 > Auditor independence for the audit of financial statements > An
Australian perspective
Question 3
When testing the computerised controls over payroll using test data, which of
the following would be the most likely outcome?
A. Confirmation of competent payroll staff.
B. Existence of unclaimed payroll cheques held by the payroll
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manager.
C. Effective physical controls over the terminal containing payroll
master files.
D. Ineffective program controls relating to the processing of annual
leave calculations.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is correct because testing using the test data approach
focuses only on program application controls and not the processing
environment.
The first and second options are not correct as these relate to general controls
and are not computerised controls.
The third option is not correct as this is a general control relating to the
processing environment and cannot be tested using the test data approach
but rather using an integrated test facility (ITF).
Module 3 > Using CAATs for tests of controls > Test data
Question 4
Which of the following is a situation where materiality would not be relevant?
A. Identifying inherent risks.
B. Planning the audit engagement.
C. Determining the relevant evidence gathering procedures.
D. Assessing if the financial statements are free from misstatements.
You selected C - This is incorrect. The correct answer is A
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The first option is correct as inherent risk is the susceptability of subject
matter to misstatements ignoring any internal controls that may be in place.
So the inherent risk is assessed by the nature of an item and not by reference
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to calculated materiality.
For example, foreign exchange transactions would be inherently risky because
of the susceptability of errors in the complex calculation. This was determined
without reference to audit materiality.
Module 1 > Elements of an assurance engagement > Audit risk
Question 5
You are auditing the accounts of Strawberry Ltd and have sent a solicitors’
confirmation request to their lawyers, Raspberry Ltd. Despite repeated
requests, Raspberry Ltd have not replied to your confirmation.
What action should the auditor do?
A. Include an adverse opinion on the audit report.
B. Perform alternative verification procedures to gain comfort.
C. Include as a significant deficiency in the management letter.
D. Lodge an application with ASIC to withdraw from the audit
engagement.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer in accordance with ISA 501.
The first option is incorrect as no information has been provided indicating
that the financial statements are misstated.
The third option is incorrect as significant deficiencies pertain to internal
control weaknesses.
The fourth option is incorrect because withdrawal does not equate to the
client's lawyer's non-responsiveness.
Question 6
Which of the following would be performed when substantively testing subsequent events?
A. Investigate changes in long term loans after year end.
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B. Recalculate the accuracy of depreciation on a plant acquired after year-end.
C. Determine that changes in payroll rates have been authorised by
senior management.
D. Inquire about payroll cheques recorded after year end but were
subsequently cleared to bank statements after year end.
You selected D - This is incorrect. The correct answer is A
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The first option is correct because it may require disclosure in the notes in the
year end financial statements. This is because the loan exists in the current
period and subsequent changes after year end would likely be of interest to
users of financial statements and so may require disclosure.
The second and fourth options are incorrect because they relate to conditions
that occurred after year end and so are unlikely to affect the current financial
statement disclosures as a subsequent event.
The third option is incorrect as this is a test of control and not a substantive
test. Further it does not provide evidence relating to subsequent events.
Question 7
Who should sign the comfort letters relating to information in a client’s
funding document?
A. Audit committee.
B. Senior management.
C. Independent auditor.
D. The chairman of the board of directors.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as the comfort letter is sent and signed
by the auditor to the underwriter. The comfort letter is based on the auditor
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having performed the requesting parties’ specified procedures. No assurance
is provided in the comfort letter.
Question 8
Which of the following correctly describes the advantages of using continuous
assurance in the internal audit environment?
A. Reduction in items tested.
B. Increased audit coverage at lower cost.
C. Reduced costs associated with decreased coverage.
D. Increased costs which is off-set by higher assurance.
You selected B - This is correct
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Continuous auditing using automated feedback mechanisms, allow for greater
audit covered (items/transactions tested) throughout a given period and this
is typically achieved at a lower cost.
Other responses are not considered advantages of continuous assurance in
the internal audit environment.
Question 9
You are performing substantive procedures on items of inventory. You have
selected items from the inventory records and checked that the items of stock
are on hand.
Which of the following assertions related to account balances does the above-
mentioned audit procedure test?
A. Existence.
B. Completeness.
C. Rights and obligations.
D. Valuation and allocation.
You selected A - This is correct
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TOTAL MARKS : 1MARKS OBTAINED 1
By selecting an item of inventory recorded by the entity, and then physically
verifying that the inventory is on hand, the auditor is confirming that the
inventory per the accounting records actually exists.
Question 10
Which of the following is a fundamental principle per the Code of Ethics for
Professional Accountants?
A. Honesty.
B. Neutrality.
C. Confidentiality.
D. Professional scepticism.
You selected C - This is correct
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The five fundamental principles are integrity, objectivity, professional
competence and due care, professional behaviour and confidentiality. Thus,
only the third option is correct.
Module 1 > International Code of Ethics for Professional Accountants >
Fundamental principles
Question 11
Which of the following correctly represents audit risk?
A. Control risk x Detection risk.
B. Inherent risk x Business risk.
C. Inherent risk x Control risk x Detection risk.
D. Inherent risk x Detection risk x Business risk.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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Audit risk is the risk that the auditor would express an incorrect audit opinion.
This is affected by inherent risk, control risk and detection risk. The audit risk
formula is AR = IR x CR x DR. Therefore, option C is correct.
Business risk is a risk faced by the client (that is, the entity being audited) and
thus it is not a function of audit risk.
Therefore, the second and fourth options are incorrect. The first option is
incorrect because it omits inherent risk.
Module 1 > Overall objectives of the independent auditor and the conduct of
an audit in accordance with International Standards on Auditing >
Components of audit risk
Question 12
What is the main reason as to why an auditor would want to obtain
knowledge in regards to a new client?
A. Provide constructive suggestions improving the company's internal
controls structure.
B. Understand the events and transactions that have occurred which
will impact the financial statements.
C. Develop an attitude of professional scepticism in regards to the
financial statement assertions undertaken by management.
D. Evaluate whether the sum of known misstatements means that the
financial statements as a whole are materially misstated.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is correct because obtaining a knowledge of the business
and the industry enables the auditor to obtain an understanding of the events
and transactions which will impact the financial statements.
The first option is incorrect as this is a secondary not main reason for
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obtaining knowledge about the client.
The third option is incorrect because developing an attitude of professional
scepticism occurs in all audits and has no impact on gathering knowledge
about the client itself.
The fourth option is incorrect because this only provides limited information
and other factors would need to be considered in evaluating final audit
findings.
Question 13
Which of the following would an auditor generally not do during the planning
stage when trying to obtain an understanding of the client and its business?
A. Re-evaluate the client's internal control environment.
B. Read current issues of industry magazines the client is part of.
C. Perform tests of details on transactions and significant account
balances.
D. Review prior year audit working papers.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is incorrect as test of details are performed after the planning
stage once the client has understood the client and its operations.
All the other activities are performed at the planning phase to gain a better
understanding of the client and to identify the risks of material
misstatements.
Question 14
Which of the following types of evidence would an auditor focus on to ensure
controls are operating effectively?
A. Bank's response to the confirmation request sent by the auditor.
B. Client records documenting the use of computer programs.
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C. Solicitor's responses to the representation letter sent by the auditor.
D. Confirmations of customer balances verifying receivables balances.
You selected D - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The second option is the correct answer because it will help the auditor in
evaluating the design and effectiveness of the internal controls and the
client's control over the use of its computer system via documentation, which
will be tested via review of documentation records.
The first and third options are incorrect because letters of representation
provide comfort that the work has been done and hence are substantive tests.
The fourth option is incorrect because this is a substantive test on accounts
receivable balances confirming existence and hence is not a test of control.
Question 15
Bruthen Ltd discovered that it overstated its sales figures in the prior year
ended 30 June 2015.
Which of the following statements is the best way to address this issue?
A. Adjust sales for the year ended 30 June 2016.
B. Spread the current adjustment for both the year ended 30 June
2016 and future years.
C. Restate the 30 June 2015 financial statements presented for
comparative purposes.
D. Disclose this as an adjustment to the statement of comprehensive
income for the year ended 30 June 2016.
You selected A - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer because the overstatement is an error
which must be accounted for by restating the prior year financial statements,
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in accordance with IAS 8. Hence, accounting errors must be adjusted
retrospectively.
Question 16
You have completed the performance audit for a State Government sporting
agency and are currently reviewing responses to recommendations raised in
the interim report you have sent them. On one of the responses, the CEO has
written that this problem has never occurred before in the past.
Which of the following is the most appropriate action for the lead auditor?
A. Schedule a follow-up audit immediately.
B. Comment that the deficiency identified is an isolated one-off event.
C. Discuss and meet with the audit client to review the
appropriateness of the response.
D. Issue an adverse finding in the report and mark it to the attention of
the minister concerned.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as the auditor must be satisfied as to
why this error has occurred and what steps will be taken by the agency in
order to rectify this. Further audit testing can be carried out so as to
determine if this is an isolated one-off event and/or continual pattern of
errors.
Module 5 > Performance of activity > The performance audit process
Question 17
What disclosures should be included when preparing prospective financial
statements?
A. Summary of significant assumptions only.
B. Summary of significant accounting policies only.
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C. Both a summary of significant assumptions and significant
accounting policies.
D. Summary of significant assumptions and any accounting policies
that differ from historical financial statements.
You selected D - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer as per ISAE 3400, paragraph 2.
Question 18
Which of the following risks can be directly controlled by the auditor?
A. Control risk.
B. Inherent risk.
C. Business risk.
D. Detection risk.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
Business risk relates to the client and the industry in which the client operates
in. Inherent risk relates to the existence of issues that can cause
misstatement. Control risk relates to ineffective controls that have been
implemented by the client. Hence, none of these risks are within the control of
the audit.
Detection risk, however, is directly controlled by the auditor. If the auditor
wants to lower detection risk, more audit work will be required. Reducing the
amount of audit work and testing will increase detection risk.
Question 19
During the audit of XYZ Pty Ltd, an SME operating in the educational sector in
Perth, you have discovered a material misstatement which has resulted in
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revenue being overstated.
Management bonuses are based on certain revenue targets being achieved.
Further audit procedures revealed that the overstatement has resulted from a
software malfunction, which erroneously allocates a portion of GST in favour
of the client, instead of to the tax authorities.
The software has been in use by the client since their inception and, therefore,
the misstatement exists in the current and prior period financial statements.
Management is not particularly computer literate, and is not able to edit the
functioning of the software package, apart from the percentage of GST
allocations (amongst other settings). The audit work noted that the default
manufacturer settings prevail in the software.
Which of the following best describes the misstatement you identified?
A. Fraud, due to the manipulation, falsification or alteration of
accounting records or supporting documentation.
B. Error, due to a lack of oversight by management and their failure to
carry out their duties with due competence and care.
C. Fraud, due to the misapplication of accounting principles relating to
amounts, classification, manner of presentation or disclosure.
D. Fraud, due to the misrepresentation in, or intentional omission from,
the financial statements of events, transactions or other significant
information.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
From the facts presented, it does not appear that management has acted with
the intention to deceive.
Even though their bonus scheme depends on revenue targets, management
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has merely failed to suitably amend the default settings on their off-the-shelf
software package to correctly calculate GST allocations.
It is likely, therefore, that the misstatement has arisen due to an error, rather
than any intentional fraudulent act on the part of management.
Question 20
Mr A is a senior audit partner with a number of years of technical and practical
audit experience. He also currently satisfies all the requirements for continued
professional development.
In terms of the Framework for Audit Quality published by the IAASB, which of
the following best categorises the information relating to Mr A?
A. Input factors.
B. Output factors.
C. Process factors.
D. Contextual factors.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
In terms of the Framework for Audit Quality published by the IAASB, one of
the input factors to audit quality include being sufficiently knowledgeable,
skilled and experienced. Hence these factors about Mr A are input factors.
Question 21
Which of the following regarding audit documentation in terms of ISA 230 is
correct?
A. Oral discussions are exempted from having to be documented.
B. All audit working papers should have the same form and content.
C. Audit documentation enables external inspections to be conducted.
D. The conclusions on working papers must indicate the effect on the
audit opinion.
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You selected C - This is correct
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C is correct because audit documentation enables external reviewers to
understand what work was done and assess the evidence obtained and
procedures performed against auditing standards.
A is incorrect because auditors can only rely on evidence that was
documented. If it is not documented, it is considered ‘not done’.
B is incorrect because the form, content and extent of audit documentation
will vary between audits and will depend on such factors as the nature of the
audit procedures to be performed and the extent of judgment required.
D is incorrect because the audit opinion is determined after all audit work is
done and evidence collected. The audit work papers should have conclusions
about the evidence obtained but it is not always possible to link this to the
audit opinion.
Question 22
In relation to the auditors’ use of experts, which of the following is correct?
A. The client is not required to understand the nature of the work
undertaken by the expert.
B. The auditor should obtain an understanding of the methods and
assumptions used by the expert.
C. The expert is not expected to understand the corroborative use the
auditor will place on his/her work.
D. The auditor is required to perform tests and analyses on the
methods and assumptions undertaken by the expert.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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The second option is correct as the auditor should obtain a general
understanding of the assumption and methods used in the work performed by
the expert.
The first option is incorrect because the client would have some
understanding of the work of the expert.
The third option is incorrect as the expert would have a basic understanding
of what the auditor's findings would be.
The fourth option is incorrect because the auditor is not required to re-test the
work of the expert.
Question 23
Which of the following tends to be the most predictable when using analytical
procedures as part of substantive testing?
A. Data subject to audit testing in the prior year.
B. Relationships involving balance sheet accounts.
C. Transactions subject to management scrutiny.
D. Relationships involving profit and loss accounts.
You selected B - This is incorrect. The correct answer is D
TOTAL MARKS : 1MARKS OBTAINED 0
The fourth option is correct as this is the more predictable outcome when
using analytical procedures rather than substantive tests of detail per ISA 520.
Revenues and expenses (P&L items) are generally more predictable and
subject to substantive analytical procedures than balance sheet items, which
are tested using tests of detail.
Analytical procedures are generally more applicable to transactions as these
are predictable over time. Classes of transactions refer to P&L items. On the
other hand, account balances (balance sheet items) are generally tested
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using tests of detail. Refer to assertions about classes of transactions and
assertions about account balances.
The first option is incorrect, because prior year data is not a reliable predictor
of subsequent year's data. Both the second and third options are incorrect, as
balance sheet accounts are less predictable than profit and loss accounts.
Question 24
Your client, Langston Ltd, has asked you to report on specific financial data
which is included in the full set of financial statements.
Which of the following best describes the scope, use and reporting of the
specific financial data to be presented?
A. It should be limited to data derived from the audited financial
statements
B. It should indicate that the data is not fairly stated in all material
respects.
C. It should be distributed to only senior management and the board
of directors.
D. It should conform to a financial reporting framework, in accordance
with GAAP.
You selected A - This is correct
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The first option is the correct answer as it should be limited to the financial
statements.
The second option is incorrect because the report will state that the selected
data is fairly stated in all material respects of the financial statements.
The third option is incorrect because it is not limited to both senior
management and board of directors only.
The fourth option is incorrect because the data does not need to follow a
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specific financial reporting framework other than GAAP. It is often appropriate
for such engagements to be performed on the basis of agreed-upon
procedures.
Question 25
Which of the following describes the elements that must be included in an
internal audit report?
i) The criteria used.
ii) The audit approach.
iii) An executive summary.
iv) A limited assurance opinion.
A. i and ii only.
B. ii and iv only.
C. i, ii and iii only.
D. i, iii and iv only.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
A limited assurance opinion is not one of the elements of an internal audit
report. Rather the internal auditor would include a conclusion and
recommendations.
The following are essential elements of internal audit reports:
-- an executive summary — the purpose of the summary document is to alert
the recipient to the key findings. It should encourage the reader to want to
read the full report, and should generally include:
- a summary of key findings
- the audit objectives and coverage
- an overall conclusion
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-- an introduction, incorporating:
- the reason for conducting the audit
- the objectives of the audit
- the audit approach
- the audit coverage
- the criteria used
-- a section on each of the areas audited — these sections could be split up by
issues addressed, parts of organisation audited, etc. These sections would
include a description of the work done, results and specific recommendations
-- a list of recommendations with the auditee’s responses
-- a conclusion.
Question 26
Which of the following relating to the audit of SMEs is correct?
A. All the ISAs must be fully applied.
B. The auditor can apply 'ISAs for SMEs' which are specifically for such
organisations.
C. The ISAs can be proportionately applied.
D. The ISAs requirements relating to evidence gathering is reduced.
You selected C - This is correct
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The third option is correct because the IAASB have indicated that the ISAs
should be applied proportionately to the audit of SMEs based on the size and
complexity of the entity.
The first option is not correct as it is often not possible to apply all the ISA
requirements to the audit of SMEs because certain requirements may be
irrelevant.
The second option is incorrect because there are no such standard as ISAs for
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SMEs. There are standards called IFRS for SMEs but this relates to financial
reporting and not auditing of SMEs.
The fourth option is incorrect as the same requirements for evidence
gathering would be applicable to audits of SMEs as well as large entities.
Question 27
Which of the following would be a valid objective of the external auditor?
A. An auditor should obtain absolute assurance about whether the
financial statements as a whole are free from material
misstatements, whether due to fraud or error.
B. An auditor should obtain reasonable assurance about whether the
financial statements as a whole are free from any misstatements,
whether due to fraud or error.
C. An auditor should obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatements, whether due to fraud or error.
D. An auditor should obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatements due to error, and obtain absolute assurance that no
fraud has occurred.
You selected C - This is correct
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The auditor is required to obtain reasonable assurance - this is a high level of
assurance, instead of an absolute level. Absolute assurance is not possible
due to the inherent limitations of an audit where most evidence obtained is
persuasive rather than conclusive.
While an auditor must remain alert to the possibility of fraud, it is not the
auditor's responsibility to detect fraud.
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Question 28
You are undertaking the planning procedures for Topup Ltd and have noted
that the debtors turnover ratio has increased significantly during the year
ended 30 June 20X5.
Which of the following options best explains this analysis?
A. Sales for each month were 10% higher than those months of the
preceding year.
B. The accounts receivable relating to a major credit sale in 20X6 was
correctly recorded in 20X6 but the corresponding sale was recorded
in 20X5.
C. Items shipped on consignment during June 20X5 were recorded as
credit sales, no cash receipts were received on consignment.
D. The company increased credit sales by 5% after offering lenient
credit terms to customers, which were 45 days instead of 30 days.
You selected D - This is incorrect. The correct answer is B
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The second option is correct because recording 20X6 sales in 20X5 would
cause the numerator of the debtors' turnover ratio to increase. However, the
corresponding trade receivable would be correctly recorded in the 20X6
financial records and so the denominator would remain unchanged. The
overall effect is an increase in the debtors turnover ratio.
The first option is incorrect because there would be an expected pro-rata
increase in accounts receivable, thus resulting in no change to the ratio.
The third option is incorrect as both the numerator and denominator will
increase, meaning the ratio still stays the same.
The fourth option is incorrect as the denominator would increase (50%
extension to terms) more than the numerator (only a 5% increase), meaning
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the overall ratio decreases.
Module 3 > Performing analytical procedures
Question 29
Which of the following is a function of both detection risk and risk of material
misstatement?
A. Audit risk.
B. Quality control.
C. Non adjustable material misstatements
D. Modified audit opinion
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is the correct answer because audit risk is the risk the auditor
expresses an inappropriate audit opinion when the financial statements are
materially misstated.
The second option is incorrect because quality control relates to requirements
placed upon auditors in conducting the audit.
The third and fourth options are incorrect because internal control and
corroborating evidence are not functions of these risks.
Question 30
Which of the following is not a required disclosure relating to a key audit
matter?
A. How the auditor addressed the matter.
B. Management's response to the key audit matter.
C. Why the auditor considers the matter to be a key audit matter.
D. Reference to related disclosures in the financial statements.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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The second option is the correct answer as all other options indicate
disclosures required in terms of ISA 701, para. 13.
Question 31
When performing reasonableness tests on payroll, which of the following
procedures is correct?
A. Compare actual payroll costs with budgeted payroll costs.
B. Trace individual employee deductions to client generated payroll
journal entries.
C. Observe employees receiving their payroll cheques from the payroll
department.
D. Verify that all cheques representing unclaimed wages are mailed to
the respective employees.
You selected B - This is incorrect. The correct answer is A
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The first option is the correct answer as this would be included in the payroll
audit program to test for reasonableness.
The second option is incorrect as total employee deductions would be traced
to the payroll journal.
The third option is incorrect as this would only be done if internal controls
were weak.
The fourth option is incorrect as the employee would request the payroll
department to mail this over to them and it would not be tested by the
auditor.
Question 32
Which of the following would most likely raise significant doubt as to the
entity’s ability to continue as a going concern?
A. Cash flows from operations are negative.
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B. Research and development projects are postponed indefinitely.
C. Stock dividend issues replace annual cash dividend payments.
D. The company is unable to raise additional capital to fuel growth
You selected A - This is correct
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The first option is the correct answer because per ISA 570, negative cash
flows is an example of such a condition.
The second option is incorrect as postponement of research and development
may not necessarily be a result of extreme financial difficulties.
Both the third and final options are incorrect as they are not specific examples
which affect the company's going concern.
Question 33
Which of the following best describes the main outcome of a performance
audit?
A. Make recommendations for improving performance.
B. Evaluate whether the organisation's operational objectives as
defined by the policy are still relevant.
C. Report on the entity's success or failure in reaching its goals of
maximising profit.
D. Determine whether the financial statements are presented in a true
and fair view.
You selected B - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is the correct answer. A performance audit reviews and
evaluates the economy, effectiveness and/or efficiency of the organisation,
but the next step is to make recommendations to indicate the improvements
that are necessary.
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The second option is incorrect as performance engagements are generally not
performed to determine whether objectives are still relevant.
The third and fourth option is incorrect as performance engagements are not
financial statement audits and do not generally look at profitability and/or
whether financial reflect and true and fair view of the state of affairs of the
organisation.
Question 34
You are currently performing an internal audit of a listed company and, based
on the work performed, it was noted that one of the managers had committed
an improper act.
Which of the following is the best option as to where the report is to be
distributed to?
A. The shareholders.
B. Senior management.
C. The external auditors.
D. The board of directors.
You selected D - This is correct
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The fourth option is the correct answer per IIA Standard 2440 - Disseminating
Results.
Both the first and third options are incorrect as it should not bypass the chain
of command.
The second option is also incorrect as there is a possibility that they may be
involved in the improper conduct.
Question 35
You have been advised by the Police Department that they have received
extra funding from the State Government to increase the number of mobile
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speed cameras as part of a 12-month blitz. The aim of this project is to reduce
the number of fatal accidents on roads from speeding by 20% over the next
12 months.
Based on the information provided, which of the following is considered to be
an appropriate outcome measure?
A. Number of mobile speed cameras installed and working.
B. Number of drivers caught speeding via detection of the mobile
speed camera.
C. The total cost incurred in installing and maintaining mobile speed
cameras in these sites.
D. Reduction in the percentage (over the 12 month period) of
offending drivers being caught for speeding.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as it looks at the results of the
introduction of speed cameras and what the intention is expected to generate
as a result of this (i.e. this is an outcome measure)
The outcome is to slow drivers down and therefore reduce the number of fatal
accidents caused by speeding. The remaining three options are incorrect as
they are output measures.
Question 36
Which of the following are characteristics of a suitable criteria?
A. Completeness and accuracy.
B. Understandability and impartiality.
C. Relevance and understandability.
D. Consistency and accuracy.
You selected C - This is correct
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TOTAL MARKS : 1MARKS OBTAINED 1
The five characteristics of suitable criteria include relevance, completeness,
reliability, neutrality and understandability.
Hence, only the third option is correct.
Question 37
You are an auditor in charge on the audit of a large, multinational
pharmaceuticals manufacturer. You are currently in the midst of reviewing
your graduate accountants’ work papers, and have identified the following
statements and conclusions relating to accounts receivable, which is a
material balance:
(a) A significant proportion of confirmations were received back with
disagreements with the balances recorded by the client.
(b) A discussion was held with the client, who indicated that the
disagreements all related to timing differences between the customer’s
records and the records of the client.
The graduate accountant noted the results of the above discussions, and
further that no evidence existed to contradict the assertions by management.
The work paper concluded that the balance on accounts receivable was
reasonably stated.
Which of the following qualities relating to professional scepticism has the
graduate accountant most likely failed to exercise?
A. Self-esteem.
B. Recognition of people's motivations and perceptions.
C. Lack of independence.
D. Professional judgement.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
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The graduate accountant has not challenged the attempt at persuasion from
the client by requesting evidence to support their assertions. They have
therefore not acted with self-esteem, which is the self confidence to resist
persuasion and to challenge assumptions or conclusions.
Question 38
Which of the following computer assisted audit techniques allows fictitious
and real transactions to be processed without the client being aware of this?
A. General controls testing.
B. Data conversion testing.
C. Test data.
D. Integrated test facility.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as it allows the auditor to use test data
into the system of live transactions to which the client will be unaware of.
The first option is incorrect as this is not an approach or a technique to testing
IT controls but refers to assessing controls such as Structure of IT activities, its
policies and procedures etc.
The second option is incorrect as data conversion testing is not an approach
but rather a description of controls required to ensure accurate conversion
e.g. proper training, data entry manuals that deal with data conversion, and
appropriate chart of accounts.
The third option is incorrect as test data allows the auditor to test valid and
invalid transactions but this would not including creating entity's in the client's
system. The client would also be aware of the test being performed in the
system.
Module 3 > Using CAATs for tests of controls > Integrated Test Facility
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Question 39
Which of the following are further audit procedures to be carried out after the
initial risk assessment has been performed?
A. Substantive procedures.
B. Secondary risk assessment procedures.
C. Both substantive procedures and initial determination of risks of
material misstatements.
D. Substantive tests of details and internal control modifications.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is the correct answer because further audit procedures would
contain substantive testing and tests of controls, not risk assessment
procedures.
The second and third options are incorrect as this does not contain risk
assessment procedures.
The fourth option is incorrect as substantive tests are required but internal
controls modification is not an audit procedure.
Question 40
Your client is Violet Ltd and you have issued an unqualified opinion on their
accounts for the year ended 30 June 20X5. Five months later, a debtor is
wound up prior to repaying the amount owed to the company. You also
discover that management had received a letter (from the debtor) prior to
year end stating the company was in distress and was not in a position to pay
the amount owed.
Which of the following correctly indicates the first action you would take
regarding this discovery?
A. Contact the client to communicate the intention to issue a qualified
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opinion on the basis of fraudulent reporting and the misstatement
arising due to the issue.
B. Perform alternative procedures to provide a satisfactory basis for
the unqualified opinion.
C. Inquire with management if there are stakeholders who will rely on
the unqualified opinion on the accounts.
D. Assess the magnitude of the misstatement and the impact it will
have on the unqualified opinion issued.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as the auditor needs to assess the
impact it would have on the unqualified opinion.
Both the first and second options are incorrect because an assessment needs
to be made first if these procedures need to be performed or not.
The third option is incorrect because the importance of the omitted procedure
needs to be assessed first prior to advising stakeholders of the potential
impact.
Question 41
What type of analytical procedure would be best to use when analysing
relationships between balance sheet accounts of a large proprietary
company?
A. Risk analysis.
B. Ratio analysis.
C. Trend analysis.
D. Regression analysis.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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The second option is the correct answer because balance sheet accounts may
be analysed through a number of ratios (e.g. quick ratio).
The third option is incorrect as trend analysis is more appropriate for
reviewing the profit and loss statement.
The fourth option is incorrect as it is not frequently used in practice.
The first option is incorrect because it is not a type of analytical procedure.
Question 42
What type of audit report would be issued if a client is facing the uncertainty
of litigation against a supplier?
A. Qualified due to a scope limitation.
B. Qualified with a basis for qualification paragraph.
C. Unqualified with an emphasis of matter paragraph.
D. Adverse with a basis for adverse opinion paragraph.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is correct because the uncertainty is not definite or
quantifiable.
The first option is incorrect as a qualified opinion is not appropriate.
The second and fourth options are not correct as they are not appropriate in
the given circumstances.
Question 43
You are currently finalising the internal audit report for Big Bank Inc. Findings
are currently being categorised into ‘Deficiency findings’ for major problems
and ‘Other areas for improvement’ for less serious problems.
Which of the following deficiencies identified would be included in ‘Other
areas for improvement’?
A. Certain loans did not have adequate insurance coverage over the
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property.
B. The loan clerk prepares and authorises the disbursement cheques
of the loan proceeds.
C. A large amount of cash was tied into a bundle and placed on a
portable table behind the tellers.
D. The bank incurred extra postage by not combining monthly mailing
of customer statements with other bank related information.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as this is a matter of operating
efficiency than an internal control weakness (IIA Standard 2410 - Criteria for
Communicating).
The first option is incorrect as it violates bank policy given that destruction of
uninsured collateral would result in significant loan losses.
The second option is incorrect as it is improper segregation of duties leading
to potential employee fraud.
The third option is also incorrect as it could result in cash shortfalls which
would be impossible to track down.
Question 44
Which of the following relating to internal auditing is correct?
A. Continuous internal auditing results in great audit coverage at a
lower cost.
B. Internal auditors are not expected to be independent as they are
employed within the company.
C. Internal auditors assume management's responsibilities when they
perform tests and provide advice.
D. The International Standards on Auditing must be complied with
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when performing internal audit services.
You selected A - This is correct
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Continuous auditing would enable the collection of greater evidence and the
ability to test more. Doing this on a continuous basis would result in the
overall cost being lower than it would have been had the same amount of
audit work and evidence been collected during cyclical audit testing.
Internal auditors are expected to be independent and they do not assume
management's responsibilities. Further, the IIA (2012) are used for performing
internal audit services and not the International Auditing Standards which
applies to external audits.
Question 45
Which of the following would not be a valid consideration during the audit of
an SME?
A. If an ISA is relevant to an SME, all requirements of that ISA must be
applied in full during the audit.
B. Standard audit programs or checklists, drawn up on the assumption
of a few relevant control activities, may be used to plan the audit.
C. The form, content and extent of audit documentation required is
permitted to vary in relation to the size and complexity of the SME
being audited.
D. The auditor must comply with all ISAs, except for those that are not
relevant and the auditor must document rationale for determining
which standards are deemed not relevant.
You selected B - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
Even when an ISA is relevant to an SME, not all requirements of every ISA will
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be relevant when performing the audit of an SME.
For example, holding an engagement team discussion as part of the risk
assessment activities would not be appropriate if the audit team consisted of
only one person.
Question 46
Which of the following is a reason why regulators favour audit partner rotation
over audit firm rotation?
A. There would most likely be increased professional scepticism.
B. There would be the removal of undue reliance on previous year's
audit work.
C. There is no evidence to support a positive relationship between firm
rotation and higher audit quality.
D. Auditors are likely to be more attentive and cautious knowing that
their work may potentially be reviewed by another audit firm.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
Supporters in favour of audit partner rotation over firm rotation believe that
increased independence does not necessarily result in enhanced audit quality.
All the other options are arguments put forward by proponents of audit firm
rotation.
Module 2 > Auditor independence for the audit of financial statements >
Auditor and audit firm rotation
Question 47
Which of the following is least likely considered to be a risk assessment
procedure?
A. Analytical review.
B. Review of directors' minutes.
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C. Confirmation of accounts receivable balances.
D. Observation of certain accounting procedures.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as confirmation of accounts receivable
is considered to be a substantive test rather than a risk assessment
procedure.
The remaining three options are risk assessment procedures.
Question 48
Which of the following types of audit evidence is most persuasive?
A. Client representation letter.
B. Bank statements obtained from the client's bank.
C. Sequentially numbered client purchase orders.
D. Client reconciliations supporting balance sheet items.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer because such bank statements are
prepared outside the scope of the client and provides the auditor with a high
level assurance.
The remaining three options are incorrect because they are client internally
generated documents which are less persuasive audit evidence. Client
prepared documents are less reliable as they may be manipulated to cover
fraud and other misstatements.
Module 3 > Evaluation of audit evidence > Sufficiency and appropriateness of
evidence
Question 49
In terms of the standard management representation letter provided in
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connection with audits of financial statements, which of the following is most
likely to be included?
A. Plans for a wholly-owned takeover of a company.
B. The appointment of a non-executive chairman to the board of
directors.
C. A statement from the internal auditor confirming operating
effectiveness of controls.
D. A statement that all information relating to fraud and suspected
fraud has been disclosed.
You selected A - This is incorrect. The correct answer is D
TOTAL MARKS : 1MARKS OBTAINED 0
The last option is correct as management is required to make a statement
relating to the full disclosure of fraud and suspected fraud to the auditor in the
standard management representation letter in terms of ISA 580.
The first two options are not specific items that one would most likely find in
the management representation letter. Although these are possible inclusions,
these are not the 'standard' inclusions per ISA 580 Appendix 2 and thus it is
not the 'most likely' answer.
The third option is incorrect as the internal auditors would not be expected to
make a statement in the management representation letter.
Module 4 > Completing the fieldwork > Management representation letter
Question 50
Which report would include a summary of findings rather than assurance?
A. Review report.
B. Compilation report.
C. Examination report.
D. Agreed-upon procedures report.
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You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as agreed-upon procedures reports
includes findings.
The first option is incorrect because a review report includes limited
(negative) assurance and not a summary of findings.
The second option is incorrect because a compilation report does not include
a summary of findings.
The third option is incorrect as an examination report (e.g. in the context of an
audit examination that provides reasonable assurance, or the examination of
prospective financial information) includes positive assurance and not a
summary of findings.
Question 51
Which of the following correctly describes engagements where auditors
provide an independent assessment of the management of Government
programs against objective criteria?
A. Statutory audit.
B. Compliance audit.
C. Performance audit.
D. Agreed upon procedures audit.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as a performance engagement is an
audit or review of activities to assess their economy, efficiency or
effectiveness.
Question 52
You are currently undertaking an internal audit of the repairs area of Big
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Planes Incorporated. It was noted that a sample of workers had not signed off
on their timesheets. This issue was also identified and raised in the previous
internal audit.
Which is the best option to determine what action the internal auditor should
take?
A. Instruct the workers to sign their timesheets to eliminate the error.
B. Include this finding in the current internal audit report after
discussions with management.
C. Ask the supervisor of the repairs department to authorise the
timesheets on their behalf.
D. Withhold conclusions about internal controls over payroll based on
the findings made, in regards to the repairs area.
You selected D - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The second option is the correct answer as the situation requires corrective
action and management needs to know it still exists (IIA Standard 2410 -
Criteria for Communicating).
The first option is incorrect as it is beyond the scope of the internal auditor's
authority.
The third option is incorrect as irrespective of what has happened, conclusions
must be made in regards to the company's internal controls over payroll.
The fourth option is incorrect as withholding the internal audit conclusion is
not an appropriate action in this instance. The fact that a sample of
timesheets are not signed off is a control deficiency and the audit can make a
conclusion regarding it. Hence it would not be a likely action to withhold the
conclusion.
Question 53
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Which of the following best describes the main focus of performance
auditing?
A. Providing comfort through existing internal controls.
B. Verifiying that the company's financial reports are fairly presented.
C. Confirming accuracy of data presented in the organisation's
accounting records.
D. Making future improvements in order to ensure the organisation's
goals are met.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as performance audits deal mainly
with efficiency and effectiveness, with the intention of making improvements
in future to meet the organisation's goals.
Question 54
Through their initial planning procedures, the audit team has identified that
the internal control environment of the entity they are auditing is weak due to
a complete lack of controls over significant transactions. The overall inherent
risk of the financial statements has been assessed as moderate.
Which of the following responses would be the most appropriate, given an
increase in control risk?
A. Perform increased substantive testing to obtain sufficient and
appropriate audit evidence to reduce audit risk to an acceptably low
level.
B. Perform increased control testing on a larger proportion of controls
to quantify the extent of the weakness, and the impact on the level
of detailed testing required.
C. Perform increased control testing and increased substantive testing
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procedures to obtain reasonable assurance relating to material
misstatements whether due to control weaknesses or errors in
amounts.
D. Perform alternative control testing procedures, such as holding
management discussions and observing the performance of
significant transactions to identify whether informal controls exist.
You selected C - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The facts indicates that the control environment does not contain any controls
over significant transactions, therefore any response that involves the testing
of controls is invalid.
The audit risk formula is AR = IR x CR x DR. The only risk that the auditor may
influence through their work is detection risk. By performing additional
substantive procedures, detection risk is reduced.
As inherent risk is moderate, it is likely that this would reduce audit risk to an
acceptably low level overall.
Module 2 > Overall objectives of the independent auditor and the conduct
of an audit in accordance with International Standards on Auditing >
Components of audit risk
Question 55
Which of the following best describes assessing the risk of material
misstatement?
A. Determine materiality levels.
B. Consider the complexity of the transactions involved.
C. Evaluate the risk of incorrect statements due to illegal acts.
D. Evaluate the likelihood that the financial statements may be
inaccurate due to fraud or error.
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You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as this is in accordance with the
professional standards.
The first option is incorrect because the determination of materiality levels is
determined prior to the stage of the audit.
The second option is incorrect because the complexity is not considered.
The third option is incorrect as the assessment is not confined to illegal acts.
Question 56
Which of the following in regards to performance materiality is correct?
A. It is not required to be documented in the working papers.
B. The amount is less than overall financial statement materiality.
C. It should be calculated at the beginning of the audit and not revised
thereafter.
D. It should be established as separate amounts for the various
financial statements.
You selected D - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The second option is the correct answer because the purpose of performance
materiality is for the auditor to provide assurance that a series of immaterial
misstatements do not combine to a material undetected amount of
misstatement.
The first option is incorrect as performance materiality must be documented
in the working papers.
The third option is incorrect because performance materiality can be revised
especially if there are significant changes that occurred during the audit.
The fourth option is incorrect as performance materiality is established for the
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financial statements as a whole.
Question 57
As part of our your planning for Jumbo Ltd you are conducting preliminary
analytical procedures.
For risk assessment purposes, what area should the audit focus on?
A. Assessing the adequacy of available evidence.
B. Providing assurance that material misstatements will be identified.
C. Reducing the scope of both tests of controls and substantive
testing.
D. Enhancing the auditor's understanding of movements in balances
during the financial year.
You selected A - This is incorrect. The correct answer is D
TOTAL MARKS : 1MARKS OBTAINED 0
The fourth option is the correct answer because by increasing the auditor's
understanding, it may also help to identify the existence of unusual
transactions; events and/or other matters which may have audit implications.
The other three options are incorrect as they are not a focus of risk
assessment purposes.
Question 58
How much assistance on internal controls can auditors provide to their audit
clients?
A. Unlimited assistance.
B. No assistance on any type can be provided.
C. Only very limited assistance can be provided.
D. As less risk is assumed by the auditors, a higher level of assistance
is appropriate.
You selected B - This is incorrect. The correct answer is C
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The third option is correct because auditors can provide a limited amount of
non-assurance services to their clients, provided this does not create a
significant self-review threat to their objectivity.
The first option is incorrect because there is a limitation on the amount of
assistance that can be provided. Providing excessive non-assurance services
to an assurance client (such as assistance with internal controls) would create
a significant self-review and self-interest threat to objectivity.
The second option is incorrect as some assistance can be provided. The fourth
option is incorrect because the level of risk and assistance is inappropriate
and provides an invalid trade-off.
Question 59
The audit partner communicated issues that affect fair presentation of the
financial statement to those charged with governance (TCWG). However, the
audit partner is not happy with the outcome and does not believe that the
communication with TCWG is adequate.
Which of the following is not an appropriate action for the audit partner?
A. Obtain legal advice.
B. Communicate with regulators.
C. Issue an unqualified audit report with an emphasis of matter
paragraph if no disclosure is made by TCWG.
D. Withdraw from the engagement if permitted by law.
You selected B - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
In terms of ISA 260, para.A53, if the situation of inadequate two-way
communication cannot be resolved then the auditor needs to take appropriate
action. This could include modifying the audit report (scope limitation),
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obtaining legal advice, communicating with third parties (e.g. regulator), and
even withdrawing from the engagement.
Module 4 > Communication and reporting responsibilities > Communicating
with the entity
Question 60
At the reporting stage of a public sector performance engagement, who is
likely to be the intended users to whom the report would be addressed?
A. The management of the organisation.
B. The board of directors and the external auditors.
C. The audit committee and the management of the organisation.
D. The chief executive officer, the responsible minister and parliament.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as the Auditor-General is mandated by
legislation that they report to parliament on the results of the respective
performance audit and provides copies of the final report to both the relevant
chief executive and the minister responsible.
Question 61
Which of the following is the correct definition of prospective financial
information?
A. Any financial information about the future.
B. Any financial information relating to the present or future.
C. Any financial information relating to the past, present or future.
D. Any financial information about the future related to the daily
operations of the business.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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The first option is the correct answer as it relates to information about the
future per ISAE 3400.
Question 62
Which of the following in regards to governmental performance audits is
correct?
A. They closely resemble private sector financial audits.
B. They seek to determine both program effectiveness and efficiency.
C. They are performed on an annual basis for a given governmental
organisation.
D. The auditor-general is responsible for the audit and can mandate
entities to implement recommendations.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer as the performance audit helps to
determine whether the governmental organisation is operating efficiently and
effectively.
Question 63
Which of the following is a specific threat identified by the Code of Ethics for
Professional Accountants that can potentially jeopardise a member’s ability to
comply with the fundamental ethical principles?
A. Advocacy.
B. Selfishness.
C. Competence.
D. Close-relations.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The threats identified in the Code include self-interest, self-review, advocacy,
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familiarity and intimidation. Thus, only the first option is correct.
Question 64
In terms of ISA 230, which of the following is not required to be documented?
A. The timing of an audit procedure.
B. The extent of an audit procedure.
C. The nature of an audit procedure.
D. The objective of an audit procedure.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
ISA 230 requires that the nature, timing and extent of audit procedures be
documented. The objective of the audit procedures is not required to be
documented.
Question 65
Which of the following correctly describes one of the duties of the
engagement quality control reviewer (EQCR)?
A. Determine if there is any evidence of fraud perpetuated by
management and its employees.
B. Review the materiality of adjusting journal entries raised by staff
members, during the course of the audit.
C. Review the financial statements and the proposed audit report, with
a focus on the judgments made and conclusions reached.
D. Assist in the communication of internal control weaknesses
identified during the course of the audit fieldwork and
recommendations raised to the audit committee for action.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is correct since the EQCR is required to review the financial
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statements objectively and focus on judgments made, particularly with
respect to materiality and significant risks. ISA 220, para.20 also states that
an EQCR shall include an objective evaluation of ‘the significant judgments
made by the engagement team, and the conclusions reached in formulating
the auditor’s report’.
The first option is incorrect because whether fraud has been detected or not,
the main emphasis is on the presentation of the financial statements.
The second and fourth options are incorrect because these are just two
examples the review may address in order to ensure that the financial
statements are fairly presented.
Question 66
Which of the following procedures would an auditor most likely perform in
planning for a financial statement audit?
A. Comparing the actual financial statements to budgeted financial
statements for the same period.
B. Sending a representation letter to solicitors engaged by the client in
regards to potential litigation.
C. Searching for unauthorised transactions that may assist in
detecting potential unrecorded liabilities.
D. Examining computer generated exception reports to verify and
ensure that internal controls are operating effectively.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is the correct answer because this occurs in the planning
stage of the audit, in accordance with ISA 315.
The remaining three options all occur subsequent to planning.
Question 67
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What should an auditor place primary emphasis on when auditing related
party transactions?
A. Verifying the valuation of related party transactions.
B. Confirming the cut off of related party transactions at year end.
C. Evaluating the disclosure of related party transactions.
D. Ascertaining the rights and obligations of related party transactions.
You selected B - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer because ISA 550, paragraph 09 requires
that the auditor place primary emphasis on disclosure.
The second and fourth options are incorrect because they are part of the
auditor's total responsibility and not the primary emphasis.
The first option is incorrect because verifying the valuation of related party
transactions is not the primary objective or primary focus for auditors when
testing these transactions.
Module 4 > Significant areas > Related parties
Question 68
Which of the following statements is correct in regards to negative
confirmation requests sent out to customers?
A. Negative confirmation requests are seldom used as a substantive
test.
B. Unreturned negative confirmation requests contribute to the audit
evidence gathered by an auditor.
C. Unreturned negative confirmation requests most likely means that
alternative procedures do not need to be performed as debtors
have not disputed the balance.
D. Negative confirmation requests are effective when the auditor
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suspects that the customer account balances are understated.
You selected C - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The second option is the correct answer because unreturned negative
confirmation requests is an indication that customer account balances are not
materially misstated (as customers would have written back to the auditor if
they disagreed with the stated balance in the confirmation letter). Negative
confirmation generally contributes to the audit evidence gathered by the
auditor but is generally not considered to be sufficient appropriate audit
evidence.
Consequently, the auditor would generally need to perform other additional
audit procedures before concluding that the balance is not materially
mistated.
The first option is incorrect because this is often used as a substantive test
especially when there are a large number of small balances.
The third option is incorrect because negative confirmations do not generally
provide sufficient appropriate audit evidence hence the auditor would
generally need to perform other additional audit procedures.
The fourth option is incorrect because auditors will generally not use negative
confirmations if they believe the balance is materially mistated.
Question 69
Which of the following procedures should be undertaken by an auditor of a
listed company when reviewing their interim financial information?
A. Review all unprocessed purchase requisitions.
B. Ensure clearance of outstanding cheques to post year-end bank
statements.
C. Read minutes of board of directors; committee and management
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meetings during the period.
D. Perform cut-off tests both over cash receipts and cash payments
during the period in review.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer because reading the minutes of
meetings will determine areas which may impact the interim financial
information presented.
The remaining three options are incorrect because they are verification
procedures which are beyond the scope of reviewing interim financial
information.
Question 70
Which of the following correctly describes measuring punctuality of train
services as a main criterion of developing a key performance indicator?
A. Balanced.
B. Quantifiable.
C. Free from bias.
D. Understandable.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer as punctuality demonstrates how
efficient and effective train services are running and is easily quantifiable and
measurable.
Question 71
Which of the following performance measures would be considered part of the
internal business process?
A. Customer retention.
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B. Employee satisfaction.
C. Manufacturing cycle time.
D. Training hours per employee.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is correct as cycle time is the time required to manufacture a
product and is therefore considered part of the business process.
The first option is incorrect because it relates to customer processes.
Both the second and fourth options are incorrect as they relate to learning and
growth processes.
Question 72
Which of the following is not an element of quality control as set out in ISQC
1?
A. Monitoring.
B. Human resources.
C. Leadership responsibility.
D. Compliance with regulations.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The six elements of quality control per ISQC 1 include: leadership
responsibility; ethical requirements; acceptance and continuance of client
relationships; human resources; engagement performance; monitoring.
Therefore, the fourth option is not one of the elements.
Question 73
Which of the following would not involve the Engagement Quality Control
Reviewer (EQCR)?
A. A discussion of significant matters with the engagement partner.
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B. A review of the financial statements and proposed auditor's report.
C. Evaluation of the conclusions reached and consideration of whether
the proposed auditor's report is appropriate.
D. Detailed review of selected audit documentation, including re-
performance of procedures and re-testing where appropriate, in
respect of significant judgments.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The engagement quality review would not typically involve re-work of detailed
procedures by the engagement quality reviewer. The quality review typically
would be at a higher level, where the objective is to assess whether the audit
evidence on file is sufficient and appropriate to support the audit conclusions
drawn.
Module 4 > Quality control for audits > Engagement quality control review
Question 74
You are currently performing ratio analysis for EvenKeel Pty Ltd and noted that
inventory turnover has fallen from 8.0 to 7.0 in the current year.
Which of the following is the main reason for this decline?
A. A number of expense items were incorrectly classified to cost of
goods sold when it should have been ending inventory.
B. EvenKeel uses a periodic inventory system and it was noted that a
significant number of items were missed from the year end
inventory count.
C. Whilst inventory levels remained the same for the current and prior
year, current year total sales increased and there was a higher
percentage of customers paying their accounts on time.
D. Although sales were the same for the previous and current years
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respectively, inventory amounts are higher than normal.
You selected A - This is incorrect. The correct answer is D
TOTAL MARKS : 1MARKS OBTAINED 0
The fourth option is the correct answer because a higher inventory level with
no change in cost of goods sold will decrease the ratio.
The first option is incorrect because an increase in cost of goods sold will
increase the ratio.
The second option is incorrect because the turnover ratio will increase as cost
of goods sold will be overstated and inventory will be understated.
The third option is incorrect because the increased sales would mean that the
turnover ratio would increase in the current year (assuming cost of goods sold
remains constant).
Question 75
Which of the following is the correct assertion when analysing the stock
turnover ratio?
A. Rights.
B. Existence.
C. Valuation.
D. Completeness.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer because valuation will provide the
auditor evidence of obsolete and slow moving stock and any excess, defective
or damaged items contained in stock amounts.
Question 76
Entity X is currently facing a class action law suit from certain customers who
found poison in the food products supplied to them by Entity X.
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Entity X disclosured this issue in the notes to the financial statements as a
contingent liability.
It is likely that other customers who find out about this law suit would
withdraw their business from Entity X.
The auditor of Entity X considers this law suit to be a key audit matter. Which
of the following would be a correct action for the auditor?
A. The auditor should disclose this as a key audit matter since it was
disclosed in the notes to the financial statements.
B. The auditor can choose to not disclose this key audit matter based
on the fact that the adverse consequences outweigh the benefits.
C. The auditor is required to disclose this as a key audit matter if he or
she intends to qualify the audit opinion relating to this contingent
liability.
D. The auditor should not disclose this key audit matter as the law suit
is still in progress and thus the auditor is prohibited from making
public disclosure.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is correct in terms of ISA 701, para. 13 which specifically
states that where the entity has made disclosures about matters that may
cause adverse effects, the auditor is not exempt from making disclosures
about that key audit matter.
The second option is not correct because this exemption would not apply if
the entity made disclosures about the matter.
The third option is incorrect as ISA 701, para. 12 specifically states that if the
matter resulted in a qualification to the audit opinion, it would not form part of
the key audit matter disclosure.
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The fourth option is incorrect as there is no such requirement which prohibits
the auditor to make disclousres to the fact that a law suit is still in progress.
Question 77
Which of the following is the correct assertion in determining credit sales
made before year end but recorded in the next financial year?
A. Rights.
B. Existence.
C. Presentation.
D. Completeness.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer because completeness deals with all
transactions which have been recorded in the correct period.
The first option is incorrect as it relates to assets being the rights of the entity
and liabilities being the obligations of the entity at a specified date.
The second option is incorrect as the existence assertion deals with whether
the assets exist at year end date.
The third option is incorrect as the presentation assertion deals with whether
components of the financial statements are properly classified, presented and
disclosed at year end.
Question 78
What should the opinion paragraph include when expressing an adverse
opinion?
A. The main reasons for the financial statements being misleading.
B. A direct reference to a separate paragraph disclosing the basis of
this opinion.
C. A description confirming the uncertainty or scope limitation that
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prevents an unqualified opinion from being issued.
D. The principal effects of the departure from the accounting
standards and generally accepted accounting principles.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer because the opinion paragraph
should include a direct reference to a separate paragraph disclosing the basis
of the opinion.
The first option is incorrect because whilst the explanatory paragraph
provides a description of the substantive reasons for the adverse opinion, the
opinion paragraph does not.
The third option is incorrect because neither an uncertainty or scope limitation
leads to an adverse opinion.
The fourth option is incorrect because the principal effects should be
described in a separate paragraph and not the opinion paragraph.
Module 4 > Modified auditor's report > Adverse opinion
Question 79
You have recently completed the internal audit for the hedging operations of a
bank and noted the lack of controls evident in the trading process and
effective monitoring of successful traders. The success of traders was linked
to higher compensation in the form of bonuses. However, after discussions
with senior management, it was decided that these findings would not be
reported to the audit committee.
Which of the following statements could have justified the auditor’s decision
to not report the findings to the audit committee?
A. Management plans to initiate corrective action, based on the
findings identified.
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B. The board of directors has a separate committee to make
recommendations in regards to compensation.
C. Hedging is very complex and hence the internal auditor should rely
on management's analysis of the issue raised.
D. The amounts being hedged and the potential risks associated with
this are not material to the overall organisation.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer because the only justification is that
the deficiency plus the risks associated are immaterial (IIA Standard 2130 -
Control).
The first option is incorrect as significant control deficiencies must be reported
even if corrective action is planned.
The second option is incorrect as the compensation system influences
employee behaviour and is part of the control environment. Any reservations
noted by the internal auditor should be communicated to the audit
committee.
The third option is incorrect as internal auditors must have appropriate
expertise and experience to undertake the audit.
Question 80
Auditor X received a subpoena to provide evidence relating to information he
acquired as a result of his professional dealings with Client A.
In terms of APES 110, which of the following is correct?
A. Auditor X should refuse to disclose information due to the
fundamental duty of confidentiality.
B. Providing information about his client in court would give rise to an
advocacy threat to his independence.
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C. Auditor X should provide information requested as this is required
by law and so is an exception to the confidentiality principle.
D. Client A can force Auditor X to maintain confidentiality by invoking
the fundamental principles of integrity, objectivity and professional
behaviour.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is correct as the Code para. 114.1 A1 provides exceptional
circumstances when compliance with the duty of confidentiality can be
overruled. Disclosure is permitted when required to do so by law.
Question 81
Which of the following suite of standards would result in reasonable assurance
being expressed?
A. ISA.
B. ISA and ISRE.
C. ISA and ISRS.
D. ISA, ISQC and ISRE.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
A is correct as ISAs relate to standards used for the performance of audit
engagements. Audits result in reasonable assurance.
B is incorrect as ISRE relates to the performance of review engagements and
limited assurance is expressed in a review engagement.
C is incorrect as ISRS relates to the performance of related services and no
assurance is expressed for these services.
D is incorrect as ISQC relates to quality control for firms and does not result in
any assurance. ISRE relates to the performance of review engagements and
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limited assurance is expressed in a review engagement. Hence this option is
also incorrect.
Module 1 > Reasonable and limited assurance > Reasonable
Question 82
Which of the following would define having a ‘questioning mind’?
A. Having a disposition to inquiry, with some sense of doubt.
B. Withholding judgment until appropriate evidence is obtained.
C. Having a desire to investigate beyond the obvious, with a desire to
corroborate.
D. Having the self confidence to resist persuasion and to challenge
assumptions or conclusions.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
A questioning mind means having a disposition to inquiry, with some sense of
doubt.
Question 83
Which of the following relating to asset valuations would most likely require
special consideration?
A. Fixed assets comprise of investment properties.
B. The client has acquired a multi-purpose printing and photocopying
machine.
C. Diminishing value methods are being used for assets such as
factory equipment and motor vehicles.
D. Assets which are less than $1,000 are expensed to the profit and
loss statement even when the expected life is more than 1 year.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
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The first option is the correct answer as the auditor would involve an expert to
help in valuation issues.
The second option is incorrect as this would not lead to valuation
difficulties.The third option is incorrect as diminishing value methods are
acceptable per GAAP.
The fourth option is incorrect as expensing small items to the profit and loss
statement is acceptable as these transactions are immaterial.
Module 3 > Using the work of other auditors and experts > Component
auditors
Question 84
You are undertaking an analytical review on Dialmo’s profit and loss statement
for the year ended 30 June 20X5. During the year you noted that gross profit
increased significantly.
Which of the following scenarios best explains the reason for this situation?
A. An increase in the company tax rate.
B. A decrease in year-end bonsues paid to sales personnel.
C. An increase in units sold, with unit prices and costs remaining
steady.
D. Outsourcing part of the manufacturing process to a third party
resulting in additional costs incurred.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer because increases in units sold leads to
increased income and hence gross profit increases (assuming unit prices and
costs remain steady).
The first and second options are incorrect because income taxes and year-end
sales bonuses are not included in the gross profit calculation.
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The fourth option is incorrect as an increase in cost of goods sold would
decrease gross profit.
Question 85
Which of the following procedures should an auditor perform in regards to
subsequent events testing?
A. Review cut-off bank statements for several months after year end.
B. Communicate any internal control deficiencies to the audit
committee.
C. Obtain and compare the latest interim financial statements to the
financial statements being audited.
D. Send follow-up requests to customers who have not replied initially
to accounts receivable confirmation letters.
You selected A - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer as it is in accordance with ISA 560,
paragraph 6.
The first option is incorrect as bank statements are received for the period
immediately after year-end.
The second option is incorrect because the communication of internal control
deficiencies is not a subsequent events procedure.
The fourth option is incorrect because this will be usually done before review
of subsequent events are performed.
Question 86
Which of the following would be detected during a review of the client’s sales
cut-off procedures?
A. Unrecorded sales at year-end.
B. Excessive write-off of accounts receivables balances.
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C. Shipments not containing sales invoices and other shipping
documentation.
D. Recording cash received from debtors in the incorrect financial
period
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is correct as the auditor will review sales recorded late in June
and in early July, which would be done by reviewing the period when revenue
was earned by the shipment of goods for services performed as to when
revenue was recorded. Accordingly, reviewing transactions in early July, would
indicate the possibility of unrecorded sales in the June financial year.
The second option is incorrect as writing off account receivables balances
would not help in undertaking sales cut-off testing.
The third option is incorrect because lack of sales invoices and shipping
documentation will make it harder to verify and identify the supporting
evidence.
The fourth option is incorrect because such activities in relation to cash
receipts would unlikely be detected in sales cut-off testing. Procedures such as
analytical review and sending confirmations would detect such activities.
Question 87
Which of the following disclosures would be included in an auditor’s review of
interim financial information of a public company?
A. A statement highlighting the types of procedures performed in a
review.
B. A statement that the interim financial information provides a
'meaningful and not inconsequential' assurance since its a limited
assurance.
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C. A statement that the review of financial information has a lower
scope than a compilation report prepared in accordance with
Australian accounting standards.
D. A statement that the interim financial information provided was in
accordance with Australian accounting standards and generally
accepted accounting principles.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is the correct answer as ISRE 2410, paragraph 43g requires
that the report highlights the audit procedures the review consisted of.
The second option is incorrect as it is management who has the responsibility
for the interim financial information and not the shareholders.
The third option is incorrect because a review has a larger scope than a
compilation report.
The fourth option is incorrect as the information was reviewed (not examined)
in accordance with Australian accounting standards.
Question 88
Which of the following components of the COSO framework relates to the
development of policies and procedures to mitigate financial risks?
A. Control environment.
B. Risk assessment.
C. Control activities.
D. Monitoring activities.
You selected A - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer. A key control activity is the deployment
of policies and procedures to establish and communicate processes and
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controls within business processes and to set expectations.
Refer to the COSO illustrative tool discussed in the Study guide which lists out
the 17 principles relating to the framework.
Question 89
Which of the following matters would not typically be considered in
establishing the overall audit strategy?
A. Specifying the characteristics of the engagement.
B. Specifying the nature, timing and extent of substantive testing
procedures.
C. Defining reporting objectives, timing of audit work and nature of
communications.
D. Defining the significant factors, preliminary engagement activities
and knowledge gained on other engagements.
You selected C - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The audit strategy is usually high level in nature - it specifies:
1. Characteristics of the engagement
2. Reporting objectives, timing of the audit and nature of communications
3. Significant factors, preliminary engagement activities and knowledge
gained on other engagements
4. Nature, timing and extent of resources
The strategy document may contain other items, however, the nature, timing
and extent of substantive audit procedures would usually only be determined
after audit planning and potentially some tests of controls have been
completed.
Question 90
Section B: Multiple Choice Question – Multiple Options
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This section has 1 question worth 1 mark (total of 1 mark)
Select all that apply
Andrea has determined that the going concern basis is appropriate for her
client but that a material uncertainty exists.
Which of the following conclusions is appropriate under the circumstances?
(Select all that apply)
A. Issue an unmodified audit report if management disclose the issue
and appropriately discuss it.
B. Issue an unmodified opinion with the heading ‘Material Uncertainty
related to Going Concern’ if management fail to disclose the issue.
C. Issue an adverse opinion if the issue is material but not pervasive
and management fail to disclose it.
D. Issue an adverse opinion if the issue is material and pervasive and
management fail to disclose it.
E. Issue an unmodified opinion with the heading ‘Material Uncertainty
related to Going Concern’ if management disclose the issue.
F. Issue a qualified opinion if management disclose the issue and
include the heading ‘Material Uncertainty related to Going Concern’.
You selected F - This is incorrect
You selected E - This is correct
The correct answers are: D and E
TOTAL MARKS : 1MARKS OBTAINED 0
The fourth and fifth options are correct.
The fourth option is correct as an adverse opinion is issued if the material
uncertainty is both material and pervasive, and the issue has not been
disclosed in the financial statements.
The fifth option is also correct as an unmodified opinion with the heading
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‘Material Uncertainty related to Going Concern’ is issued if the going concern
basis is appropriate and management have appropriately disclosed the
material uncertainty.
The first option is incorrect as the heading ‘Material Uncertainty related to
Going Concern’ must be included even if management have disclosed the
issue. This means that a modified audit report will be issued.
The second option is incorrect as an unmodified opinion will not be issued in
this case as the issue has not been disclosed in the financial statements.
The third option is incorrect as an adverse opinion is only issued if the
material uncertainty is material and pervasive.
The sixth option is incorrect if the heading ‘Material Uncertainty related to
Going Concern’ is only used if an unmodified audit opinion is being issued.
Module 4
Pages 254-255
References:
CPA Advanced Audit and Assurance (AAA) 5th Edition notes, published by John Wiley
& Sons Australia Ltd, November 2019
CPA Advanced Audit and Assurance (AAA), Knowledge Equity, Online Learning
Modules, October 2020
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AAA PRACTICE EXAM 1
Question 1
Section A: Multiple Choice Questions – Single Option
This section has 89 questions worth 1 mark each (total of 89 marks)
Which of the following relating to limited assurance engagements is correct?
A. A review engagement would result in limited assurance being provided. B. Tests of detail are generally
performed in limited assurance engagements. C. Limited assurance is only relevant for half year reviews
of financial statements. D. The opinion is expressed in a negative manner as basic analytical procedures
are not performed.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is correct as limited assurance engagements (e. reviews) result in limited assurance.
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The second option is incorrect as test of details are generally performed in a reasonable assurance
engagement (e. an audit) and not a limited assurance engagement (e. a review).
The third option is incorrect as a limited level of assurance can be provided on other type of
engagements, not just reviews of half year financial statements.
The fourth option is incorrect as basic analytical procedures are performed in a limited assurance
engagement.
Question 2
You are a senior accountant of XYZ Auditors, a small boutique audit firm in Brisbane. Their major audit
client, PQR Manufacturers, wishes to obtain your firm’s assistance in implementing a new system of
internal control over their finished goods inventory.
It is expected that this new system of internal control will greatly reduce the need for the audit team to
perform substantive testing procedures in current and future audits.
The total fee for the engagement to develop the new system is $11,000, which consists of 7 billable hours
for yourself, and 2 billable hours for your manager to review your work.
In the prior year, XYZ Auditors provided 9 hours of consultancy and advisory services to PQR
Manufacturers.
Would the above engagement be permitted in terms of Division 3 of the Corporations Act 2001 (Cwlth)?
A. Yes, because the billed hours do not exceed the maximum of 10 hours of non-audit services allowed
by the Act in the current year. B. Yes, because although the total billed hours would exceed the 10 hours
permitted by the Act, it is less than 20 hours over a 24 month period. C. No, because the billed hours in
the current year plus the hours billed in the prior year exceeds the maximum of 10 hours of non- audit
services allowed by the Act. D. No, unless the audit work performed on the new system of internal control
was performed and reviewed by audit staff other than yourself and your manager.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
A is correct because the guidance included in the Corporations Act is based on maximum hours test,
whereby a maximum of 10 hours of non-audit services can be provided during the period to which the
audit relates. A further 10 hours of non-audit services can be provided in the 12 months immediately prior
to the period to which the audit relates.
Module 2 > Auditor independence for the audit of financial statements > An Australian perspective
Question 3
When testing the computerised controls over payroll using test data, which of the following would be the
most likely outcome?
A. Confirmation of competent payroll staff. B. Existence of unclaimed payroll cheques held by the payroll
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manager. C. Effective physical controls over the terminal containing payroll master files. D. Ineffective
program controls relating to the processing of annual leave calculations.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is correct because testing using the test data approach focuses only on program
application controls and not the processing environment.
The first and second options are not correct as these relate to general controls and are not computerised
controls.
The third option is not correct as this is a general control relating to the processing environment and
cannot be tested using the test data approach but rather using an integrated test facility (ITF).
Module 3 > Using CAATs for tests of controls > Test data
A. Investigate changes in long term loans after year end. B. Recalculate the accuracy of depreciation on
a plant acquired after year-end. C. Determine that changes in payroll rates have been authorised by
senior management. D. Inquire about payroll cheques recorded after year end but were subsequently
cleared to bank statements after year end.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is correct because it may require disclosure in the notes in the year end financial
statements. This is because the loan exists in the current period and subsequent changes after year end
would likely be of interest to users of financial statements and so may require disclosure.
The second and fourth options are incorrect because they relate to conditions that occurred after year
end and so are unlikely to affect the current financial statement disclosures as a subsequent event.
The third option is incorrect as this is a test of control and not a substantive test. Further it does not
provide evidence relating to subsequent events.
Question 7
Who should sign the comfort letters relating to information in a client’s funding document?
A. Audit committee. B. Senior management. C. Independent auditor. D. The chairman of the board of
directors.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as the comfort letter is sent and signed by the auditor to the
underwriter. The comfort letter is based on the auditor having performed the requesting parties’ specified
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procedures. No assurance is provided in the comfort letter.
Question 8
Which of the following correctly describes the advantages of using continuous assurance in the internal
audit environment?
A. Reduction in items tested. B. Increased audit coverage at lower cost. C. Reduced costs associated
with decreased coverage. D. Increased costs which is off-set by higher assurance.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
Continuous auditing using automated feedback mechanisms, allow for greater audit covered
(items/transactions tested) throughout a given period and this is typically achieved at a lower cost.
Other responses are not considered advantages of continuous assurance in the internal audit
environment.
Question 9
You are performing substantive procedures on items of inventory. You have selected items from the
inventory records and checked that the items of stock are on hand.
Which of the following assertions related to account balances does the above- mentioned audit
procedure test?
A. Existence. B. Completeness. C. Rights and obligations. D. Valuation and allocation.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
By selecting an item of inventory recorded by the entity, and then physically verifying that the inventory is
on hand, the auditor is confirming that the inventory per the accounting records actually exists.
Question 10
Which of the following is a fundamental principle per the Code of Ethics for Professional Accountants?
A. Honesty. B. Neutrality. C. Confidentiality. D. Professional scepticism.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The five fundamental principles are integrity, objectivity, professional competence and due care,
professional behaviour and confidentiality. Thus, only the third option is correct.
Module 1 > International Code of Ethics for Professional Accountants > Fundamental principles
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Question 11
Which of the following correctly represents audit risk?
A. Control risk x Detection risk. B. Inherent risk x Business risk.
Which of the following would an auditor generally not do during the planning stage when trying to obtain
an understanding of the client and its business?
A. Re-evaluate the client's internal control environment. B. Read current issues of industry magazines the
client is part of. C. Perform tests of details on transactions and significant account balances. D. Review
prior year audit working papers.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is incorrect as test of details are performed after the planning stage once the client has
understood the client and its operations.
All the other activities are performed at the planning phase to gain a better understanding of the client
and to identify the risks of material misstatements.
Question 14
Which of the following types of evidence would an auditor focus on to ensure controls are operating
effectively?
A. Bank's response to the confirmation request sent by the auditor. B. Client records documenting the
use of computer programs. C. Solicitor's responses to the representation letter sent by the auditor. D.
Confirmations of customer balances verifying receivables balances.
You selected D - This is incorrect. The correct answer is B
TOTAL MARKS : 1MARKS OBTAINED 0
The second option is the correct answer because it will help the auditor in evaluating the design and
effectiveness of the internal controls and the client's control over the use of its computer system via
documentation, which will be tested via review of documentation records.
The first and third options are incorrect because letters of representation provide comfort that the work
has been done and hence are substantive tests.
The fourth option is incorrect because this is a substantive test on accounts receivable balances
confirming existence and hence is not a test of control.
Question 15
Bruthen Ltd discovered that it overstated its sales figures in the prior year ended 30 June 2015.
Which of the following statements is the best way to address this issue?
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A. Adjust sales for the year ended 30 June 2016. B. Spread the current adjustment for both the year
ended 30 June 2016 and future years.
C. Restate the 30 June 2015 financial statements presented for comparative purposes. D. Disclose this
as an adjustment to the statement of comprehensive income for the year ended 30 June 2016.
You selected A - This is incorrect. The correct answer is C
TOTAL MARKS : 1MARKS OBTAINED 0
The third option is the correct answer because the overstatement is an error which must be accounted for
by restating the prior year financial statements, in accordance with IAS 8. Hence, accounting errors must
be adjusted retrospectively.
Question 16
You have completed the performance audit for a State Government sporting agency and are currently
reviewing responses to recommendations raised in the interim report you have sent them. On one of the
responses, the CEO has written that this problem has never occurred before in the past.
Which of the following is the most appropriate action for the lead auditor?
A. Schedule a follow-up audit immediately. B. Comment that the deficiency identified is an isolated one-
off event. C. Discuss and meet with the audit client to review the appropriateness of the response. D.
Issue an adverse finding in the report and mark it to the attention of the minister concerned.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is the correct answer as the auditor must be satisfied as to why this error has occurred
and what steps will be taken by the agency in order to rectify this. Further audit testing can be carried out
so as to determine if this is an isolated one-off event and/or continual pattern of errors.
Module 5 > Performance of activity > The performance audit process
Question 17
What disclosures should be included when preparing prospective financial statements?
A. Summary of significant assumptions only. B. Summary of significant accounting policies only. C. Both
a summary of significant assumptions and significant accounting policies. D. Summary of significant
assumptions and any accounting policies that differ from historical financial statements.
You selected D - This is incorrect. The correct answer is C
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
From the facts presented, it does not appear that management has acted with the intention to deceive.
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Even though their bonus scheme depends on revenue targets, management has merely failed to suitably
amend the default settings on their off-the-shelf software package to correctly calculate GST allocations.
It is likely, therefore, that the misstatement has arisen due to an error, rather than any intentional
fraudulent act on the part of management.
Question 20
Mr A is a senior audit partner with a number of years of technical and practical audit experience. He also
currently satisfies all the requirements for continued professional development.
In terms of the Framework for Audit Quality published by the IAASB, which of the following best
categorises the information relating to Mr A?
A. Input factors. B. Output factors. C. Process factors. D. Contextual factors.
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
In terms of the Framework for Audit Quality published by the IAASB, one of the input factors to audit
quality include being sufficiently knowledgeable, skilled and experienced. Hence these factors about Mr
A are input factors.
Question 21
Which of the following regarding audit documentation in terms of ISA 230 is correct?
A. Oral discussions are exempted from having to be documented. B. All audit working papers should
have the same form and content. C. Audit documentation enables external inspections to be conducted.
D. The conclusions on working papers must indicate the effect on the audit opinion.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
C is correct because audit documentation enables external reviewers to understand what work was done
and assess the evidence obtained and procedures performed against auditing standards.
A is incorrect because auditors can only rely on evidence that was documented. If it is not documented, it
is considered ‘not done’.
B is incorrect because the form, content and extent of audit documentation will vary between audits and
will depend on such factors as the nature of the audit procedures to be performed and the extent of
judgment required.
D is incorrect because the audit opinion is determined after all audit work is done and evidence collected.
The audit work papers should have conclusions about the evidence obtained but it is not always possible
to link this to the audit opinion.
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Question 22
In relation to the auditors’ use of experts, which of the following is correct?
A. The client is not required to understand the nature of the work undertaken by the expert. B. The
auditor should obtain an understanding of the methods and assumptions used by the expert. C. The
expert is not expected to understand the corroborative use the auditor will place on his/her work. D. The
auditor is required to perform tests and analyses on the methods and assumptions undertaken by the
expert.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is correct as the auditor should obtain a general understanding of the assumption and
methods used in the work performed by the expert.
The first option is incorrect because the client would have some understanding of the work of the expert.
The third option is incorrect as the expert would have a basic understanding of what the auditor's findings
would be.
The fourth option is incorrect because the auditor is not required to re-test the work of the expert.
Question 23
Which of the following tends to be the most predictable when using analytical procedures as part of
substantive testing?
A. Data subject to audit testing in the prior year. B. Relationships involving balance sheet accounts. C.
Transactions subject to management scrutiny. D. Relationships involving profit and loss accounts.
You selected B - This is incorrect. The correct answer is D
TOTAL MARKS : 1MARKS OBTAINED 0
ii) The audit approach.
iii) An executive summary.
iv) A limited assurance opinion.
A. i and ii only. B. ii and iv only. C. i, ii and iii only. D. i, iii and iv only.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
A limited assurance opinion is not one of the elements of an internal audit report. Rather the internal
auditor would include a conclusion and recommendations.
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The following are essential elements of internal audit reports:
-- an executive summary — the purpose of the summary document is to alert the recipient to the key
findings. It should encourage the reader to want to read the full report, and should generally include:
• a summary of key findings
• the audit objectives and coverage
• an overall conclusion
-- an introduction, incorporating:
• the reason for conducting the audit
• the objectives of the audit
• the audit approach
• the audit coverage
• the criteria used
-- a section on each of the areas audited — these sections could be split up by issues addressed, parts
of organisation audited, etc. These sections would include a description of the work done, results and
specific recommendations
-- a list of recommendations with the auditee’s responses
-- a conclusion.
Question 26
Which of the following relating to the audit of SMEs is correct?
A. All the ISAs must be fully applied. B. The auditor can apply 'ISAs for SMEs' which are specifically for
such organisations. C. The ISAs can be proportionately applied. D. The ISAs requirements relating to
evidence gathering is reduced.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The third option is correct because the IAASB have indicated that the ISAs should be applied
proportionately to the audit of SMEs based on the size and complexity of the entity.
The first option is not correct as it is often not possible to apply all the ISA requirements to the audit of
SMEs because certain requirements may be irrelevant.
The second option is incorrect because there are no such standard as ISAs for SMEs. There are
standards called IFRS for SMEs but this relates to financial reporting and not auditing of SMEs.
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The fourth option is incorrect as the same requirements for evidence gathering would be applicable to
audits of SMEs as well as large entities.
Question 27
Which of the following would be a valid objective of the external auditor?
A. An auditor should obtain absolute assurance about whether the financial statements as a whole are
free from material misstatements, whether due to fraud or error. B. An auditor should obtain reasonable
assurance about whether the financial statements as a whole are free from any misstatements, whether
due to fraud or error. C. An auditor should obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatements, whether due to fraud or error. D. An auditor
should obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatements due to error, and obtain absolute assurance that no fraud has occurred.
You selected C - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The auditor is required to obtain reasonable assurance - this is a high level of assurance, instead of an
absolute level. Absolute assurance is not possible due to the inherent limitations of an audit where most
evidence obtained is persuasive rather than conclusive.
While an auditor must remain alert to the possibility of fraud, it is not the auditor's responsibility to detect
fraud.
Question 28
You are undertaking the planning procedures for Topup Ltd and have noted that the debtors turnover
ratio has increased significantly during the year ended 30 June 20X5.
Which of the following options best explains this analysis?
A. Sales for each month were 10% higher than those months of the preceding year.
Which of the following is not a required disclosure relating to a key audit matter?
A. How the auditor addressed the matter. B. Management's response to the key audit matter. C. Why the
auditor considers the matter to be a key audit matter. D. Reference to related disclosures in the financial
statements.
You selected B - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The second option is the correct answer as all other options indicate disclosures required in terms of ISA
701, para. 13.
Question 31
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When performing reasonableness tests on payroll, which of the following procedures is correct?
A. Compare actual payroll costs with budgeted payroll costs. B. Trace individual employee deductions to
client generated payroll journal entries. C. Observe employees receiving their payroll cheques from the
payroll department. D. Verify that all cheques representing unclaimed wages are mailed to the respective
employees.
You selected B - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is the correct answer as this would be included in the payroll audit program to test for
reasonableness.
The second option is incorrect as total employee deductions would be traced to the payroll journal.
The third option is incorrect as this would only be done if internal controls were weak.
The fourth option is incorrect as the employee would request the payroll department to mail this over to
them and it would not be tested by the auditor.
Question 32
Which of the following would most likely raise significant doubt as to the entity’s ability to continue as a
going concern?
A. Cash flows from operations are negative. B. Research and development projects are postponed
indefinitely. C. Stock dividend issues replace annual cash dividend payments. D. The company is unable
to raise additional capital to fuel growth
You selected A - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The first option is the correct answer because per ISA 570, negative cash flows is an example of such a
condition.
The second option is incorrect as postponement of research and development may not necessarily be a
result of extreme financial difficulties.
Both the third and final options are incorrect as they are not specific examples which affect the
company's going concern.
Question 33
Which of the following best describes the main outcome of a performance audit?
A. Make recommendations for improving performance. B. Evaluate whether the organisation's
operational objectives as defined by the policy are still relevant. C. Report on the entity's success or
failure in reaching its goals of maximising profit. D. Determine whether the financial statements are
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presented in a true and fair view.
You selected B - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The first option is the correct answer. A performance audit reviews and evaluates the economy,
effectiveness and/or efficiency of the organisation, but the next step is to make recommendations to
indicate the improvements that are necessary.
The second option is incorrect as performance engagements are generally not performed to determine
whether objectives are still relevant.
The third and fourth option is incorrect as performance engagements are not financial statement audits
and do not generally look at profitability and/or whether financial reflect and true and fair view of the state
of affairs of the organisation.
Question 34
You are currently performing an internal audit of a listed company and, based on the work performed, it
was noted that one of the managers had committed an improper act.
Which of the following is the best option as to where the report is to be distributed to?
A. The shareholders. B. Senior management. C. The external auditors. D. The board of directors.
You selected D - This is correct
The five characteristics of suitable criteria include relevance, completeness, reliability, neutrality and
understandability.
Hence, only the third option is correct.
Question 37
You are an auditor in charge on the audit of a large, multinational pharmaceuticals manufacturer. You are
currently in the midst of reviewing your graduate accountants’ work papers, and have identified the
following statements and conclusions relating to accounts receivable, which is a material balance:
(a) A significant proportion of confirmations were received back with disagreements with the balances
recorded by the client.
(b) A discussion was held with the client, who indicated that the disagreements all related to timing
differences between the customer’s records and the records of the client.
The graduate accountant noted the results of the above discussions, and further that no evidence existed
to contradict the assertions by management. The work paper concluded that the balance on accounts
receivable was reasonably stated.
Which of the following qualities relating to professional scepticism has the graduate accountant most
AAA Practice EXAM 1 - srthrth
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likely failed to exercise?
A. Self-esteem. B. Recognition of people's motivations and perceptions. C. Lack of independence. D.
Professional judgement.
You selected D - This is incorrect. The correct answer is A
TOTAL MARKS : 1MARKS OBTAINED 0
The graduate accountant has not challenged the attempt at persuasion from the client by requesting
evidence to support their assertions. They have therefore not acted with self-esteem, which is the self
confidence to resist persuasion and to challenge assumptions or conclusions.
Question 38
Which of the following computer assisted audit techniques allows fictitious and real transactions to be
processed without the client being aware of this?
A. General controls testing. B. Data conversion testing. C. Test data. D. Integrated test facility.
You selected D - This is correct
TOTAL MARKS : 1MARKS OBTAINED 1
The fourth option is the correct answer as it allows the auditor to use test data into the system of live
transactions to which the client will be unaware of.
The first option is incorrect as this is not an approach or a technique to testing IT controls but refers to
assessing controls such as Structure of IT activities, its policies and procedures etc.
The second option is incorrect as data conversion testing is not an approach but rather a description of
controls required to ensure accurate conversion e. proper training, data entry manuals that deal with data
conversion, and appropriate chart of accounts.
The third option is incorrect as test data allows the auditor to test valid and invalid transactions but this
would not including creating entity's in the client's system. The client would also be aware of the test
being performed in the system.
Module 3 > Using CAATs for tests of controls > Integrated Test Facility
Question 39
Which of the following are further audit procedures to be carried out after the initial risk assessment has
been performed?
A. Substantive procedures. B. Secondary risk assessment procedures. C. Both substantive procedures
and initial determination of risks of material misstatements. D. Substantive tests of details and internal
control modifications.
You selected A - This is correct
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The first option is the correct answer because further audit procedures would contain substantive testing
and tests of controls, not risk assessment procedures.
The second and third options are incorrect as this does not contain risk assessment procedures.
The fourth option is incorrect as substantive tests are required but internal controls modification is not an
audit procedure.
Question 40
Your client is Violet Ltd and you have issued an unqualified opinion on their accounts for the year ended
30 June 20X5. Five months later, a debtor is wound up prior to repaying the amount owed to the
company. You also discover that management had received a letter (from the debtor) prior to year end
stating the company was in distress and was not in a position to pay the amount owed.
Which of the following correctly indicates the first action you would take regarding this discovery?
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Related Questions
Q1: Which of the following are the techniques available as a substantive analytical procedures?
1. Reasonableness test
2. Ratio analysis
3. Trend analysis
4. Assertion
a- 1and 3 only
b-1 and 2 only
c-1,2, and 3 only
d- 1,2,3,and 4 only
Q2: Which of the following is normally the most reliable source of audit evidence?
a- Banker’s statements
b- Minutes of Board Meeting
c- Oral confirmation from the management.
d- Internal audit reports of the company
Q3: Benefits of planning in the audit of financial statements are:
1. to develop appropriate attention to important areas of the audit.
2. To identify and resolve potential problems on a timely basis.
3. Assisting in the selection of engagement team members with appropriate level of capabilities.
a- 2 only
b- 1,2, and 3 only
c- 1 only
d- 2 and 3 only
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Auditing Theory
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b. The main objective of the independent auditor is to fulfill the needs of the general public for
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c. Independent auditing is also known as compliance auditing.
d. Internal auditing is also known as operational auditing.
e. BIR auditing is also known as compliance auditing.
f. The internal auditor is directly concerned with the detection and prevention of fraud.
g. The independent auditor is also directly concerned with the detection of prevention of fraud,
just like the internal auditor.
h. Independent auditing is a "broken" activity, unlike internal…
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All options information and correct answer please
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Select one:
a. Neither service provides assurance on financial statements
b. review
c. Each service provides the same level of assurance on financial statements
d. audit
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None
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Course Name: Auditing (Accounting)
Write a concise answer between 500 to 550 words for each question.
2. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. Why
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Answer the marked questions on the picture
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2
The two main types of assurance level that auditors can perform are ________ and __________
High (Audit)
Moderate (Review)
Negative assurance
Positive assurance
Question 2 options:
a)
B & C
b)
A & C
c)
A & B
d)
C & D
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Balance sheet
Claims, litigations, and assessments
Disclosure checklist
Factual
Hr
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PayMaster
Pro for a
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Please Solve In 20mins
I will Thumbs-up promise
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What is the name of accounts that has materiality limit of 1/2% to 1% applied?
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A. acritical analysis of some of the complexities
and key issues involved in impairment testing
especially in light of the COVID-19 pandemic. In
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accounting professional bodies or academic
journals.
For the Part A of the report requirements, you
need research on complexities with impairment
testing. Here you will need to look at reports
released by the Big 4 accounting firms or the
professional accounting bodies like CPA, CA or
ACCA. Briefly summarise what the key
complexities could be. For example, you need to
calculate recoverable amount for impairment
testing which is fair value less costs to sell or value
in use. Given the uncertainties posed by COVID,
perhaps it is hard to calculate future cash flows
for value in use, or fair values might no longer be
available, or risk or interest rates might be of
concern. need to analyse and summarise what
key accounting bodies and accounting
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Question 1
For each of the following scenarios, indicate whether in your opinion it is a violation of the
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3. Chan and Mo, CPAS, perform the annual financial statement audit for SoCal Ltd. Ann Mo,
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significant controlover SoCal. The amount of Ann Mo's investment in Greenfieldis
immaterial to her net worth. ..
4. David Lam, CPA, is assignedto serve as the audit manager on the Safety Bank
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Negative Assurance in Review Reports. One portion of the report on a review services engagement is the following: “Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformitywith generally accepted accounting principles [or another framework for financial reporting].”Required:a. Is this paragraph a “negative assurance” given by the accountants?b. Why is negative assurance generally prohibited in audit reports?c. What justification is there for permitting negative assurance in a review services report on unaudited financial statements and on interim financial information?
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Please answer with reason for all why the option is correct and why the other options are incorrectPlease answer correct otherwise skip it
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AUDITING
Answer the following questions and
explain the correct answers per item.
Also explain why the other choices
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A. No reference to the original engagement.
B. Reference to a departure from PSAs.
C. Scope limitations that may have resulted in the change of engagement.
D. Information about review procedures already performed.
2. The Philippine Framework for Assurance Engagements identifies two types of assurance
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A. A reduction in assurance engagement risk to a very low level in the circumstances of
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B. A reduction in assurance engagement…
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Adverse
Basis for mod paragraph
Cpa firm
Disclaimer of opinion
Expressing opinion
Management
I modified
Unqualified
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2.
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Question 2 options:
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b) False
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