ACB3041 Lecture Handout Topic 1:

Introducti on and Overview of Audit and Assurance

Example 1: PAQ 1.5 Being an auditor (adapted)

You have recently graduated from your university course and start work with an audit firm. You
meet an old school friend, Kim, for dinner – you haven’t seen each other for several years. Kim is
surprised that you are now working as an auditor because your childhood dream was to be a football
star. Unfortunately your knee was injured in a fall and you can no longer play football. The
conversation turns to your work and Kim wants to know how you do your job. Kim cannot
understand why an audit is not a guarantee that the company’s profit is absolutely correct and free
of error and fraud. Kim also thinks that company managers will lie to you in order to protect
themselves, and as an auditor you would have to assume that you cannot believe anything a
company manager says to you.

Required:

(a) Explain to Kim the concept of reasonable assurance, and how reasonable assurance is
determined. Explain why an auditor cannot offer absolute assurance.

(b) Explain to Kim the concept of professional scepticism and how it is not the same as assuming
that managers are always trying to deceive auditors.

Solution

(a) Explain to Kim the concept of reasonable assurance, and how reasonable assurance is
determined. Explain why an auditor cannot offer absolute assurance.

 An audit provides reasonable assurance, not absolute assurance

 However, Kim expects an audit to provide absolute assurance. This is an example of the
expectation gap.

 Reasonable assurance is high (not absolute) assurance on the reliability of subject matter

 There is no guarantee that the financial report is free from error or fraud, or that the company
will not fail.

Why?

 Nature of financial reporting – requires judgements about accounting estimates, and the choice
and application of various accounting methods

 There is usually not one ‘right’ answer for a company’s profit, so the auditor cannot guarantee
the profit reported by the company is ‘right’; only provide assurance about the appropriateness
of the accounting method selection and application and the accounting estimates

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 Nature of the audit process – auditors cannot review every transaction and account balance, so
use sampling

 Some transactions and balances are difficult to gather reliable evidence about, and auditors have
a limited time frame in which to complete the audit

 Fraud can be difficult to uncover because the client may have taken steps to conceal it

(b) Explain to Kim the concept of professional scepticism and how it is not the same as assuming
that managers are always trying to deceive auditors.

 Professional scepticism is an attitude that requires the auditor to remain independent of the
client and its staff

 The auditor has a questioning mind and thoroughly investigates all evidence presented by their
client

 This does not mean that the auditor regards the client as a liar, but that they need to do more
than simply take the client’s word about anything

 Managers will not always try to deceive auditors, but auditors must take the responsibility of
gathering evidence to verifying managers’ statements

 Usually, there will be confirming evidence which supports the client’s statements, such as
evidence gathered from independent third parties

 The auditor needs to be alert to the fact that some managers will try to deceive auditors
sometimes

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 Test your knowledge!

1. An example of the three parties in an assurance engagement would be:

a. audit client, employee, customer
b. audit client, supplier, auditor
c. auditor, shareholder, general public
d. auditor, general public, employees

2. A limitation of an audit is caused by:

a. the nature of financial reporting
b. the nature of audit procedures
c. the need for the audit to be conducted within a reasonable period of time and at a reasonable
cost
d. all of the above

3. Which of the following is not a type of opinion?

a. qualified opinion
b. modified opinion
c. adverse opinion
d. disclaimer of opinion

4. Which of the following is not true in relation to comparability?

a. able to identify trends, that may influence their perception of how well the entity is doing
b. able to assess performance of the entity over time and with other entities
c. able to evaluate
d. all of the above are correct

5. The largest accounting firms in Australia are known collectively as the:

a. ‘Big-3’
b. ‘Big-4’
c. ‘Big-5’
d. ‘Big-5½ ’

6. Which of the following is incorrect? A government can be considered to be a user of the general
purpose financial reports because:
a. it is the basis for the calculation of taxes owed to the government
b. it can determine whether certain regulations have been complied with
c. to gain a better understanding of the entities activities
d. to assess the entity so that it can provide the entity with grants that will benefit society

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7. Which of the following is not a responsibility of auditors:
a. preparing the financial reports
b. maintaining professional scepticism
c. using professional judgement based on expertise, knowledge and training
d. applying due care during the audit process

8. The objective of the Financial Reporting Council does not include:

a. to oversee the process used for setting accounting and auditing standards
b. to monitor and report regularly on matters concerning auditor independence
c. to be involved in the technical issues around the standard-setting process
d. all of the above are included in the objectives of the Financial Reporting Council

9. Auditor rotation in CLERP 9 states that an auditor cannot perform a significant role in the audit of
a client in more than:
a. two out of five years
b. two out of seven years
c. five out of seven years
d. six out of seven years

10. The expectation gap is caused by:

a. realistic auditor expectations
b. unrealistic user expectations
c. realistic user expectations
d. unrealistic auditor expectations

Chapter 1

1. The parties or matters relevant to an assurance engagement are:

(a) users, responsible party, subject matter.
(b) assurance practitioner, responsible party.
(c) responsible party, users, subject matter, criteria.
(d) assurance practitioner, users, responsible party.

2. When performing an audit required under section 301 of the Corporations Act the auditor
has a responsibility to:
(a) form an opinion on the subject criteria.
(b) form an opinion on the independence of the directors.
(c) form an opinion on the truth and fairness of the financial report.
(d) all of the above.

3. Performance audits are useful because they:

(a) include a comprehensive audit.
(b) allow the auditor to demonstrate how well they are performing.

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 (c) are concerned with the economy, efficiency, and effectiveness of an organisation’s
activities.
(d) involve gathering evidence to ascertain whether the entity under review has followed
the rules, policies, procedures, laws or regulations with which they must conform.

4. The function of internal audit is determined by:

(a) the IIA.
(b) the government.
(c) the external auditor.
(d) those charged with governance and management.

5. Negative assurance means:

(a) the auditor has conducted an audit and provides an opinion that the financial reports
are true and fair.
(b) the auditor has conducted sufficient work to conclude that the appropriate
outcome is an adverse audit report.
(c) the auditor has done adequate work and nothing came to their attention which would
lead them to believe that the information being assured is not true and fair.
(d) the auditor disclaims responsibility for the audit opinion because they are unable
to do sufficient work to conclude that the information being assured is true and fair.

6. An auditor disclaims responsibility when:

(a) the users cannot rely on the financial report.
(b) the audit opinion is unqualified and unmodified.
(c) the auditor is unable to obtain sufficient evidence about a potentially material
and pervasive matter.
(d) the audit opinion is unqualified and the auditor includes a paragraph in the audit
report to emphasise something important.

7. Those charged with governance have a responsibility to ensure that the information in
financial report is:
(a) true and fair.
(b) relevant and reliable.
(c) comparable and understandable.
(d) all of the above.

8. Agency theory explains that audits are demanded because conflicts can arise between:
(a) auditors and owners.
(b) owners and principals.
(c) agents and managers.
(d) managers and owners.

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 9. The insurance hypothesis means:
(a) an audit acts as insurance.
(b) owners must take insurance.
(c) managers must take insurance.
(d) none of the above.

10. The audit expectation gap occurs when:

(a) the public is well educated about auditing.
(b) user beliefs do not align with what an auditor has actually done.
(c) auditors perform their duties appropriately and satisfy users’ demands.
(d) peer reviews of audits ensure that auditing standards have been applied correctly and
the standards are at the level that satisfy users’ demands.

Chapter 2

1. Professional competence and due care mean that members of professional bodies must:
(a) act diligently.
(b) maintain their knowledge and skill at the required level.
(c) keep up to date with changes in regulations and standards.
(d) all of the above.

2. Professional behaviour means that members of professional bodies must:

(a) claim to possess all qualifications.
(b) comply with rules and regulations.
(c) provide all services clients request.
(d) question the reputation of accountants who are not members of professional bodies.

3. Professional independence for auditors:

(a) is only relevant to audits for new clients, not continuing clients.
(b) is the ability to act with integrity, objectivity and professional scepticism.
(c) detracts from the ability of users to rely on the financial report to make their decisions.
(d) is important when the auditor acts independently, and it does not matter what
people believe about the auditor’s independence.

4. A self-interest threat arises when:

(a) the client threatens to use a different auditor next year.
(b) the auditor encourages others to buy shares in the client.
(c) an assurance team member has recently been a director of the client.
(d) the auditor owns shares in a business that is a major supplier to the client.

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5. A self-review threat arises when:
(a) the auditor has a loan from the client.
(b) the auditor represents the client in negotiations with a third party.
(c) there is a long association between the assurance firm and its client.
(d) the auditor performs services for the client that are then subject of the assurance
engagement.

6. Safeguards to independence:
(a) deal with a threat when one becomes apparent.
(b) minimise the risk that a threat to independence will surface.
(c) are developed by the accounting profession, legislators, regulators, clients and
accounting firms.
(d) all of the above.

7. Safeguards to independence:
(a) include audit committees.
(b) are not the responsibility of the client.
(c) are too difficult to implement by audit firms; they must be contained in legislation.
(d) apply only to business relationships between auditors and clients, not social
relationships.

8. Audit committees for companies in the top 300 on the ASX:

(a) can be any size.
(b) should have a formal charter.
(c) must have the same chair as the board of directors.
(d) must include the chief financial officer (CFO) if the CFO is on the board of directors.

9. Generally, the auditor could be legally liable under:

(a) contract law to third parties and to the client.
(b) the tort of negligence but not contract law to the client.
(c) contract law and under the tort of negligence to the client.
(d) contract law but not under the tort of negligence to third parties.

10. If a prospective new audit client does not allow the auditor to contact its existing auditor:
(a) the auditor should refuse to take on the prospective new client.
(b) the auditor should respect the prospective client’s right to privacy.
(c) the auditor should contact the existing auditor anyway because it is their duty.
(d) the existing auditor should contact the new auditor to tell them all about the client.

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Chapter 3

1. When gaining an understanding of the client, the auditor will identify the geographic
location of the client because:
(a) more spread out clients are harder to control.
(b) the auditor will plan to use staff from affiliated offices to visit overseas locations.
(c) the auditor will need to visit the various locations to assess processes and procedures at
each site.
(d) all of the above.

2. When gaining an understanding of the client’s sources of financing the auditor:

(a) will assess if the client is meeting interest payments when they are due.
(b) is not interested in debt covenants because all debt contracts are the same.
(c) will ignore the relative reliance on debt versus equity funding because that is a
management decision, not an audit issue.
(d) none of the above.

3. When gaining an understanding of the client at the industry level the auditor will:
(a) use information about the client’s industry.
(b) not consider government taxes on the industry because they are out of the client’s
control.
(c) ignore bad news reports about the client firm because the client’s reputation in the
press is not important.
(d) not consider the level of demand for the goods and services provided by other
companies in the client’s industry.

4. The ASX Corporate Governance Council’s Corporate governance principles and

recommendations are designed to help companies:
(a) improve performance.
(b) improve their corporate structure.
(c) enhance their accountability to shareholders and other interested third parties.
(d) all of the above.

5. An attitude of professional scepticism means:

(a) any indicator of fraud is properly investigated.
(b) the auditor can rely on management assertions.
(c) the auditor can rely on past experience to determine current risk of fraud.
(d) all of the above.

6. An example of an incentive or pressure that increases the risk of fraud is:

(a) the client operates in a stable industry.

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 (b) the client has a history of making losses.
(c) management remuneration mostly comprises base salary.
(d) all of the above.

7. The auditor must consider whether it is appropriate to assume that the client will remain as
a going concern:
(a) if there are mitigating circumstances.
(b) only if the client is listed on a stock exchange.
(c) because going concern means the client is facing bankruptcy.
(d) because this question affects the appropriate basis for valuing assets.

8. The risk assessment phase of an audit does not include:

(a) audit execution and reporting.
(b) gaining an understanding of the client.
(c) development of an audit strategy and a risk and materiality assessment.
(d) identification of factors that may affect the risk of a material misstatement in the
financial report.

9. When gaining an understanding of the client the auditor will consider:

(a) related party identification.
(b) controls over the technology used to process and store data electronically.
(c) the appropriateness of the client’s system of internal controls to mitigate
identified business risks.
(d) all of the above.

10. Client closing procedures:

(a) affect expense accounts only.
(b) are routine transactions that do not affect audit risk.
(c) are the responsibility of those charged with governance who must ensure that
transactions are recorded in the correct accounting period.
(d) all of the above

Chapter 4

1. Adopting an audit strategy that relies heavily on substantive testing:

(a) is appropriate when internal controls are very strong.
(b) requires the auditor to conduct extensive control testing.
(c) means that the auditor will conduct some interim testing and minimal year-end account
balance testing.
(d) means that the auditor will gain the minimum necessary knowledge of the client’s
system of internal controls.

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2. Adopting an audit strategy that does not rely heavily on substantive testing:
(a) is appropriate when internal controls are minimal.
(b) requires the auditor to conduct extensive control testing.
(c) means that the auditor will conduct extensive year-end account balance testing.
(d) means that the auditor will gain the minimum necessary knowledge of the client’s
system of internal controls.

3. Which of the following is a true statement about profitability ratios?

(a) All companies have a high inventories turnover ratio.
(b) Auditors will be interested in trends in profitability ratios.
(c) Profitability ratios should be the same for all divisions of the company.
(d) Companies will try to have the same profitability ratio in each month of operation.

4. Common uses of analytical procedures include:

(a) risk identification during the risk assessment stage.
(b) estimating account balances during the risk response stage.
(c) overall assessment of the financial report at the final review stage of the audit.
(d) all of the above.

5. An auditor is interested in the client’s inventories turnover ratio because it helps the auditor
understand:
(a) if the client is in the right industry.
(b) if the industry is the same as another industry.
(c) if the client’s debtors are paying their accounts on time.
(d) if the client is as competitive and has as high a turnover as the industry average.

6. Analytical procedures:
(a) can only be performed on annual data.
(b) are only useful if the client’s variation from budget is low.
(c) are not affected if the client changes its accounting methods.
(d) must take into account seasonal variation in the client’s business.

7. An auditor will identify accounts and related assertions at risk of material misstatement:
(a) after testing internal controls.
(b) before writing the audit report.
(c) in order to plan the audit to focus on those accounts.
(d) to eliminate audit risk and make the audit report more timely.

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 8. For an audit, the auditor can control:
(a) inherent risk.
(b) control risk.
(c) financial risk.
(d) detection risk.

9. The relationship between risk and the materiality level set in the risk assessment phase:
(a) is positive.
(b) is inverse.
(c) is irrelevant.
(d) depends on the size of the client.

10. Testing controls means that:

(a) no substantive testing is required.
(b) the auditor can completely rely on a client’s system of internal controls.
(c) the auditor can plan to reduce their reliance on detailed substantive testing of
transactions and account balances.
(d) all of the above.

Q.1 Which of the following is NOT true about Corporate Social Responsibility assurance?

A. reporting is voluntary and is becoming more widespread.

B. includes both financial and non-financial information.

C. is required to be performed by an auditor.

D. disclosures include environmental, employee and social reporting.

Q.2 Which body has a mission ‘to develop, in the public interest, high-quality auditing and assurance
standards and related guidance to enhance the relevance, reliability and timeliness of information
provided to users of audit and assurance services?

A. the IAASB

B. the AASB

C. the AUASB

D. the FRC

Q.3 Agency theory can be described as the theory of

A. hiring an agency to review the work of the management, in this case it is the auditor

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B. when the finance function is outsourced to an outside party, and the auditor is required to audit
the outside party’s work

C. the relationship between the owner and the management of the business when the owner is not
the manager of the business

D. none of the above.

Q.4 In relation to auditing the information hypothesis relates

A. to what auditing is

B. to which auditing standards are produced

C. to ‘does the audit meet the demands of users’

D. to why demand for audits exists

Q.5 Under ASA 200/ IAS 200 the primary objective of a financial report audit is to

A. ensure that the company is free from all material fraud

B. provide assurance about the future viability of the entity

C. to express an opinion as to whether the financial report is prepared in all material aspects, in
accordance with a financial reporting framework

D. ensure the company complies with all aspects of Corporations Law

Q.6 Which of these is not an objective of the surveillance program undertaken by ASIC?

A. to improve the quality of financial reporting

B. to ensure directors and auditors focus on disclosures of useful and meaningful information for
investors and other users.

C. to investigate both material and immaterial disclosures concerning current liabilities

D. all of the above are objectives of the surveillance program undertaken by ASIC

Q.7 Which of the following is true regarding auditors and fraud?

A. auditors are required to detect all fraud during an audit

B. auditors should actively investigate the possibility of fraud if suspicious circumstances exist

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C. in the Kingston Cotton Mill case it was said that the audit role was not primarily to detect fraud

D. b. and c. are true

Q.8 In Australia the auditors opinion in the audit report must state

A. whether the financial report is represented fairly, in all material respects, in accordance with the
applicable financial reporting framework

B. whether the financial report represents a true and fair view, in all material respects, in accordance
with the applicable financial reporting framework

C. whether the financial report provides a reasonable level of assurance, in all material respects, in
accordance with the applicable financial reporting framework

D. a. or b.

Q.9 The statutory body that is responsible for hearing applications in Australia as to whether
auditors and liquidators have breached the Corporations Act is

A. ASIC

B. CALDB.

C. FRC

D. AUASB

Q.10 Insurance hypothesis tells us that

A. investors will demand that financial reports be audited as a way of insuring against some of their
loss should their investment fail

B. investors can insure themselves against loss by investing in a diverse investment portfolio should
an individual investment fail.

C. investors cannot insure themselves against loss when investing in an entity.

D. the entity can take out insurance to protect itself from such risks as employee or management
fraud which can lead to material misstatements in the financial statements

Q.11 It is a requirement to be registered as an auditor in Australia to

A. be a fit and proper person

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B. be a member of CPA Australia, the ICAA or other approved body

C. have a degree or diploma from a course in accounting (including auditing) of not less than 3 years
duration and in commercial law(including company law) of not less than 2 years duration or have
other equivalent qualifications acceptable to ASIC.

D. all are requirements to be registered as an auditor in Australia

Q.12 The oversight structure of financial reporting in Australia had many levels. The Companies
Auditors and Liquidators Disciplinary Board (CALDB) is part of which level?

A. regulation by the profession

B. regulation by the firm.

C. self or peer regulation

D. unrealistic auditor expectations

Q.13 An area where auditors in Australia have generally not expanded their role is

A. detection of fraud

B. evaluation of whether an entity is a going concern

C. reporting on internal controls

D. all of the above are areas in Australia where auditors have not expanded their role

Q.14 The expectation gap can be reduced by

A. auditors performing their duties properly

B. enhanced reporting to explain what processes have been followed in arriving at an audit or a
review opinion

C. assurance providers reporting accurately the level of assurance being provided

D. all of the above

Q.15 A limitation of an audit is caused by

A. the nature of financial reporting

B. the nature of audit procedures

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C. the need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.

D. all of the above

Q.16 Which of the following is an example of an assurance engagement which provides reasonable
assurance?

A. The review of annual financial statements

B. The audit of annual financial statements
C. The reporting of procedures performed by the auditor concerning a review of the system of
internal control as agreed by the client
D. All of the above

Q.17 the expectation gap is caused by

A. Realistic auditor expectations

B. Unrealistic user expectations
C. Realistic user expectations
D. Unrealistic auditor expectations

Q.18 the best test to decide if audits provide good value is

A. By examing how often audits are associated with company failure

B. By examing.......
C. By examing.......
D. It is not possible to designate any one test.......

Q.19 the three major professional accounting bodies in Australia are

A. ICAA, CPA and ASIC

B. CPA Australia, NIA(IPA) and AARF
C. ATO, AUASB and ASIC
D. ICAA, CPA Australia and NIA(IPA)

Q.20 which of the following is incorrect? The Australian Securities and Investments
Commission(ASIC)

A. Registers auditors and processes......

B. Requires all auditors’ financial statements to be independently audited annually
C. Provides a whistleblowing facility for the reporting of contraventions of the Corporations
Act
D. Enforces independence requirements for auditors

Q.21 which of these was not an Australian corporate collapse?

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 A. HIH Insurance Ltd
B. One. Tel
C. Harris Scarfe
D. All were Australian corporate collapses

Q.22 the body that is responsible for setting the auditing standards in Australia is

A. AASB
B. IAASB
C. AUASB
D. FRC

Q.23 in Australia, all of the following are required to have an annual audit, except

A. Public companies limited by guarantee

B. Small proprietary companies
C. Statutory authorities
D. All of the above are required to have an annual audit with no exceptions

Q.24 which of these is not a reform introduced by CLERP 9 in relation to Auditors and annual general
meeting (AGMs)?

A. shareholders can submit written questions to the auditor before the AGM relating to the
auditor’s report and the conduct of the audit.
B. The auditor must attend the AGM
C. The auditor must address the AGM
D. A reasonable opportunity.....

Q.25 suppliers (creditors) as a user of the financial statements would least consider which of the
following aspects of the financial statements

A. Solvency of the entity

B. Profitability of the entity
C. Return on investment of the entity
D. Corporate social responsibility of the entity

Q: When auditors are engaged in work where no assurance is provided:

Ans- An Assurance is not provided as the client determines the nature , timing and extent of the
evidence that is gathered and will determines their ownotcome.

Q: An example of unmodified audit opinion is:

Ans- Unqualified audit opinion with an emphasis of matter.

Q: Suppliers as a user of the financial statements would least consider which of the following aspects
of the financial statements:
Ans- Return on investment to the entity

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19.  An example of the three parties in an assurance engagement would be:

E. *a.       audit client, supplier, auditor.

F. b.         audit client, employee, customer.
G. c.         auditor, general public, employees.
H. d.         auditor, shareholder, general public.

20.       An assurance engagement can be defined as

a. an engagement of an expert to direct the entity on subject matter.

b. an engagement to enhance the reliability of the subject matter.
C. an audit to determine the validity of the subject matter.
d.an engagement to determine a true and fair view of the entities course of actions.

21.       Which of the following is NOT true about Corporate Social Responsibility assurance?

a.         disclosures include environmental, employee and social reporting.

b.         includes both financial and non-financial information.

c.         reporting is voluntary and is becoming more widespread.

*d.       is required to be performed by an auditor.

22.       A limitation of an audit is caused by

a.    the need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.

b.         the nature of audit procedures.

c.         the nature of financial reporting.

*d.       all of the above.

23.       Which of the following would be an example of a reasonable assurance engagement?

a.         the reporting of procedures performed by the auditor as agreed by the client.

*b.       the audit of annual financial statements.

c.         the review of annual financial statements.

d.         all of the above.

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24.       When auditors are engaged in work where no assurance is provided this means;

      *a.   An assurance is not provided as the client determines the nature, timing and extent of the
evidence that is gathered and will determine their own outcome.

      b.    The auditors found anomalies in the financial information and no assurance will be given
until further testing is conducted.

      c.   That the review indicates adverse finding and the auditors are not prepared to give an
assurance that the information gives a true and fair view.

      d.   No assurance is provided as the client will determine the outcome once the auditors have
gathered the correct data.

25.       In a review engagement, which of the following is least likely to occur during the
engagement?

a.         enquiries with management and other personnel.

b.         analytical procedures.

c.         review of the internal controls of the entity.

*d.       substantive audit procedures.

26.       The wording of a negative expression of opinion generally states that:

a.         there is something wrong with the subject matter.

b.         there is nothing wrong with the subject matter.

c.         there is something that has come to the auditor’s attention that would lead them to believe
that the information being assured is not true and fair.

*d.       there is nothing that has come to the auditor’s attention that would lead them to believe that
the information being assured is not true and fair.

27.       The following can be said about an emphasis of matter:

a.         it cannot be used when expressing audit opinion that has pervasive misstatements.

b.         it is only used in unqualified audit opinions.

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c.         it is included when the auditors opinion has changed and the auditor wants to bring the users’
attention to a particular matter.

*d.       it is included when the auditor’s opinion has not changed and the auditor wants to bring the
users’ attention to a particular matter.

28.       Which of the following is not a type of opinion?

*a.       modified opinion.

b.         qualified opinion.

c.         disclaimer of opinion.

d.         adverse opinion.

29.       An example of an unmodified audit opinion is:

*a.       unqualified audit opinion with an emphasis of matter.

b.         adverse audit opinion.

c.         qualified audit opinion.

d.         none of the above.

30.       Which of the following is not true in relation to comparability?

a.         able to assess performance of the entity over time and with other entities.

b.         able to identify trends that may influence their perception of how well the entity is doing.

c.         able to evaluate.

*d.       all of the above are correct.

31.       In addition to the preparation of financial statements, it is also the responsibility of those
charged with governance to:

a.  selecting and applying appropriate accounting policies and making reasonable accounting
estimates.

b.    establish and maintain internal controls that are effective in preventing and detecting material
misstatements.

c.      identify the financial reporting framework to be used in the preparation and presentation of
their financial report.

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*d.     all of the above.

32.       Professional skepticismPerformance audits are useful because they: does not involve:

a.         being suspicious when evidence contradicts documents held by their client or enquiries made
of client personnel.

b.         seeking independent evidence to corroborate information provided by their client.

*c.       the professional requirement that all management representations be substantiated with
supporting documentation.

d.         none of the above.

Q: The Companies and Liquidators Disciplinary Board can respond to applications made by:

a. ASIC & APRA

b. The general public
c. The APRA
d. The ASIC

Q: Which of the following is incorrect? The Australian Securities and Investments Commission (ASIC):

Ans – requires all auditors financial statements to be independently audited annually.

Q: Professional scepticism does not involve:

Ans- the professional requirement that all management representations be substantiated with
supporting documentation

Q: Agency theory explains that audits our demanded because conflicts can arise between

Ans – Managers & Owners

Q: Which of the following regulators do not impact on the audit process

Ans- APESB

MULTIPLE CHOICE QUESTIONS

15. Pete Marsh wrote up an advertisement for his firm. In his draft to the local newspaper he
indicated that the firm was able to provide services that he knew it could not deliver. Which
part of the profession’s standards or codes of conduct was Pete breaking?

a. objectivity
b. professional behaviour
c. confidentiality

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 d. communication

16. Cliff Marsden has been an audit manager at Copeland & Cahoon, CA’s the past ten years.
Two years ago he performed human resources and internal audit functions for 9 months
while his client underwent a major restructuring. His firm has a policy of changing audit
partners and managers every five to seven years. He is reluctant to take on the audit
because he believes there is an independence threat. Which threat is in play?

a. integrity threat

b. familiarity threat

c. self-review threat

d. advocacy threat

17. Luanne Phong just joined the firm of Moses, Denson, and Etchevery (MDE). She found out
that she owns shares in a client company of MDE. She is going to divest herself of these
shares. Which threat to her independence will she be eliminating?

a. self-interest threat
b. self-review threat
c. familiarity threat
d. advocacy threat

18. Jae Williams, CA lives in the same neighbourhood as one of her major clients. She and her
children are involved in the Lord Reading Yacht Club, as are many of her client’s
management employees. How would her independence threat best be described?

a. self-interest threat
b. self-review threat
c. advocacy threat
d. none of these

19. Shayna Kirschfield audits a company that has market capitalization of $20,000,000. There is
also a requirement that the partners in her firm be rotated every seven years and the audit
committee must pre-approve all services provided to the client by Shayna’s firm. What kind
of client is this?

a. small business
b. diversified
c. reporting issuer
d. partnership

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20. When Joe Girardi, CA tried to collect last year’s audit fees, he was told that he would receive
the fees for the previous year and the current year upon finishing this year’s work and
issuing a “clean” audit opinion. This was non-negotiable and he was told that if he did not
want to go along with it, the client would get another auditor. When he decided to leave his
client, what threat to his independence did he mitigate?

a. self-interest threat
b. self-review threat
c. advocacy threat
d. none of these

21. The firm of McMaster and Martin, CA’s is concerned that its client’s current corporate
culture may have an impact on the firm’s independence. What kinds of safeguards can the
client introduce or create to reduce the threat to independence?

a. introduce appropriate corporate governance mechanisms such as the establishment

of an audit committee
b. ensure that the responsibility for the appointment and removal of an auditor rests
with independent directors on the audit committee or the board
c. both a and b
d. none of the above

22. When the external auditors perform work they are responsible for auditing the financial
statements. Which users are the auditors least likely to deal with in fulfilling their duties?

a. executive directors of the board

b. audit committee of the board

c. shareholders

d. internal auditors

23. Brenda Beauchamp withdrew from a client engagement. The client sued her for not fulfilling
the understanding in the engagement letter and can establish that Brenda owed him a duty
of due care. How can this be done using legal means?

a. the client can sue the auditor for breach of contract

b. the client can claim that the auditor failed to take reasonable care in the
performance of the audit
c. both a and b
d. none of the above

24. Rob Wood has reviewed the engagement letter his firm has prepared for a client. Which of
these elements would he be surprised to find?

a. unrestricted access to persons within the entity in order to obtain audit evidence

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 b. references to Canadian generally accepted auditing standards

c. management’s responsibilities

d. previous year’s internal control issues

25. Which of the following is a fundamental principle of professional ethics?

a. confidentiality
b. objectivity
c. integrity
d. all of the above

26. Professional behaviour refers to the obligation that all members of the professional bodies:
a. ensure that they do not harm the reputation of the accounting profession.
b. not allow their personal feelings or prejudices to influence their professional
judgment.
c. refrain from disclosing information to people outside of their workplace that is
learned as a result of their employment.
d. be straightforward and honest.

27. Objectivity refers to the obligation that all members of the professional bodies:
a. be straightforward and honest.
b. refrain from disclosing information to people outside of their workplace that is
learned as a result of their employment.
c. not allow their personal feelings or prejudices to influence their professional
judgment.
d. ensure that they do not harm the reputation of the accounting profession.

28. Auditor independence is:

a. defined as acting with integrity, objectivity and professional scepticism and
essential when complying with the ethical principles to act with integrity and
objectivity.
c. both a and b.
d. not fundamental to every audit.

29. Independence in appearance is:

a. the ability to act with integrity, objectivity and professional scepticism.
b. the belief that independence of mind has been achieved.
c. the ability to make a decision that is free from bias, personal beliefs and client
pressures.
d. also referred to as actual independence.

30. Threats to the independence of auditors include:

a. familiarity threats.
b. self-interest threats.

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 c. advocacy threats.
d. all of the above.

31. A self-interest threat refers to the threat that can occur when an accounting firm or its staff:
a. is threatened by the client's staff or directors.
b. has a financial interest in an audit client.
c. needs to form an opinion on their own work or work performed by others in the
firm.
d. acts on behalf of its assurance client.

32. Which of the following is an example of a familiarity threat to independence?

a. a bank account held with the client
b. performing services for the client that are then assured
c. both a and b
d. a former partner of the assurance firm holding a senior position with the client

33. What type of threat to independence arises when an accounting firm acts on behalf of its
assurance client?
a. advocacy threat
b. self-interest threat
c. intimidation threat
d. self-review threat

34. Intimidation threats to independence include:

a. the threat that that the client will use a different assurance firm next year.
b. a close business relationship with the client.
c. representing the client in a legal dispute.
d. preparing information for the client that is then assured.

35. Safeguards to independence are created by:

a. accounting firms.
b. the profession, legislation or regulation.
c. clients.
d. all of the above.

36. An example of a safeguard to independence created by accounting firms is:

a. the establishment of a code of ethics.
b. legislation that requires that an auditor be independent.
c. the existence of client acceptance and continuation procedures.
d. the establishment of an audit committee.

37. Having policies and procedures to ensure the quality of an accounting firm's service is an
example of a safeguard to independence created by:
a. the client's audit committee.

24
 b. the Canada Business Corporations Act.
c. the client's board of directors.
d. None of the above.

38. The main recipients of the financial statements and the attached audit report are
acknowledged as:
a. the board of directors.
b. the shareholders or members.
c. the audit committee.
d. the provincial stock exchanges.

39. Examples of board committees include the:

a. risk committee.
b. nomination committee.
c. compensation committee.
d. all of the above.

40. It is the responsibility of the board of directors to:

a. ensure that the financial statements are fairly presented.
b. provide an opinion on the fair presentation of the financial statements.
c. direct the auditors to audit specific financial statement accounts.
d. none of the above.

41. Executive directors are:

a. part of the company's management team.
b. full-time employees of the company.
c. not members of the company's board of directors.
d. a and b.

42. Management failed to put in a system of adequate internal controls. The public accounting
firm uncovered the weakness, but did not report it to the Board members of the company.
What kind of liability, if any, would the auditors be exposed to?
a. breach of contract
b. contributory negligence
c. a and b
d. no liability

43. The principles established by Justice Moffitt in the Pacific Acceptance case do not include:
a. auditors are watchdogs but not bloodhounds.
b. auditors must properly document procedures used.
c. auditors have a duty to use reasonable skills and care.
d. auditors must audit the whole year.

44. Under tort law, to prove that an auditor has been negligent the plaintiff must establish:
a. there was a breach of the duty of care.

25
 b. a loss was suffered as a result of the breach of duty of care.
c. a duty of care was owed by the auditor.
d. all of the above.

45. Auditors can avoid litigation by:

a. ensuring compliance with ethical regulations.
b. meeting with the client's nomination committee to discuss any significant audit
issues.
c. training their staff and regularly updating their knowledge.
d. a and c.

46. An auditor's assessment of their client's integrity would not include:

a. whether the auditor has sufficiently competent staff to complete the audit.
b. the client's attitude to audit fees and its willingness to pay a fair amount.
c. the client's attitude to risk exposure and management.
d. the reputation of the client and its management.

47. The final stage in the client acceptance and continuance decision process involves:
a. the auditor obtaining a management representation letter from the client.
b. the auditor preparing an independence declaration statement.
c. the client's audit committee meeting with the auditor.
d. the preparation of an engagement letter.

Q: Having policies and procedures to ensure the quality of an accounting firm's service is an example
of a safeguard to independence created by:

Ans- no Response is correct

Q: The main recipients of the financial report and the attached audit report are acknowledged as

Ans- The Shareholders or members

Q: Under tort law, to prove that and auditor has been negligent the plaintiff must establish:

Ans- a duty of care, a loss suffered, breach of duty of care (all responses)

Q: According to the ASX Corporate Governance Council, an audit committee should

Ans- Consist of a majority of independent directors.

Q: The main recipients of the financial report and the attached audit report are acknowledged as:

Ans- The Share Holders or members

Q: Which of the following was an observation or recommendation by Justice Owen in the HIH Royal
Commission Report

Ans- An independent and objective audit, conducted with an appropriate degree of professional

26
skepticism is required.

Q: Professional competence refers to the to the members of a professional body

Ans- Maintain there level of knowledge and skill required by the professional body

Q: If auditors identify risk factors that indicate that the going concern assumption is in doubt, they
will:

Ans – Undertake procedure to gather evidence regarding each risk factor.

Q: Which of the following is an example of a misappropriation of assets fraud?

Select one:
Ans- Unauthorized discount or refund to customers.

Q: An auditor is usually most concerned with which of the ASX Corporate Governance Council's
principles?

Ans- Safeguard integrity and financial reporting

Q:The ASX Corporate Governance Council's Principle 2 'Structure the board to add value' includes
which of the following recommendations?

Ans- The chair should be, the board should be ( both response)

Q: Preliminary risk identification can be affected by

Ans- Fraud risk & corporate governance

Q: Which of the following is not an example of a risk when a client installs a new IT system

Ans- The client has inappropriate procedure of selecting new IT system

Q: If auditors believe there is a risk that expenses incurred before year-end will be excluded from the
current year's expenses, they will:

Ans -Trace transaction recorded close to year-end to source documentation.

Q: When gaining an understanding of their client, at which level do auditors not usually consider the
relevant issues?

Ans- Audit committee level

Q: Opportunities to perpetrate a fraud include all the following except:

Ans –

18. Planning an audit of a financial report requires that an auditor plan their audit to
reduce audit risk to an acceptable low level. Audit risk can be defined as;

a. The risk that the auditor does identify the material misstatements

27
 *b. The risk that the auditor expresses and inappropriate opinion at the
conclusion of the audit
c. That fraud exists in the accounts and the client is aware that the fraud
exists
d. That sufficient appropriate evidence cannot be gathered to form an opinion
of the truthfulness of the financial statements

19. The execution stage of an audit involves:

a. evaluating the results of the detailed testing and forming an opinion on the truth
and fairness of the client's financial report
b. the assessment of the audit firm's quality control procedures
*c. the performance of detailed tests of controls and substantive testing of transactions
and accounts
d. gaining an understanding of the client

20. Preliminary risk identification can be affected by:

a. fraud risk
b. corporate governance
*c. Both a and b
d. None of the above

21. When gaining an understanding of their client, at which level do auditors not usually
consider the relevant issues?

*a. audit committee level

b. economy level
c. entity level
d. industry level

22. Which of the following is an example of information used by auditors in gaining an

understanding of a client at the entity level?

a. The level of competition in the client's industry

*b. Whether the client is an importer or exporter of goods
c. The client's ability to withstand currency fluctuations
d. The level of government support in the client's industry

23. In assessing the client's relationship with its employees, the auditor will consider:

a. The level of unionisation among the workforce

b. The attitude of staff to their employer
c. How well a client pays its employees
*d. All of the above

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24. Which of the following statements regarding the level of demand for the goods sold or
services provided by companies is correct?

*a. If a client's products or services are seasonal, this will affect revenue flow
b. If a client operates in an industry subject to changing trends, the client does not risk
inventory obsolescence
c. If a client's products or services are seasonal, this will not affect revenue flow
d. When a product or process is subject to technological change, there is never a risk
that the client will be left behind by its competitors

25. Red flags that auditors can use to alert them to the possibility that a fraud may have
occurred include:

a. Strong internal controls

b. Routine transactions
*c. A high turnover of key employees
d. Effective internal auditing staff

26. When assessing fraud risk, an auditor will adopt an attitude of:

a. Confidentiality
*b. Professional scepticism
c. Belief in management
d. None of the above

27. Which of the following is an example of a misappropriation of assets fraud?

*a. Unauthorised discounts or refunds to customers

b. Inappropriate application of accounting principles
c. Unrecorded liabilities
d. improper asset valuations

28. When assessing the risk of fraud, an auditor can consider:

a. Attitudes and rationalisation to justify a fraud

b. Incentives and pressures to commit fraud
c. Opportunities to perpetuate a fraud
*d. All of the above

29. Attitudes and rationalisation to justify a fraud include:

a. Significant related party transactions

*b. An excessive focus on profit maximisation
c. A significant decline in demand for the client's products or services
d. A high volume of transactions close to year-end

30. The going concern assumption is made when it is believed that:

29
 a. A company will become insolvent within the next accounting period
b. The board of directors does not believe the company's financial report presents a
true and fair view
*c. A company will remain in business for the foreseeable future
d. A company is a separate legal entity

31. If auditors identify risk factors that indicate that the going concern assumption is in doubt,
they will:

*a. Undertake procedures to gather evidence regarding each risk factor

b. Refuse to continue as the auditor of their client
c. Report the client to the Australian Taxation Office
d. Reduce the extent of further audit testing that they undertake

32. Which of the following is not an example of a mitigating factor that reduces the risk that the
going concern assumption may be in doubt?

a. The ability to raise additional funds via borrowings

b. A letter of guarantee from a parent company
c. The ability to sell an unprofitable segment of the business
*d. Significant rapid increase in competition

33. Corporate governance means:

a. the viability of a company to remain in business for the foreseeable future

*b. the rules, systems and processes within companies used to guide and control them
c. an intentional act through the use of deception to obtain an unjust or illegal
advantage
d. the processes used by a client when finalising the accounts for an accounting period

34. The ASX Corporate Governance Council's Principle 2 'Structure the board to add value'
includes which of the following recommendations?

a. The chair should be an independent director

b. The board should establish a nomination committee
*c. a and b
d. None of the above

35. The 'if not, why not' approach of the ASX Corporate Governance Council to its
recommendations requires companies to:

*a. Disclose whether they have complied with the principles and recommendations
b. Establish an audit committee
c. Report to ASIC any breaches by their auditor of the Code of Ethics
d. Have a majority of the board as independent directors

36. An auditor is usually most concerned with which of the ASX Corporate Governance Council's
principles?

30
 a. Respect the rights of shareholders
*b. Safeguard integrity in financial reporting
c. Structure the board to add value
d. Remunerate fairly and responsibly

37. Risks associated with information technology include;

a. Loss of data
b. Errors in programs
c. Unauthorised access to computers
*d. All of the above

38. Unauthorised access to a company's data can occur when:

a. Inadequate backups of data are maintained

*b. There are poor password protection procedures
c. Computer programs are tested thoroughly
d. There are sufficient security procedures

Q: Auditors can assess the adequacy of their client's closing procedures by

Ans- checking the accuracy & looking at (Both Answers)

Q: Which of the following are relevant when gaining an understanding of the client at the economy
level?
Ans –

Q: Which of the following is not an example of a risk when a client installs a new IT system?

Ans-

Q: Planning an audit of a financial report requires that an auditor plan their audit to reduce audit risk
to an acceptable low level. Audit risk can be defined as;

a. The risk that the auditor does identify the material misstatements
*b. The risk that the auditor expresses and inappropriate opinion at the
conclusion of the audit
c. That fraud exists in the accounts and the client is aware that the fraud
exists
d. That sufficient appropriate evidence cannot be gathered to form an opinion
of the truthfulness of the financial statements

Q: Control risk is:

Ans- the risk that a client system of internal controls will not prevent or detect a material
misstatement

Q: An audit strategy:

Ans-involves determining the amount of time to be spent testing the clients internal control,

31
conducting detail substantive, testing and sets the scope, timing and direction of the audit.

Q: Which of the following statements is correct about audit risk

Ans – all responses

Q: An audit strategy will include increased reliance on tests of controls when:

Ans- when inherent risk and control risk are low

Q: Which of the following statements about materiality is incorrect

Ans- information is considered material if it has no impact on the decision-making process of

financial report users.

Q: by assessing control risk as high, an auditor has determined that their client's system of internal
controls:

Ans: is unlikely to be effective in mitigating inherent risk identified

Q: As a rule of thumb which of the following items would be considered immaterial?

Ans- None of the above

Q: A transaction walkthrough involves:

Ans – Tracing a transaction through a client’s accounting system

Q: the audit strategy for a client with high inherent risk and high control risk will include:

Ans- No or very limited tests of control

Q: In conducting analytical procedures, which of the following information sources are not generally
considered to be reliable?

Ans- information generated by an accounting system with ineffective internal control

When gaining an understanding of the client, the auditor will identify their geographic
location of the client because:
- the auditor will need to visit the various locations to assess processes and procedures at each
site
- the auditor will plan to use staff from affiliated officers to visit overseas locations
- more spread out clients are harder to control
Which of the following are relevant when gaining an understanding of the client at the economy
level:

A self-interest threat arises when: the auditor owns shares in the client.
A self review threat arises when: the auditor performs services for the client that are then subject of
the assurance engagement

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The purchase of a new off the shelf program reduces the risks as: There is an ease in adapting the
software for the companies reporting needs.
When gaining an understanding of the clients sources of financing the auditor: will assess if the
client is meeting interest payments when they are due
When gaining an understanding of the client at the industry level, the auditor will: consider
the level of demand for the goods provided by companies in the industry
Which of the following are relevant when gaining an understanding of the client at the economy
level: Level of competition.

33