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MCQ Auditing

Auditing & Assurance I (National University of Ireland Galway)

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1. The auditor is more likely to conduct audit procedures on an account balance (e.g. inventory, or trade receivables) at a date before the
financial year end, when:

a) Control risk is assessed as high.

b) Inherent risk is assessed as high.

c) Planned detection risk is accepted as high.

d) Acceptable detection risk is low.

2. The primary audit objective for the external auditor in completing their audit procedures is to:

a) Confirm that the company’s internal controls are adequate and operating effectively.

b) Confirm the stability and viability of the company.

c) Determine whether or not there is a material misstatement in the financial statements.

d) Ensure that there is no fraud in the company.

3. Which of the following is most likely to be considered to be ethically unacceptable?

a) Receiving a bonus for performing the annual audit of a client by a pre-agreed deadline.

b) The private client advisory division of your firm receiving commissions from a life assurance company when clients purchase life policies
from that company.

c) Operating a “clients funds” bank account where client funds are held in trust pending completion of corporate finance transactions.

d) Making a presentation to the members of the local Chamber of Commerce (Business Support Organization) outlining your firm’s services.

4. Materiality in the context of the audit of financial statements is most correctly defined as:}

a) Any amount that would cause the balance sheet not to balance.

b) Erroneous inclusions, omissions, or misstatements in the financial statements that would influence the economic decision making of the
primary users of the financial statements.

c) Any amount greater than 5% of the Profit before tax.

d) Erroneous inclusions, omissions, or misstatements in the financial statements that would influence the decision making of Management.

5. In terms of an external auditor, the concept of “Professional Scepticism” refers to:

a) The need to always identify the worst possible outcome in the case of uncertainty of audit evidence.

b) The need for the auditor to be aware that users of the financial statements are generally sceptical about “professionals” and what they do.

c) The requirement to have an independent, questioning approach to the information and evidence obtained during the audit.

d) An approach to the efficient administration of the audit.

6. You are an audit senior completing the testing of trade receivables for Audit Client Ltd. You become aware that a credit note issued for
$200,000 for goods returned from a customer before the year end has been incorrectly recorded as a sales invoice to that customer in error.
The cost of the goods returned is $120,000. The figure for inventory in the financial statements has been determined by way of a costed
physical stock count. Assume this is material and ignore any tax effect. What audit adjustment would you propose to management?

a) DR. Revenue Euro 400K, CR. Trade Receivables Euro 400K.

b) DR. Revenue Euro 200 K, CR. Receivables Euro 200K, DR. Inventory Euro 120 K, CR. Cost of Sales Euro 120K

c) CR. Revenue Euro 200 K, DR. Receivables Euro 200K, CR. Inventory Euro 120 K, DR. Cost of Sales Euro 120K

d) DR. Revenue Euro 200 K, CR. Trade Receivables Euro 200K

7. Consider the following scenario: The testing of a random sample of items from the inventory purchase records of Swift Sales Ltd. (an on-
line mail order business), revealed that thirty three purchase invoices from foreign suppliers had an incorrect exchange rate applied when
translating the cost amount for entry to the accounting system. The combined value of the error amounts to $18K. The total purchases for
the year were $1,890K. What would the auditor’s response be?

a) Consider this to be a material error which automatically results in a qualification to the audit report.

b) Consider this to be an inmaterial error and no further work is required.

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c) Ascertain why the error uncured and extend the audit testing to determine if there were further errors.

d) Request the client to post an appropriate adjustment to correct the financial statements and if they accede to the request draw a line under
the issue as no other action is required because the error has been corrected.

8. Consider the following risk selections. Which of the selections are wholly in the control of the auditor?

a) Both inherent risk and control risk.

b) Only control risk.

c) Only detection risk.

d) Both Control Risk and Detection risk.

9. As part of your analytical procedures on the financial statements of Audit Client Ltd. you have identified that the Gross Profit margin has
decreased from 43.2% last year to 34.6% in the current year. Which one of the following could be a valid explanation for this increase?

a) There was a significant change in the mix of products sold.

b) A new product was launched by Audit Client Ltd. during the year. This new product can be sold at a similar price to existing similar product
lines but it is much less expensive to produce.

c) An easing of competition in the market that allowed the company to increase their selling prices for certain product lines.

d) A new production process has led to an increase in raw material/finished product yields.

10. An audit firm has an audit client in the catering business. Which of the following would not be considered a threat to the auditor’s
independence:

a) The engagement partner’s nephew has recently been recruited onto the audit client’s finance team.

b) The engagement partner’s niece used the services of the audit client company to cater for her recent wedding. While she paid the normal
rate for the catering service, she said that she was really pleased with how the day went.

c) The audit firm has kept the same engagement partner in charge of the audit for the past seven years, as he is intimately familiar with the
audit client’s business.

d) One of the partners in the audit firm, who is not in the audit department but in the corporate consulting department of the firm, has advised
the audit client company on pension scheme structuring.

11. Which of the following items, noted during a review of Audit Client Ltd’s board meeting minutes, would not be considered to give rise to
a an increase in audit risk for the current financial year?

a) The terms of business negotiated with a significant new supplier, Gama Ltd, three months before the year end specifies that if Audit Client
Ltd places an agreed level of orders over consecutive six month trading periods they will be entitled to a volume rebate.

b) The Board was presented with a very critical report on the functioning of the Internal Audit department. After some discussion it was agreed
that a new head of Internal Audit should be recruited.

c) It is noted in the minutes that the Sales Director presented a new bonus incentive for the sales team. The new scheme is aggressive in timing
salaries in favour of higher “sales target” bonuses and is expected to drive an increase in sales in what is becoming a more competitive market.
The Board approved the scheme subject to a six monthly review.

d) The warehouse inventory management IT system will need to be replaced to avail of the latest technological efficiencies and a tender
process was approved. The IT manager has been changed with the responsibility of overseeing this development over the next three months
with the tendering process expected to have been launched just before the year end.

12. Which of the following financial statements assertions are most supported by the following control:

Control. – Sequentially pre-numbered “Goods Delevery Notes”, signed by the customer confirming receipt of physical items delivered, are
matached and filed with a print-out of the related sequentially numbered electronic customer “Sales Order Forms”.

a) Completeness of Sales and Trade Receivables.

b) Classification of Sales and Cost of Sales.

c) Completeness of cost of sales.

d) Existence of Inventory and Trade Payables.

13. During the course of an audit, the auditor, as a result of new information, reassesses audit risk the result of which is a reduction in the
acceptable level of detection risk. This means that the auditor should:

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a) The auditor needs to revisit the audit plan and plan to reduce substantive audit procedures in light of the reduction where possible in order
to conduct a more efficient audit.

b) The auditor needs to revisit the audit plan to conduct greater substantive audit procedures as appropriate in light of the reduction.

c) The auditor needs to reassess the level of financial statement materiality and raise it to counter the reduction in the acceptable level of
detection risk.

d) The auditor needs to reassess the level of financial statement materiality and reduce it in line with the reduction in the acceptable level of
detection risk in order to balance the audit risk equation.

8 14. Which of the following sources of audit evidence for the existence assertion of Trade Payables would be considered to be the
strongest?

a) Account statements from supplier at the year end date.

b) Copies of original purchase orders.

c) Filed purchase invoices from the suppliers.

d) Listing of balances in the “purchase ledger” reconciled to the General Ledger.

15. Which of the following factors would need to be considered in assessing if an auditor is independent from an audit client?

a) The integrity of the client’s management team.

b) If any member of the audit firm has recently joined the finance function in the client company.

c) Whether the client has an appropriately constituted “Audit Committee”.

d) Whether the audit has or has not recurring non-audit fee income from this client.

16. What financial statement assertions for inventory of a manufacturing company would be supported by the following information:
Details of post year end sales in terms of volumes by product and revenue.

a) Cut-off.

b) Existence and Completeness.

c) Rights and Obligations and Existence.

d) Value and cut-off.

17. During testing, using a sample of wage payments, of the operation of an internal control over the correct application of income tax rules
for deducting income tax from employee wages, a small number of immaterial errors have been noted. What other procedures might you
perform to close out on this issue?

a) Increase the sample size to determine the extent and frequency of the error throughout the population.

b) Communicate the error to the client’s accountant.

c) Report the error to the Tax Authorities.

c) As the errors are immaterial take no further action.

18. Which of the following is not an appropriate procedure for the auditor to perform when attending a year end inventory count being
undertaken by a client?

a) Agree to share the count responsibilities with the client where the auditor counts a proportion of the inventory and the client the rest.

b) Review a sample of the clients inventory counts and carry out test counts.

c) Gather details of inventory movements before and after the count.

d) Ascertain the details of how the client has overseen the count and allocated responsibilities to their employees involved in the count.

19. Which of the following would be least relevant in obtaining an understanding of the control environment of an audit client?

a) The qualifications and experience of members of the internal audit department.

b) The composition and competencies of the members of the Board.

c) The organisational structure and reporting lines.

d) A complex international customer base.

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20. Which two of the following might be most likely to indicate that an audit client could have a higher than normal “inherent” risk?

a) The identification in the draft annual report of the following business risk together with management’s plans to mitigate that risk: “IT
systems could be the target of a cyber attack”.

b) Recent changes to Senior Management.

c) The company has failed to meet its targeted increase in market share in Germany, one of 6 countries it exports to.

d) The imposition of significant new regulatory requirements that will mean more complex and restrictive production processes.

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