Deck 4: Overview of the Audit Financial Statements

Question 1

An engagement letter contains express or implied terms of the contractual arrangement with the client. Which of the following is not one of those terms?

A) to exercise a reasonable degree of skill and care.
B) to report the duties of the auditor.
C) to be independent of the company.
D) to give an opinion on the truth and fairness of the financial statements of the company.

Answer 1

B

Question 2

The body that prepares the auditing standards that apply in Australia is:

A) the AUASB.
B) the ASIC.
C) the AASB.
D) the IFAC.

Answer 2

A

Question 3

When auditors issue an audit report that expresses an audit opinion what duty are they fulfilling?

A) the duty to use reasonable care and skill.
B) the duty to be independent.
C) statutory duty to report to members and to ASIC.
D) a procedural duty.

Answer 3

C

Question 4

S.294.of the Corporations Act requires a Directors' Declaration. Which of these is not an inclusion in that declaration?

A) that the financial statements and notes comply with accounting standards.
B) that the financial statements and notes are correct and accurate.
C) that the financial statements and notes comply with the Corporations Act.
D) all are included in the declaration.

Question 5

During the course of the audit engagement, the external auditor suggests an adjustment to the financial statements. The suggestion is accepted by management without argument. This suggests that:

A) the external auditor is primarily responsible for the fairness of the financial statements.
B) the internal auditor has assumed responsibility for the changes made.
C) the external auditor has prepared the financial statements.
D) the client has assumed responsibility for the changes made.

Question 6

The Corporations Act requires that auditors are competent. To be suitably qualified the person must:

A) be a member of the ICAA, CPA Australia, the National Institute of Accountants or other prescribed body.
B) hold a degree, diploma or certificate from a university or other prescribed body.
C) be a fit and proper person to be registered as an auditor.
D) all of the above.

Question 7

The Corporations Act does not require the audit of which of the following type of entity, except in specified circumstances?

A) a large proprietary company.
B) a small proprietary company.
C) a public company.
D) a government company.

Question 8

The work of an internal auditor can be used to complement, but not substitute for, the work of the independent auditor. Which of the following factors is not one of the considerations listed by ASA 610 that is relevant in determining the effect of an internal auditor's work on the audit?

A) past communications of the internal auditors with management
B) the organisational status
C) the scope of the work.
D) technical training and proficiency of the internal auditor.

Question 9

Which of the following is not an inherent limitation of an audit?

A) time lapse between the balance date and the presentation of the audit report.
B) audit testing of selective samples.
C) forming professional judgements in highly specialised areas.
D) all are inherent limitations.

Question 10

The primary reasons for the existence of Auditing Standards is:

A) They are necessary to maintain a cost-effective service.
B) They will safeguard the auditor when they are sued.
C) They provide assurance of the minimum standards that should have been employed by the auditor in arriving at the opinion.
D) All of the above

Question 11

In a financial statement audit, the auditor maintains professional relationships with:

A) shareholders and creditors
B) the board of directors and ASIC
C) the audit committee and the internal auditors
D) management and the professional accounting bodies

Question 12

Audit committees are perceived to strengthen the independence of auditors. Which of the following is normally an objective of an audit committee?

A) ensuring that the entity operates in the best interests of the shareholders.
B) assisting the board of directors to discharge its responsibility to exercise due care, diligence and skill.
C) giving advice on the selection of the board of directors
D) all are objectives of an audit committee

Question 13

As a general rule, the auditor is appointed by the shareholders at the annual general meeting. Which of the following is not true concerning the appointment of an auditor?

A) In practice the shareholders generally accept the recommendations of the directors concerning the appointment
B) the appointment stands for 12 months until the next annual general meeting
C) the company is liable to pay reasonable fees and expenses of the auditor.
D) an auditor ceases to hold office after a company goes into liquidation.

Question 14

S. 308.of the Corporations Act requires certain implied conditions to be reported on in an audit report if there is any deficiency, or failure to comply. Which of the following is one of those implied conditions?

A) whether the auditor has obtained all information, explanation and assistance required.
B) whether an audit has been carried out.
C) whether the auditor is independent of the company.
D) whether the financial statements are properly drawn up so as to give a true and fair view of the company's financial affairs.

Question 15

The words that best describes the relationship which should exist between the external auditor and the management of the client company are:

A) adversarial relationship.
B) mutual trust and respect.
C) advocacy of management's position.
D) skeptical vigilance.

Question 16

The most common form of audit opinion is:

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

Question 17

Which of the following are the international auditing standards?

A) international standards on auditing (ISAs).
B) international standards on assurance engagements (ISAEs).
C) international standards on related services (ISRSs).
D) all of the above.

Question 18

Which of the following is a benefit of the ASIC register of company auditors?

A) the register contains a code of ethics that auditors must follow
B) the register provides assurance of the qualification, level of competence and experience of the auditor.
C) the register facilitates disciplinary procedures against auditors
D) all of the above are benefits

Question 19

The removal and resignation of auditors must be :

A) by resolution of the company.
B) with special notice to the ASIC for its consent.
C) both the above.
D) none of the above.

Question 20

Which of these is true concerning the audit report format?

A) The standard format may not reflect fully the complexities involved in the audit process and the decision about the audit opinion.
B) The auditor is guaranteeing the accuracy of the financial statements and solvency of the entity.
C) The auditor is providing early warning signs of company failure.
D) All of the statements are true

Question 21

Identify and explain two of the limitations of audited financial statements.

Question 22

It is regarded as best practice in regard to the composition of audit committees to
A) have an executive director as chairperson.

A) have the internal auditor as a member.
B) have the external auditor as a member
C) none of the above are regarded as best practice in regard to the composition of audit committees

Question 23

The lapse of time between the balance sheet date and the presentation of the audit report:

A) may be up to four months
B) is on average two months
C) is not a problem as the auditor is required to undertake a review of subsequent events
D) is increasing over time because of the greater number of auditing standards that now apply to audits

Question 24

For each of the following items, identify whether they are the responsibility of management or of the auditor.
1.Distribute the annual report to shareholders
2.Deliver the audit report to the entity
3.Obtain and evaluate evidence concerning the financial statements
4.Preparation and presentation of the financial report
5.Designing internal control procedures
6.Express an opinion on the financial statements
7.Selecting appropriate accounting policies
8.Verify financial information is presented in accordance with standards

Question 25

List the requirements necessary for an individual to become a registered auditor.

Question 26

Identify and explain two of the benefits of having audited financial statements.

Question 27

Explain the difference between an unmodified and a modified audit report and list the different types of each.

Question 28

ABC Ltd recently established an audit committee in compliance with the Australian Stock Exchange listing requirements. The committee is made up of Ian Wright, John Small and Todd Smith. Ian is an executive of the company and has worked his way up from a factory worker through to management. Ian is the chairperson of the audit committee. John is not a member of management and is therefore a non-executive director but he does serve on a number of boards. John's background is in accounting and before he became a director he was the CFO of a large corporation for many years. Todd is the chairperson of the board of directors and is an executive of the company. Todd's background is in manufacturing and he has been with the current company for 5.years. The committee has just completed having its formal charter drawn up which details its rights and responsibilities.
Identify the strengths and weaknesses of ABC Ltd's audit committee.

Question 29

For each of the following groups explain the relationship with the auditors and how they may interact.
-The shareholders
-The board of directors and the audit committee
-Internal auditors
-Management

Question 30

Identify and explain two duties of an auditor.

Question 31

An auditor must be registered:

A) by the Financial Reporting Council
B) by the AUASB
C) by the ASIC
D) through CPA Australian, the ICAA or the National Institute of Accountants

Question 32

The Australian Securities Exchange (ASX)

A) requires all listed companies to have an audit committee
B) requires the Top 300 companies to have an audit committee
C) recommends but does not require listed companies to have an audit committee
D) requires all listed companies with a capitalisation of more than $200 million to have an audit committee

Question 33

The group which has the legal responsibility for removal of the auditor is:

A) the board of directors
B) management.
C) the shareholders.
D) the audit committee.