Deck 1: Unit 1-10

Question 1

An entity uses internal control procedures in order to mitigate the risks to which the entity is exposed. Listed below are two internal control procedures which are applicable to an entity's sales and receivables system.
Match each internal control procedure with the risk mitigated from the list below:
-Sales are made to customers who cannot pay
-Sales are not made to existing customers
-Deliveries are not made to bona fide customers
-Customer refuses to pay for goods allegedly not received
-Customer orders not being fulfilled

Answer 1

-Sales are made to customers who cannot pay
-Customer refuses to pay for goods allegedly not received

Question 2

Which one of the following best describes the role of the International Auditing and Assurance Board (IAASB)?
The IAASB is responsible for:

A) Setting auditing standards which are compulsory throughout the world
B) Monitoring auditors to ensure that they comply with auditing standards
C) Investigating and disciplining auditors who fail to comply with auditing standards
D) Setting auditing standards which facilitate the convergence of national and international auditing standards

Answer 2

D

Question 3

List five threats to auditor independence and provide an example of each

Answer 3

-Self-interest threats, which may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member. Example: Insider trading
- Self-review threats, which may occur when a previous judgement needs to be re-evaluated by the accountant originally responsible for that judgement. Example: Auditing accounts prepared by the auditor
- Advocacy threats, which may occur when an accountant promotes a position or opinion to the point that subsequent objectivity may be compromised. Example: Representing a client at a tribunal
-Familiarity threats, which may occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others. Example: Work with small family companies
-Intimidation threats, which may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived. Example: Threatened removal of audit to influence opinion

Question 4

State whether the following statements are true or false in respect of the rules governing audit activity
a-The work of the auditing profession is governed solely by the Companies Act 2006
b-The Financial Reporting Council has the power to discipline auditors who perform their work poorly

Question 5

Which of these is not the function of a Recognised Supervisory Body?

A) Admission of members
B) Disciplining members
C) Setting ethical standards
D) Investigating complaints
E) Reviewing audits of public limited companies to maintain auditing standards

Question 6

Explain the responsibilities of
-the directors
-the auditors
in connection with the preparation and publication of a company's financial statements

Question 7

Which course of action should you follow?
a) You have to decline as it is a definite conflict and is effectively ruled out by the ethical guidelines of your RSB.
b) It is a conflict of interest and there is a danger of being involved in management decision making which is prohibited specifically by the ethical rules. Providing separate teams were used and the internal audit was overseen by another partner it would be possible to take on the work. The external audit team must remain independent of the internal audit team and there must be no communication between them except at arm's length during the course of the audit.
c) It will help the audit by giving you a better insight into the company so could be looked at as an extension of the external audit. You could use the same team and simply amend the external audit programs accordingly.
d) If this was the USA it would be illegal and cases such as Enron demonstrate the dangers of being seen to go soft on the company because of all the lucrative non audit work - best to avoid the whole thing even if it means a rival firm becomes involved with your client.

Question 8

Briefly describe three audit strategies

Question 9

Mautz and Sharaf set out a series of postulates and assumptions on which their theory of auditing was based. Set out in not more than 500words the basis of their approach and the problems which subsequent commentators have indicated with their approach. Note it is not necessary for you to set out the postulates in detail merely use them to indicate points in your answer where necessary.

Question 10

List the five fundamental ethical principles all auditors must abide by

Question 11

Set out the rights and duties of auditors under the Companies Act 2006

Question 12

What are the preconditions for an audit?

Question 13

You have been asked to prepare a presentation on materiality which will provide guidance to members of staff in conducting limited company audits.
Include in your presentation
A definition of materiality and performance materiality
The alternative measures that could be employed to determine a materiality limit for an audit.

Question 14

State the advantages and disadvantages of a framework approach to corporate governance as opposed to a legislative approach

Question 15

State whether the following statements are true or false in respect of external auditors' responsibilities
a-Auditors are responsible for the financial content of the annual accounts
b-Auditors do not have to have absolute assurance that the figures they audit are correct

Question 16

Explain in not more than 500 words the role and function of an audit committee

Question 17

Sparkies has undergone a period of substantial growth following its establishment five years ago by two electricians who pooled their redundancy pay. Because of a lack of accounting expertise within the company it has traditionally looked to its auditors, Sudden Haddock & Co, for accounting services in the preparation of annual financial statements as well as for the statutory audit function.
Sudden Haddock & Co have also provided advice in connection with the company's accounting and internal control systems.
Sudden Haddock & Co is a two partner firm of certified accountants and registered auditors whose clients are mainly sole traders, partnerships and small limited companies. Although Sparkies was originally atypical small company client, its growth over the last five years has meant that it now accounts for approximately 20% of Sudden Haddock & Co's gross fee income and the company has indicated that it may
wish to issue shares on the stock market in the near future.
Required:
Discuss the extent to which it is acceptable and desirable that Sudden Haddock & Co have in the past provided the three services of statutory audit, advice in connection with systems, and accountancy services in the preparation of annual financial statements to Sparkies.

Question 18

Explain in no more than 200 words The Theory of Rational Expectations developed by Professor Limperg

Question 19

What is meant by 'substance over form'?

Question 20

Which of these statements is true?
An audit benefits a company because

A) It reassures the shareholders that the accounts are accurate
B) Makes the management accountable to the shareholders
C) Guarantees that the accounts are free from fraud or error
D) Guarantees that the financial information shown is true and fair

Question 21

Explain the purpose of a 'hot' review and distinguish it from a 'cold' review

Question 22

Explain, in not more than 500 words the auditors' duties with regard to Money Laundering and the steps they must take in respect of client activity

Question 23

List two ways in which analytical procedures can help the auditor in the planning stage of the audit

Question 24

Outline the relationship between audit risk, materiality limits and audit planning