Deck 2: Corporate Governance and Audits

Question 1

Owners want assurances that the representations made by management and the board are accurate and objectively verifiable.

Answer 1

True

Question 2

The CLERP 9 Act was enacted, in part, to address fundamental problems in corporate governance.

Answer 2

True

Question 3

Shareholders require accountability as to how the resources that have been entrusted to management and the board have been used.

Answer 3

True

Question 4

The CLERP 9 Act requires management (both the CEO and CFO) to certify the accuracy of the financial report and provides criminal penalties for materially misstated financial reports.

Question 5

The auditor must not communicate significant audit adjustments to the audit committee.

Question 6

The auditor must communicate whether major issues were discussed with management before the auditor was engaged or whether management has consulted with other audit firms on accounting issues.

Question 7

A company with good governance will have an independent board and audit committee members who take their roles seriously and have sufficient time and resources to perform their work.

Question 8

The recent empirical studies have shown that companies with weaker corporate governance have lower costs of capital superior share price returns compared to companies with good corporate governance.

Question 9

Standards on Review Engagements (ASREs) apply when an auditor is developing and communicating an opinion on interim financial information.

Question 10

The Standards on Assurance Engagements (ASAEs) only apply to audits or reviews of historical financial information.

Question 11

Understanding the US situation is important as all companies incorporated or listed outside of the US need to comply with the requirements of the Sarbanes-Oxley Act 2002.

Question 12

All of the standards start from fundamental principles on how an audit engagement should be planned and conducted and then how the results should be communicated.

Question 13

In order to safeguard the auditor's independence, the CPAA and ICCA issued a revised code of conduct in relation to independence and established an independent body to issue such pronouncements, APESB.

Question 14

An outcome of the Ramsay Report (2002) was the taking up of a recommendation for the Australian Stock Exchange (now ASX) to take responsibility for corporate governance recommendations.

Question 15

The CLERP 9 Act requires the auditor to make an annual declaration, addressed to the board of directors, that the auditor has maintained independence in accordance with the Act and the rules of the professional accounting bodies.

Question 16

The CLERP 9 Act requires the lead engagement or review audit partners participating in audits to rotate off the engagement every five years.

Question 17

The audit committee typically would not review the analysis of the Directors' Report section of the annual report filed with ASIC to determine that discussion therein is consistent with the committee's understanding of operational performance.

Question 18

The internal auditor performs audits of company compliance with company policies and laws, audits to evaluate the efficiency of operations and periodic evaluation and tests of controls.

Question 19

The Audit Committee reviews management's performance and determines their remuneration.

Question 20

The accounting standards (AASBs) provide the framework for the audit opinion formulation process.

Question 21

One purpose of the planning meeting is to assist the auditor to develop an understanding of key accounting issues and assumptions that affect the preparation of the financial statements.

Question 22

The concept of materiality is pervasive and guides the nature and extent of auditing the financial report.

Question 23

If the evidence does not support a fair presentation, the auditor will continue with the audit of the other accounts.

Question 24

Shareholders require accountability from management for:

A) financial performance
B) financial transparency
C) quality of internal controls
D) all of these choices

Question 25

Shareholders provide effective oversight through:

A) auditor appointment
B) approval of major initiatives
C) election of board members
D) all of these choices

Question 26

In response to the corporate failures early in this century the CLERP 9 Act was enacted, in part, to address fundamental problems in:

A) corporate governance
B) internal audit functions
C) manufacturing
D) all of these choices

Question 27

Which of the following should be communicated by the auditor to the audit committee?

A) all deficiencies in internal control
B) all audit adjustments
C) all accounting policies
D) all significant accounting and audit issues

Question 28

The following are the categories of framework pronouncements adopted by the AUASB except:

A) auditing standards (ASAs)
B) generally accepted accounting principles (GAAP)
C) Standards on Review Engagements (ASREs)
D) Standards on Quality Control (ASQC)

Question 29

CLERP 9 Act requires management (both CEO and CFO) to certify:

A) independence
B) honesty
C) competence
D) accuracy of the financial reports

Question 30

The auditing standards are set by various regulators to provide assurance to the public that:

A) audits are conducted in a professional manner
B) misstatements are prevented
C) financial results are clearly communicated
D) all of these choices

Question 31

Specific activities performed by regulatory agencies such as ASIC include the following except:

A) review of filings
B) conducting quality review inspections of audit firms
C) auditing the financial statements to express an opinion
D) monitoring trading activities

Question 32

In the US, SEC Chairman Levitt issued a report citing concerns with the audit process. These concerns included all of the following except:

A) analytical procedures were being used inappropriately to replace direct tests of account balances
B) audit documentation, especially relating to the planning of the audit, was not in compliance with professional standards
C) auditors were ignoring warning signals of fraud and other problems
D) audit firms were thoroughly evaluating internal controls

Question 33

The lead engagement and review partner must rotate every:

A) two years
B) three years
C) four years
D) five years

Question 34

The Board of Directors carry out the following specific activities except:

A) declaring dividends
B) selecting management
C) managing and reviewing operations
D) approving major changes, e.g. mergers

Question 35

Standards are similar in key areas including:

A) planning the audit to minimise risk
B) audit evidence
C) nature of the audit
D) all of these choices

Question 36

The AUASB is under the strategic direction of:

A) FRC
B) ASX
C) ASIC
D) GAAP

Question 37

Following the Ramsay Report (2002) which of the following was recommended for the responsibility for corporate governance recommendations?

A) ASIC
B) CPA
C) ASX
D) IASB

Question 38

The purpose of the planning meeting includes developing an understanding of:

A) materiality
B) the scope of the audit services to be performed
C) management's preparedness
D) all of these choices

Question 39

The development of a detailed audit program is primarily designed to discover:

A) operational efficiencies
B) off-balance sheet transactions
C) fraud
D) material misstatements

Question 40

The auditing standards require the auditor to gather:

A) accounting records
B) official correspondence
C) bank reconciliations
D) sufficient, appropriate evidence

Question 41

Audit programs are based on which following fundamental?

A) Audit procedures reflect a thorough understanding of the underlying assertions.
B) Audit procedures are adjusted for the risk of potential misstatement in the account balance.
C) There are many factors that influence the risk of misstatement.
D) all of these choices

Question 42

Auditor's independence
Discuss the more significant provisions of the CLERP 9 Act provisions that deal with the auditor's independence.