Deck 4: Overview of Elements of the Financial Report Audit Process

Question 1

Original accounting data comprises:

A)the basic data related to entity transactions.
B)information contained in the financial report.
C)depreciation and amortisation of the entity's assets.
D)all entries made in an entity's general ledger.

Answer 1

A

Question 2

Tracing is used primarily to test which of the following assertions about classes of transactions?

A)Occurrence.
B)Completeness.
C)Cut-off.
D)Classification.

Answer 2

B

Question 3

Your audit client is under intense pressure to meet an earnings target.Which transaction assertion for purchases is most at risk?

A)Occurrence.
B)Completeness.
C)Classification.
D)Accuracy.

Answer 3

B

Question 4

In testing the existence assertion for an asset, an auditor ordinarily works from the:

A)potentially unrecorded items to the financial report.
B)financial report to the potentially unrecorded items.
C)supporting evidence to the accounting records.
D)accounting records to the supporting evidence.

Question 5

Which of the following items is an example of professional scepticism?

A)Determining a low level of materiality.
B)Determining a high level of risk.
C)Being alert to conditions that may indicate risks of fraud.
D)All of the answers given are correct.

Question 6

Which of the following audit objectives relates primarily to the financial report assertion of valuation and allocation?

A)Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.
B)Inventory quantities include all products, materials and supplies owned by the company that are in transit.
C)Slow-moving and obsolete items included in inventories are properly identified.
D)Inventories exclude items billed to customers or owned by others.

Question 7

When reviewing a loan agreement to ascertain whether the bank's security over any of the client's assets has been included in the financial report, the audit assertion being achieved is:

A)valuation and allocation.
B)completeness.
C)presentation and disclosure-accuracy and valuation.
D)presentation and disclosure-completeness.

Question 8

Your audit client is a retailer that sells some of its own merchandise and a large proportion of merchandise held on consignment from suppliers.Which account balance assertion for inventory would this cause to be most at risk?

A)Existence.
B)Completeness.
C)Rights and obligations.
D)Valuation and allocation.

Question 9

Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations?

A)Inventories are properly classified in the statement of financial position as current assets.
B)Inventories exclude items billed to customers or owned by others.
C)Slow-moving and obsolete items included in inventories are properly identified.
D)Inventory quantities include all products, materials and supplies owned by the company.

Question 10

Vouching is used primarily to test which of the following assertions about classes of transaction?

A)Occurrence.
B)Completeness.
C)Authorisation.
D)Classification.

Question 11

Which of the following is not a financial report assertion?

A)Inspection.
B)Rights and obligations.
C)Valuation and allocation.
D)Existence.

Question 12

This is your first audit of Storm Ltd.During the initial planning you have discovered that the client lacks receiving reports and a policy as to the timing within which to record purchases.You have also observed that there are many adjusting entries to accounts payable, which is a material balance.The audit assertion most at risk when auditing accounts payable is:

A)existence.
B)valuation and allocation.
C)completeness.
D)rights and obligations.

Question 13

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?

A)Comparing a sample of shipping documents to related sales invoices.
B)Reviewing a standard bank confirmation.
C)Confirming a sample of recorded receivables by direct communication with the debtors.
D)Observing the client's distribution of payroll cheques.

Question 14

As part of accounts payable testing, an auditor reviews cash payments made post balance date.This is done mainly to gain evidence about which assertion?

A)Valuation and allocation.
B)Rights and obligations.
C)Completeness.
D)Existence.

Question 15

Which audit assertion relates to ensuring that all recorded sales are valid?

A)Existence.
B)Completeness.
C)Occurrence.
D)Accuracy.

Question 16

You are concerned about whether all sales have occurred.The procedure that will be most effective in verifying this assertion is:

A)selecting a sample of invoices and vouching them to delivery dockets.
B)selecting a sample of customers' orders and tracing them to delivery dockets.
C)checking the sequence of delivery dockets.
D)selecting a sample of delivery dockets and tracing them to invoices.

Question 17

Who is responsible for the preparation of the financial report?

A)Auditor.
B)Management.
C)Both auditor and management.
D)None of the answers given are correct.

Question 18

Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock sheets helps address which of the following assertions in respect of inventory?

A)Completeness.
B)Valuation and allocation.
C)Existence.
D)Rights and obligations.

Question 19

Which of the following audit objectives relates primarily to the financial report assertion of presentation and disclosure-classification and understandability?

A)Inventories are included in the statement of financial position as current assets.
B)Inventories exclude items billed to customers or owned by others.
C)Inventories are included in the statement of financial position at the lower of cost and net realisable value.
D)Inventory quantities include all products, materials and supplies owned by the company that are in transit.

Question 20

Which of the following tests would involve the exercising of professional judgment?

A)Assessing the appropriateness of the estimate of the provision for doubtful debts.
B)Obtaining a bank confirmation to support the cash at bank figure.
C)Checking the calculations on a sales invoice.
D)All of the answers given are correct.

Question 21

Your audit client is under intense pressure to meet an earnings target.Which audit procedure are you most likely to use when auditing purchases?

A)Vouching.
B)Tracing.
C)Recalculation.
D)Confirmation.

Question 22

Evidence is reliable if it:

A)signals the true state of an assertion.
B)applies to the period being audited.
C)relates to the audit objective being tested.
D)corroborates management's assertions.

Question 23

The weakest form of audit evidence among the following is:

A)a letter of representation from management.
B)confirmation of an inter-company receivable from a related company.
C)a letter of representation from the client's solicitors.
D)a bank statement.

Question 24

The following statements were made in a discussion of audit evidence between two auditors.Which statement is not valid concerning audit evidence?

A)'I am seldom convinced beyond all doubt with respect to all aspects of the reports being examined.'
B)'I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence.'
C)'I evaluate the degree of risk involved in deciding the kind of evidence I will gather.'
D)'I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it.'

Question 25

Which of the following statements concerning evidence is correct?

A)Appropriate evidence supporting management's assertions must be convincing rather than merely persuasive.
B)A client's accounting data cannot be considered sufficient audit evidence to support the financial report.
C)The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
D)Effective internal control contributes little to the reliability of the evidence created within the entity.

Question 26

Most of the independent auditor's work in formulating an opinion on a financial report consists of:

A)obtaining an understanding of the internal control.
B)obtaining and examining audit evidence.
C)examining cash transactions.
D)comparing recorded accounts with assets.

Question 27

Which of the following presumptions is correct about the reliability of audit evidence?

A)Information obtained indirectly from outside sources is the most reliable audit evidence.
B)To be reliable, audit evidence should be convincing rather than persuasive.
C)Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D)An effective internal control system provides more reliable audit evidence than does an ineffective internal control system.

Question 28

Which of the following factors is most important in determining the appropriateness of audit evidence?

A)The reliability of the evidence in meeting the audit objective.
B)The sampling method used by the auditor.
C)The quantity of the evidence obtained.
D)The objectivity of the auditor gathering the evidence.

Question 29

An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of details usually is determined by the:

A)availability of data aggregated at a high level.
B)relative effectiveness and efficiency of the tests.
C)timing of tests performed after the balance date.
D)auditor's familiarity with industry trends.

Question 30

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must:

A)be well documented and cross-referenced in the audit documents.
B)be based on sources that are considered reliable.
C)bear a direct relationship to the audit objective.
D)be of a large enough quantity to enable the auditor to form an opinion.

Question 31

In the context of an audit of a financial report, substantive tests are audit procedures that:

A)may be eliminated under certain conditions.
B)are designed to discover significant subsequent events.
C)may be either tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures.
D)will increase proportionately with the auditor's reliance on internal control.

Question 32

Audit evidence can come in different forms with different degrees of persuasiveness.Which of the following is the least persuasive type of evidence?

A)Documents mailed by outsiders to the auditor.
B)Correspondence between the auditor and suppliers.
C)Sales invoices inspected by the auditor.
D)Calculations made by the auditor.

Question 33

Auditors can eliminate engagement risk:

A)under no circumstances.
B)by establishing policies for client acceptance and continuance.
C)by lowering audit risk.
D)by lowering materiality.

Question 34

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist is:

A)audit risk.
B)detection risk.
C)control risk.
D)inherent risk

Question 35

To be appropriate, evidence must be both:

A)reliable and well documented.
B)reliable and relevant.
C)useful and independent.
D)extensive and timely.

Question 36

Which of the following statements relating to the appropriateness of audit evidence is always true?

A)Evidence gathered by an auditor from outside an entity is reliable.
B)Accounting data developed under a satisfactory internal control system are more relevant than data developed under unsatisfactory internal control conditions.
C)Oral representations made by management are not valid evidence.
D)Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

Question 37

In a financial report audit, which of the following procedures is a substantive test of transactions?

A)Testing for evidence of approval of invoices.
B)Testing recorded sales with supporting delivery dockets.
C)Confirming debtors' accounts.
D)Comparing this year's balance with the previous year.

Question 38

Which of the following is the least persuasive documentation in support of an auditor's opinion?

A)Schedules of details of physical inventory counts conducted by the client.
B)Documentation in the audit working papers of inferences drawn by the auditor from analytical ratios and trends.
C)Notation of experts' conclusions documented in the auditor's working papers.
D)Lists of negative confirmation requests for which the auditor received no response.

Question 39

Auditors are most likely to use focused audit procedures to examine:

A)routine transactions.
B)low-risk assertions.
C)only the rights and obligations assertion.
D)high-risk assertions.

Question 40

The risk that, due to the application of an inappropriate audit procedure, an auditor will conclude that a material error does not exist in an account balance when, in fact, such error does exist is referred to as:

A)sampling risk.
B)control risk.
C)non-sampling risk.
D)inherent risk.

Question 41

The situation and circumstances can dictate the level of certain risks no matter what the auditor does.However, the auditor is always able to decide to reduce one of the following risks:

A)Control risk.
B)Risk of management fraud.
C)Detection risk.
D)Inherent risk.

Question 42

Your preliminary audit plan for Astro Ltd states that planning materiality is set at one per cent of total assets.This planning materiality amount:

A)will need to be used for evaluation at the end of the engagement to judge the overall presentation of the financial report, because that was the level used to set the scope of testing.
B)should not be revised in mid-audit.
C)may be revised based on the results of audit tests and new information as the audit progresses.
D)is appropriate for planning, but the evaluation materiality amount must be based on a percentage of revenue.

Question 43

Which of the following best describes the concept of audit risk?

A)The risk of the auditor being sued because of association with an audit client.
B)The risk that the auditor will provide an unmodified opinion on a materially misstated financial report.
C)The overall risk that a material misstatement exists in the financial report.
D)The risk that auditors use audit procedures that are inappropriate.

Question 44

All of the following auditing procedures are substantive tests except:

A)analytical procedures.
B)tests of approvals on invoices.
C)vouching of sales transactions to delivery dockets.
D)confirmation of bank balances at year-end.

Question 45

Inherent risk and control risk differ from detection risk in that they:

A)arise from the misapplication of auditing procedures.
B)may be assessed in either quantitative or non-quantitative terms.
C)exist independently of the financial report audit.
D)can be changed at the auditor's discretion.

Question 46

Which of the following procedures would be least likely to be included in an auditor's test of controls?

A)Observation.
B)Enquiry.
C)Confirmation.
D)Inspection.

Question 47

Which of the following would an auditor be most likely to use in determining the preliminary judgment about materiality?

A)The entity's annualised interim financial statements.
B)The contents of the management representation letter.
C)The results of the internal control questionnaire.
D)The anticipated sample size of the planned substantive tests.

Question 48

Engagement risk is:

A)the risk of issuing an incorrect auditor's opinion.
B)the auditor's risk of loss from events arising in connection with the financial report audited and reported upon.
C)the overall risk of material misstatements.
D)the risk of entity financial failure.

Question 49

As the acceptable level of detection risk decreases, an auditor may change the:

A)substantive tests of details to substantive analytical procedures.
B)nature of substantive tests from less effective to more effective procedures.
C)number of tests of controls.
D)assessed level of inherent risk to a higher amount.

Question 50

Which of the following relatively small misstatements would most likely have a material effect on an entity's financial report?

A)An illegal payment to a foreign official that was not recorded.
B)A piece of obsolete office equipment that was not retired.
C)A petty cash fund disbursement that was not properly authorised.
D)An uncollectible account receivable that was not written off.

Question 51

Which one of the following statements is correct concerning the concept of materiality?

A)Materiality is determined by reference to guidelines established by the Australian Securities and Investments Commission (ASIC).
B)Materiality depends only on the dollar amount of an item relative to other items in the financial report.
C)Materiality depends on the nature of an item rather than on the dollar amount.
D)Materiality is a matter of professional judgment.

Question 52

As the acceptable level of detection risk decreases, the assurance directly provided from:

A)substantive tests should increase.
B)substantive tests should decrease.
C)tests of controls should increase.
D)tests of controls should decrease.

Question 53

When considering materiality for planning purposes, an auditor believes that misstatements aggregating $10 000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20 000 to materially affect the statement of financial position.Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

A)$10 000.
B)$15 000.
C)$20 000.
D)$30 000.

Question 54

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily:

A)opposite.
B)inverse.
C)direct.
D)unequal.

Question 55

Which of the following tests is intended to detect deviations from prescribed Accounting Department procedures?

A)Substantive tests specified by a standardised audit program.
B)Tests of controls designed specifically for the client.
C)Analytical tests as designed in the industry audit guide.
D)Computerised analytical tests tailored for the configuration of IT equipment in use.

Question 56

As the acceptable level of detection risk decreases, an auditor may change the:

A)timing of substantive tests by performing them at an interim date rather than at balance date.
B)assessed level of inherent risk to a higher amount.
C)timing of tests of controls by performing them at several dates rather than at one time.
D)nature of substantive tests from a less effective to a more effective procedure.

Question 57

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

A)Potential for fraud.
B)The entity is close to violating loan covenants.
C)Firm policy sets materiality at 5 per cent of pre-tax income.
D)A small misstatement that would interrupt an earnings trend.

Question 58

As the acceptable level of detection risk increases, an auditor may change the:

A)assessed level of control risk from less than high to high.
B)assurance provided by tests of controls by using a larger sample size than planned.
C)timing of substantive tests from year-end to an interim date.
D)nature of substantive tests from less effective to more effective procedures.

Question 59

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process.In regard to minimising this risk, the auditor primarily relies on:

A)substantive tests.
B)tests of controls.
C)internal control.
D)statistical analysis.

Question 60

'Dual-purpose tests' is a term used for:

A)tests of controls that address both the design of the control procedures and their operating effectiveness.
B)tests of transactions that include substantive procedures as well as tests of controls.
C)tests that address both balances and transaction classes.
D)tests performed because of client expectations as well as for gathering audit evidence.

Question 61

Audit documents that record the procedures used by the auditor to gather evidence should be:

A)considered the primary support for the financial report being examined.
B)viewed as the connecting link between the accounting records and the financial report.
C)designed to meet the circumstances of the particular engagement.
D)destroyed when the audited entity ceases to be a client.

Question 62

Audit documentation:

A)must be in electronic form.
B)must be only in paper form.
C)is not required, but is strongly recommended.
D)may be in paper, electronic or some other form.

Question 63

Which of the following statements concerning the auditor's use of the work of an expert is correct?

A)If the auditor believes that the determinations made by the expert are unreasonable, only an adverse auditor's opinion may be issued.
B)If the expert is related to the client, the auditor is not permitted to use the expert's findings as corroborative evidence.
C)The expert should be identified in the auditor's report if the auditor has relied on the expert in issuing an unmodified auditor's opinion.
D)The expert should have an understanding of the auditor's corroborative use of the expert's findings.

Question 64

The current file of an auditor's working papers is most likely to include a copy of the:

A)superannuation fund contract.
B)constitution.
C)flowcharts of the internal control activities.
D)bank reconciliation.

Question 65

Audit documentation prepared on audits of publicly-held clients is the property of the:

A)shareholders.
B)auditor.
C)management of the entity being audited.
D)the Australian and Securities Investments Commission.

Question 66

All of the following documents are typically in the current file except:

A)adjusting journal entries.
B)copies of the auditor's report.
C)chart of accounts.
D)copies of minutes of important committee meetings.

Question 67

Which of the following is not a primary purpose of audit working papers?

A)To assist in preparation of the auditor's report.
B)To support the financial report.
C)To provide evidence of the audit work performed.
D)To coordinate the audit.

Question 68

Which of the following is not a factor affecting the independent auditor's judgment as to the quantity, type and content of audit working papers?

A)The need, in the particular circumstances, for supervision and review of the work performed by any assistants.
B)The nature and conditions of the client's records and internal control.
C)The expertise of client personnel and their expected audit participation.
D)The type of financial report, schedules or other information upon which the auditor is reporting.

Question 69

An auditor's working papers will generally be least likely to include documentation showing how the:

A)client's schedules were prepared.
B)engagement had been planned.
C)client's internal control had been understood and the level of control risk assessed.
D)unusual matters were resolved.

Question 70

In planning an audit engagement, which of the following is a factor that affects the independent auditor's judgment as to the quantity, type and content of working papers?

A)The estimated occurrence rate of attributes.
B)The preliminary evaluations based upon initial substantive testing.
C)The content of the client's representation letter.
D)The anticipated nature of the auditor's report.

Question 71

Audit documents record the results of the auditor's evidence-gathering procedures.When preparing audit documents, the auditor should remember that:

A)audit documents should be kept on the client's premises so that the client can have access to them for reference purposes.
B)audit documents should be the primary support for the financial report being examined.
C)audit documents should be considered as a substitute for the client's accounting records.
D)audit documents should be designed to meet the circumstances and the auditor's needs on each engagement.