Question 1

Which of the following can be appointed as an external auditor?

Accepted Answer

An external auditor must be an independent, legally recognised qualified accountant to ensure impartiality and adherence to accounting standards. Directors or members of the company, including independent (non-executive) directors, cannot serve as external auditors to maintain audit independence.

Question 2

Testing to determine the extent of reliance that can be placed on the entity's controls is called:

Accepted Answer

Compliance testing is specifically designed to evaluate the effectiveness and reliability of an entity's internal controls, ensuring that they are operating as intended and in compliance with relevant policies and regulations. This contrasts with substantive testing, which focuses on directly testing financial transactions and balances to detect material misstatements.

Question 3

Which of the following is most correct? Assessing the auditor's knowledge of the business, assessing the risk associated with the entity's controls and records, the risk of fraud and performing an analytical review, is:

Accepted Answer

These activities are part of the planning phase of an audit, where the auditor gains an understanding of the business and assesses risks to determine the nature, timing, and extent of further audit procedures.

Question 4

A clean audit report implies that:

Accepted Answer

A clean audit report, also known as an unqualified opinion, indicates that the auditors believe the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of an entity in accordance with the applicable financial reporting framework. It does not guarantee the absence of any fraud or error, nor does it reflect the beliefs of directors or shareholders directly.

Question 5

Which of the following is not correct?

Accepted Answer

Internal auditors often liaise with external auditors to ensure a comprehensive audit coverage and to avoid duplication of efforts. This collaboration can enhance the effectiveness of the audit function within an organization.

Question 6

A 'true and fair view' is one which:

Accepted Answer

A 'true and fair view' means that the financial statements are free from material misstatements, whether due to fraud or error, and provide a reliable representation of the company's financial position, performance, and cash flows, which is essential for informed decision-making by users.

Question 7

When a customer invoice is included in the sales ledger, and it is known that the customer is in liquidation. This in the only entry in relation to this transaction and it is regarded as material. Which audit report would you issue:

Accepted Answer

An "except for" report is issued when the financial statements present fairly in all material respects, except for a material misstatement that does not pervade the financial statements. Including an invoice in the sales ledger for a customer in liquidation without making any provision for bad debt or disclosing the risk could mislead the financial statement users about the company's financial position, warranting an "except for" opinion.

Question 8

A one off fraud involving £1,500 is discovered in a large public limited company. No other issues are uncovered by the audit. The management has taken steps to ensure the fraud does not occur again and you are happy with those steps.
Which audit report would you issue:

Accepted Answer

The fraud is not material to the financial statements of a large public limited company, and management has taken satisfactory steps to prevent recurrence, so a clean report is appropriate.

Question 9

A company that trades predominately in cash was found to have no controls over the cash accounting system. As a consequence, you as auditor cannot verify sales. All other areas are fine and you are happy with them.
Which audit report would you issue:

Accepted Answer

An "Except for" report is issued when the auditor concludes that the financial statements are fairly presented, except for a specific issue. In this case, the inability to verify sales due to lack of controls over the cash accounting system is a significant issue that prevents the auditor from fully verifying the financial statements' accuracy, warranting an "Except for" report.

Question 10

The inventory in a grocery store has been value at sales price. The gross margin is 70%. In all other instances you are happy with the figures in the financial statements.
Which audit report would you issue:

Accepted Answer

The answer of The inventory in a grocery store has...

Question 11

Which of the following would result in a qualified audit report (adverse opinion)?

Accepted Answer

An adverse opinion is issued when the financial statements materially misstate the financial position of the company. The omission of the income statement from the financial statements is a significant omission that would prevent the financial statements from presenting a true and fair view, leading to a qualified audit report (adverse opinion).

Question 12

Which of the following tests would be an example of a compliance test?

Accepted Answer

The answer of Which of the following tests would be...

Question 13

Which of the following reports promotes a 'risk-based' approach to the corporate governance of an entity?

Accepted Answer

The Turnbull Report specifically promotes a 'risk-based' approach to the corporate governance of an entity, focusing on internal control and risk management as integral parts of good governance practices.

Question 14

There are two types of internal control, those controls that detect errors and those controls that prevent errors entering the accounting system. Which of the following is a control that detects errors?

Accepted Answer

Preparing bank reconciliations is a control that detects errors by comparing the company's records to the bank's records, identifying discrepancies between the two.

Question 15

There are two types of internal control, those controls that detect errors and those controls that prevent errors entering the accounting system. Which of the following is a control that prevents errors?

Accepted Answer

Matching purchase invoices with goods received notes is a preventive control measure. It ensures that payments are made only for goods that have been received, thereby preventing errors related to overpayment or payment for undelivered goods.

Question 16

Which of the following statements is correct?

Accepted Answer

External auditors report their findings about the accuracy and integrity of a company's financial statements to its shareholders, ensuring that the financial statements give a true and fair view of the company's financial performance and position.

Quiz 6: Auditing, Corporate Governance and Ethics