Auditing and Assurance Services
Midterm Exam
Course Introduction
Auditing and Assurance Services focuses on the principles, standards, and practices of external and internal auditing. The course covers the audit process, including planning, evidence collection, risk assessment, controls testing, and reporting, as well as the regulatory environment that affects audit practices. Students will learn about the ethical responsibilities of auditors, the application of professional standards, and the role of assurance services in enhancing the reliability of financial information. Emphasis is placed on understanding audit methodologies, evaluating internal controls, identifying fraud risks, and applying critical thinking to audit situations, preparing students for roles in public accounting, internal auditing, or regulatory compliance.
Recommended Textbook
Auditing Assurance Services and Ethics in Australia 10th Edition by Alvin Arens
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Chapter 1: Demand for audit and assurance services
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Sample Questions
Q1) Review and approval of audit programs by the engagement partner is a characteristic of which of the six objectives of quality control?
A) professional development
B) leadership responsibilities
C) engagement performance
D) monitoring
Answer: C
Q2) A strategic system audit approach assists the auditor to:
A) identify risks associated with the financial statements.
B) evaluate audit evidence.
C) determine which areas of the audit to focus on.
D) all of the above
Answer: A
Q3) Information risk increases as business organisations become larger.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Auditors legal environment
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Sample Questions
Q1) A tort is a civil wrong, of which negligence is a good example.
A)True
B)False
Answer: True
Q2) A specific provision of the Corporations Act which could lead to a conflict of interest is the auditor having a loan from the audit client of more than $10,000.
A)True
B)False
Answer: False
Q3) Which one of the following was NOT set out as a test for establishing a duty of care in Al Saudi Banque?
A) reasonableness
B) intention to induce
C) foreseeability
D) proximity
Answer: B
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Chapter 3: Audit quality and ethics
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Sample Questions
Q1) Which one of the following policies and procedures is NOT required by ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information?
A) leadership responsibilities for quality on audits
B) remunerating the auditor fairly and responsibly
C) ethical requirements (including independence)
D) acceptance and continuance of client relationships and specific engagements
Answer: B
Q2) Which one of the following statements about audit committees is NOT correct?
A) Members are selected from a company's board of directors.
B) Ideally, members should be actively involved in company management.
C) They help to keep auditors independent of management.
D) Most have 3-5 members.
Answer: B
Q3) The ASX Corporate Governance Principles do NOT include:
A) remunerating the auditor fairly and responsibly.
B) structuring the board to add value.
C) recognising and managing risk.
D) making timely and balanced disclosure.
Answer: A
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Chapter 4: Audit responsibilities and objectives
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Sample Questions
Q1) Professional scepticism is an attitude that includes a critical assessment of audit evidence and should be applied when planning and performing all aspects of the engagement.
A)True
B)False
Q2) If the auditor were responsible for making certain that all the assertions of management in the statements are correct, then:
A) audits would be much easier to complete.
B) bankruptcies would be reduced to a very small number.
C) audits would not be economically feasible.
D) bankruptcies could no longer occur.
Q3) Expressing an opinion on whether the financial reports are prepared in accordance with an applicable financial reporting framework is the purpose of A) a compilation.
B) a review.
C) a consulting engagement.
D) an audit.
Q4) Discuss the differences between errors, fraud, and illegal acts.Give an example of each.
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Chapter 5: Audit evidence
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Sample
Questions
Q1) The auditor is concerned that a client is failing to bill customers for shipments.An audit procedure that would gather relevant evidence would be to:
A) compare the total of the schedule of accounts receivable with the balance of the accounts receivable account in the general ledger.
B) trace a sample of sales journal entries to the accounts receivable subsidiary ledger.
C) trace a sample of shipping documents to related duplicate sales invoices.
D) select a sample of duplicate sales invoices and trace each to related shipping documents.
Q2) The reliability of audit evidence cannot be improved by testing a larger sample of items.
A)True
B)False
Q3) Analytical procedures are required during the planning and completion phases of all financial statement audits.
A)True
B)False
Q4) What are the benefits to auditors of using computer software?
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Chapter 6: Audit planning and documentation
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Sample Questions
Q1) The current audit files include all audit documentation applicable to the year under audit, including:
A) supporting schedules.
B) the audit program.
C) working trial balance.
D) all of the above
Q2) A company's constitution does NOT usually include rules and procedures for:
A) issuing shares.
B) calling general meetings.
C) appointment and retirement of directors.
D) implementing internal control systems.
Q3) The auditor plans the engagement to keep costs reasonable.This is essential to:
A) minimise legal liability and maintain the firm's good reputation in the business community.
B) help the firm remain competitive.
C) facilitate good client relations.
D) all of the above
Q4) Discuss the purpose of an audit engagement letter.
Q5) What procedures should the auditor use to identify a related-party transaction?
Q6) List the steps in planning an audit.
Page 8
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Chapter7: Materiality and risk
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Sample Questions
Q1) Acceptable audit risk is ordinarily set by the auditor during planning and:
A) varies by each major cycle and by each account.
B) holds constant for each major cycle and account.
C) varies by each major cycle but is constant by account.
D) holds constant for each major cycle but varies by account.
Q2) Materiality and risk are ________ concepts in planning the audit and designing an audit approach.
A) reasonable
B) typical
C) optional
D) fundamental
Q3) Likely misstatements arise from:
A) the auditor's estimate of misstatements.
B) projections of misstatements based on the auditor's tests.
C) projections of misstatements based on the auditor's preliminary assessment of materiality.
D) differences between management's and the auditor's judgement about estimates of account balances.
Q4) Describe the audit risk model and each of its components.
Q5) Discuss how auditors use the audit risk model when planning an audit.
Page 9
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Chapter 8: Internal control and control risk
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Sample Questions
Q1) The auditor's primary objective to obtain an understanding of internal control is that it must provide:
A) reasonable protection against client fraud and defalcations by client employees.
B) an understanding that is sufficient for the auditor to plan the audit adequately.
C) a basis for constructive suggestions to the client for improving the accounting system.
D) a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
Q2) Management's integrity and ethical values include:
A) management's actions to reduce incentives for dishonest acts.
B) communication of entity values and behavioural standards to personnel through policy statements.
C) codes of conduct.
D) all of the above
Q3) List, in order, the steps in the auditor's process of understanding internal control and assessing control risk.
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10
Chapter 9: Fraud auditing
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Sample Questions
Q1) Personal financial obligations create a risk factor relating to:
A) misappropriation of assets.
B) fraudulent financial reporting.
C) both A and B
D) none of the above
Q2) Which of the following has been the most successful method of uncovering fraud?
A) notification by employee
B) notification by external party
C) internal audit
D) anonymous letter/call
Q3) Which of the following is NOT a source of information used to assess fraud risk?
A) responses to auditor inquiries of management about their views of the risks of fraud
B) analytical procedure results obtained during planning
C) information obtained from communications among audit team members
D) all of the above
Q4) Explain how revenue accounts are especially susceptible to fraud.
Q5) What are the sources of information auditors should use when assessing fraud risk?
Q6) Discuss the role internal auditing can play in fraud prevention and detection.
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Chapter 10: The impact of information technology on the audit process
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Sample Questions
Q1) Which one of the following is NOT an application control?
A) processing controls
B) hardware controls
C) output controls
D) input controls
Q2) When auditing a computerised system, an auditor may use the test data approach as an audit tool.This technique:
A) involves introducing simulated transactions into the client's actual application program(s).
B) is a commonly used audit technique for auditing around the computer.
C) is more applicable to independent audits than internal audits.
D) should not involve the actual application programs the client uses throughout the year, since use of the actual programs would contaminate the client's accounting data.
Q3) Which of the following is a function of an embedded audit module approach?
A) Tests data used to test specific controls.
B) Analyses the client data.
C) Uses software to define the content of data records.
D) Inserts an audit module into the client's application system.
Q4) Provide five examples of different IT environments the auditor may encounter.
Page 12
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Chapter 11: Overall audit plan and audit program
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Sample Questions
Q1) Which of the following is NOT part of the methodology used in designing substantive tests of balances?
A) Design and perform analytical procedures.
B) Assess inherent risk.
C) Assess client business risks.
D) Assess control risk.
Q2) Which one of the following statements is False?
A) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures.
B) Analytical procedures emphasise the overall reasonableness of transactions and the general ledger balances.
C) Substantive tests of transactions emphasise the verification of transactions recorded in the journals and then posted in the general ledger.
D) Tests of details of balances emphasise the ending balances in the general ledger.
Q3) Audit programs are never computerised as they are unique to each client.
A)True
B)False
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Chapter 12: Audit of the sales and collection cycle: Tests of controls
and substantive tests of transactions
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Sample Questions
Q1) Which of the following is NOT an example of an internal verification procedure?
A) accounting for numerical sequence of prenumbered documents
B) checking accuracy of document preparation
C) reviewing reports for incorrect items
D) checking for authorisation of transactions
Q2) Tracing an entry from the sales journal to the master file is a posting and summarisation procedure.
A)True
B)False
Q3) Which of the following documents is used to permit the immediate deposit of cash and to improve the control over the custody of assets?
A) cash receipts journal
B) credit note
C) remittance advice
D) sales invoice
Q4) The sales and collections cycle consists of eight business functions.The first four functions result in sales transactions.Discuss each of the remaining four business functions that occur after sales transactions and identify the key documents and records involved in each of those four functions.
14
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Chapter 13: Completing tests in the sales and collection cycle:
Accounts receivable
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Sample Questions
Q1) Discuss the circumstances in which it is acceptable to use negative confirmation requests.
Q2) The auditor should evaluate the qualitative nature of misstatements found in a sample of debtors' confirmations:
A) only for large balances.
B) regardless of the dollar amount.
C) only for related party balances.
D) only for large differences.
Q3) Communication addressed to the debtor requesting confirmation on whether the balance as stated on the communication is correct or incorrect is known as a:
A) negative confirmation.
B) positive confirmation.
C) bank confirmation.
D) management letter.
Q4) Client business risks affecting accounts receivable are considered in the auditor's evaluation of inherent risk.
A)True
B)False
Page 15
Q5) Describe how the auditor tests the rights objective for accounts receivable.
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Chapter 14: Audit sampling
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Sample Questions
Q1) The point estimate, by itself, is NOT an adequate measure of the population misstatement because of:
A) population biases.
B) control risk.
C) sampling error.
D) audit risk.
Q2) While performing a substantive test of details during an audit, the auditor determines that the sample results support the conclusion that the recorded account balance is materially misstated.It is, in fact, NOT materially misstated.This situation illustrates the risk of:
A) assessing control risk too low.
B) assessing control risk too high.
C) incorrect rejection.
D) incorrect acceptance.
Q3) Acceptable risk of assessing control risk too low (ARO)is the auditor's measure of:
A) non-sampling risk.
B) inherent risk.
C) control risk.
D) sampling risk.
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Page 16
Chapter 15: Audit of transaction cycles and financial statement balances I
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Sample Questions
Q1) To BEST ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the:
A) contractual commitments made by the purchasing department.
B) purchase invoices received on or around year-end.
C) purchase cutoff procedures.
D) terms of the open purchase orders.
Q2) A zero balance confirmation
A) is similar to a positive confirmation.
B) involves sending confirmations to all vendors.
C) involves sending confirmations to active vendors whose balance has not been included in accounts payable.
D) involves sending confirmations to all vendors who have not been included in accounts payable.
Q3) When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:
A) payroll and personnel cycle.
B) inventory and warehousing cycle.
C) cash cycle.
D) acquisitions and payments cycle.
17
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Sample Questions
Q1) It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it is normal to verify:
A) all large transactions.
B) all unusual transactions.
C) a representative sample of typical additions.
D) all of the above
Q2) Examining company policies is an example of an audit procedure in auditing accrued liabilities.
A)True
B)False
Q3) Tests for kiting are performed using a list of all bank transfers made within a few days of the balance date.
A)True
B)False
Q4) Most companies are unlikely to have significant client business risks affecting cash balances.
A)True
B)False
Page 18
Q5) Discuss what is meant by kiting, and discuss how it is performed.
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Chapter 17: Completing the audit
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Q1) Which one of the following is NOT a presentation and disclosure objective?
A) completeness
B) rights and obligations
C) cutoff
D) classification
Q2) The management representation letter is prepared on the client's letterhead, addressed to the audit firm, and signed by the chief executive officer and chief financial officer.
A)True
B)False
Q3) If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: either additional evidence must be obtained or a disclaimer of opinion must be issued.
A)True
B)False
Q4) List the five categories of specific matters that should be included in a management representation letter.Include an example from each category.
Q5) What is the purpose of a management letter?
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Chapter 18: Audit reporting
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Sample Questions
Q1) Which one of the following is NOT a condition requiring departure from an unmodified opinion?
A) a materially misstated financial report
B) inability to obtain sufficient appropriate audit evidence
C) both A and B
D) none of the above
Q2) A disclaimer of opinion resulting from a client limitation requires a 'basis' section to describe the limitation.
A)True
B)False
Q3) When a misstatement in the financial report would affect a user's decision but the overall statements are still fairly stated, it would be appropriate to issue:
A) a qualified opinion.
B) an inability to form an opinion.
C) an adverse opinion.
D) an unmodified opinion.
Q4) What are the two main causes of scope limitations?
Q5) What are 'significant uncertainties', and should they always be referred to in the audit report?
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Chapter 19: Other auditing and assurance engagements
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Sample Questions
Q1) Which of the following are the two most important qualities for a performance auditor?
A) independence and competence
B) competence and technical training
C) academic background and sufficient experience
D) personality and appearance
Q2) Independence of the auditor is not relevant to greenhouse gas emission assurance engagements.
A)True
B)False
Q3) It is usually easier for an auditor to evaluate effectiveness in the public sector than the private sector.
A)True
B)False
Q4) The scope section on a special purpose financial report audit is similar to that required for audit reports on general purpose financial reports.
A)True
B)False
Q5) Discuss each of the three broad categories (types)of performance audits.
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