Auditing and Assurance Services
Mock Exam
Course Introduction
Auditing and Assurance Services explores the fundamental principles and practices of auditing within the framework of professional standards. The course covers the process of planning, executing, and reporting on audits of financial statements, with an emphasis on assessing risk, evaluating internal controls, and gathering sufficient, appropriate evidence. Students examine the ethical and legal responsibilities of auditors, as well as current developments in audit technologies and assurance services. Through case studies and practical exercises, learners gain a deeper understanding of how auditors add value by enhancing the credibility of financial information for stakeholders.
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) Completion of Client Evaluation forms is an example of the quality control objective of Ethical Requirements.
A)True
B)False
Answer: False
Q2) Results of compliance audits are typically reported to the Auditor-General.
A)True
B)False
Answer: False
Q3) Which one of the following statements is NOT true about audit reports?
A) They are prepared as the final stage of the audit process.
B) They differ in nature.
C) They communicate the auditor's findings to users.
D) They all follow the same form.
Answer: D
Q4) Since 2004 the Corporations Act has provided for the issuance of auditing standards by the Auditing and Assurance Standards Board.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Auditors legal environment
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Sample Questions
Q1) The auditor's duty to inform management about irregularities regardless of materiality was established in which one of the following cases?
A) WA Chip and Pulp Co
B) Pacific Acceptance
C) AWA
D) Kingston Cotton Mills
Answer: A
Q2) Discuss the purpose of a privity letter and how the auditor should respond to such a request.
Answer: A privity letter is a letter from a third party requesting that the auditor acknowledge the third party's reliance on the audited financial report for decision making.
AGS 1014 advises auditors to do one of the following:
.Provide an unequivocal statement that the audit report is intended for use only by the body of shareholders.
.If the auditor acknowledges responsibility to the specific third party, the auditor should obtain written representation from the third party identifying the scope and nature of the audit and acknowledging the potential inadequacy of the audit report for the third party's purposes.
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Chapter 3: Audit quality and ethics
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Sample Questions
Q1) Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm:
A) deserves to lose the lawsuit.
B) should be asked to defend the quality of the audit.
C) should not be held responsible for the financial loss suffered by others.
D) has failed to follow auditing standards.
Answer: B
Q2) What is auditor independence and why is it so important?
Answer: Independence in auditing means taking an unbiased viewpoint in the performance of audit tests, the evaluation of the results, and the issuance of the audit report.Independence is one of the auditor's most vital characteristics and is fundamental to the principles of integrity and objectivity.The reason that many users are willing to rely on the external auditors' reports as to the truth and fairness of financial statements is their expectation of an unbiased viewpoint.
Q3) To preserve audit independence, the review partner must rotate every 5 years.
A)True
B)False
Answer: True
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Chapter 4: Audit responsibilities and objectives
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Sample Questions
Q1) What is the objective in testing for cut-off?
A) that no transactions of the current period have been delayed and recorded in a future period
B) whether all of the current period's transactions are recorded
C) whether transactions are recorded in the proper period
D) that no transactions from the prior period are included in the current period's balances
Q2) ASA 300 requires an auditor to gain a reasonable understanding of the client's:
A) industry but not business.
B) business and industry.
C) business but not industry.
D) specific entity structure but not its business or industry.
Q3) Which of the following 'general transaction-related audit objectives' is NOT part of the valuation or allocation assertion?
A) accuracy
B) timing
C) completeness
D) classification
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) Distinguish between internal documentation and external documentation as types of audit evidence.Give two examples of each.Which type is considered more reliable?
Q2) Rank the reliability of the following items of audit evidence:
1)a sales invoice issued by the company
2)confirmation of an account receivable balance mailed by and returned directly to the auditor
3)minutes of a board meeting
4)a copy of a signed lease agreement
A) 2, 3, 4, 1
B) 3, 4, 2, 1
C) 2, 4, 1, 3
D) 4, 3, 2, 1
Q3) ASA 500 requires the auditor to obtain sufficient or appropriate evidence to support the opinion issued.
A)True
B)False
Q4) Physical examination is normally more reliable than observation.
A)True
B)False
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Chapter 6: Audit planning and documentation
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Q1) When a successor (new)auditor contacts a company's previous auditor, the predecessor (old)auditor is required to respond to the request for information.
A)True
B)False
Q2) The auditor's primary concern is the risk of material misstatements in the financial statements due to business risk.
A)True
B)False
Q3) A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:
A) control risk.
B) acceptable audit risk.
C) inherent risk.
D) statistical risk.
Q4) ACL is a software package which assists auditors by performing tests on a client's electronic data.
A)True B)False
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Chapter7: Materiality and risk
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Q1) Which one of the following might NOT signal a lack of integrity in management?
A) Frequent disagreements with previous auditors
B) Prior criminal conviction of an assembly line foreman
C) Frequent turnover of key internal audit personnel
D) Frequent turnover of key financial personnel
Q2) How does the amount of evidence change when the auditor reduces planned detection risk?
A) It is indeterminate.
B) It increases.
C) It remains unchanged.
D) It decreases.
Q3) When planned detection risk is high, inherent risk and control risk will also be high.
A)True B)False
Q4) Control risk and the amount of substantive evidence required are directly related; i.e., as control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.
A)True B)False
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Chapter 8: Internal control and control risk
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Sample Questions
Q1) When controls leave no documentary evidence or trail:
A) it is impossible to audit that area of client's system.
B) it is impossible to verify them, so the auditor will have to rely on substantive tests.
C) the only thing available as verification of their effectiveness is inquiry of management.
D) the auditor generally observes them being applied.
Q2) Which one of the following is NOT a control related to safeguarding IT equipment, programs, and data files?
A) access controls
B) physical controls
C) automated internal verification procedures
D) backup and recovery procedures
Q3) Management of public listed entities have to issue a report on the effectiveness of their organisation's internal control system in:
A) the United States.
B) Australia.
C) both Australia and the United States.
D) none of the above
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Chapter 9: Fraud auditing
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Q1) The risk of fraudulent financial reporting is greater for companies:
A) where there is an ineffective audit committee.
B) where greater dispersion of inventories are involved.
C) where significant estimates are involved.
D) all of the above
Q2) Fraud is more prevalent in smaller businesses because it is more difficult to maintain adequate separation of duties.
A)True
B)False
Q3) What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?
Q4) Fictitious transactions usually have:
A) the same level of documentary evidence as legitimate transactions.
B) a lower level of documentary evidence than legitimate transactions.
C) a higher level of documentary evidence than legitimate transactions.
D) no chance of being detected by comparing the level of documentary evidence to those of legitimate transactions.
Q5) What are the three actions management should take to prevent, deter, and detect fraud?
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Chapter 10: The impact of information technology on the audit process
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Q1) Describe four common audit tasks that can be simplified by the use of microcomputers in practice.
Q2) An independent auditor uses generalised audit software (GAS).The second step in using GAS, application design, might include which of the following?
A) Develop a logical approach to extract and manipulate data obtained from the client's records.
B) Design the most useful format and contents of the auditor's GAS reports.
C) Identify and describe the client's data files and the information to which access is desired.
D) all of the above
Q3) Program-oriented CAATs are useful primarily for:
A) tests of balances.
B) tests of controls.
C) analytical review tests.
D) any type of audit testing.
Q4) Discuss the major factors associated with complex IT systems that increase control risk and the likelihood of material misstatements in the financial statements.
Q5) 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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Q1) If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced.
A)True
B)False
Q2) In which stage(s)of an audit can analytical procedures be performed?
A) in conjunction with tests of transactions and tests of details of balances
B) in the completion stage
C) in the planning stage
D) all of the above
Q3) Which one of the following statements is NOT correct?
A) Tests of transactions are often performed several months prior to the balance sheet date.
B) It is common to use analytical procedures at any time during the audit.
C) Tests of details of balances are normally the last tests performed.
D) When controls are not considered effective, or when control deviations are discovered, substantive tests will be eliminated.
Q4) What factors should the auditor consider when assessing whether to perform substantive tests of final balances before the balance sheet date?
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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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Q1) The purpose of substantive tests of transactions is to determine whether:
A) the account balances are accurate.
B) there are monetary errors or irregularities in the transactions.
C) the internal control system is working.
D) the transactions this year are reasonable compared to prior years.
Q2) Which one of the following statements regarding the five types of audit tests in the sales and collection cycle is NOT correct?
A) Analytical procedures are used to test the relationships among the account balances in the cycle, both to each other and to prior years.
B) Tests of details of balances are used to verify ending account balances.
C) Substantive tests of transactions are used both to test the effectiveness of internal controls and to test the dollar amount of these transactions.
D) Tests of controls are used primarily to test the efficiency of internal controls over the five classes of transactions.
Q3) Discuss the purposes of, and differences between, design format and performance format audit programs.
Q4) Discuss what is meant by 'proof of cash receipts' and explain its purpose.
Q5) Explain what a sales return and allowance means.
Page 14
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Chapter 13: Completing tests in the sales and collection cycle:
Accounts receivable
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Q1) The primary purpose of accounts receivable confirmation is to satisfy the:
A) accuracy and cutoff objectives.
B) existence objective.
C) existence and cutoff objectives.
D) existence, accuracy, and cutoff objectives.
Q2) The results of substantive tests of sales and cash receipts transactions are used to determine the level of planned detection risk for each accounts receivable balance-related audit objective.
A)True
B)False
Q3) When the confirmation requests are returned by the customer, in many cases, they are caused by ________ between the client's and the customer's records.
A) valuation disputes
B) timing differences
C) miscommunication
D) none of the above
Q4) Explain two particular matters for the presentation and disclosure assertion for accounts receivable balances.
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) Explain the steps involved in systematic sample selection.
Q2) Which one of the following BEST illustrates the concept of sampling risk?
A) The documents related to the chosen sample may not be available for inspection.
B) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C) A randomly chosen sample may not be representative of the population as a whole on the characteristics of interest.
D) An auditor may fail to recognise errors in the documents examined for the chosen sample.
Q3) In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the:
A) interval.
B) mean.
C) computed upper exceptions rate.
D) tolerable exception rate.
Q4) Directed sample selection is the selection of each item in the sample based on some judgement criteria established by the auditor.Discuss three commonly-used criteria.
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Chapter 15: Audit of transaction cycles and financial statement balances I
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Q1) Which one of the following circumstances would NOT cause an auditor to extend payroll procedures considerably?
A) Payroll significantly affects inventory valuation.
B) There is a possibility of material fraudulent payroll transactions.
C) There is a lack of independent third-party evidence, such as confirmations.
D) There is a deficient internal control structure.
Q2) Why is inherent risk often assessed as relatively high for inventory?
A) potential for obsolescence
B) complex pricing
C) multiple storage locations
D) all of the above
Q3) State five specific balance-related audit objectives for physical inventory observation, and, for each objective, describe one common test of details of balances related to that objective.
Q4) The reliability of the perpetual inventory master file will affect the extent of the auditor's physical examination of inventory.
A)True
B)False
17
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Q1) If internal controls over cash-related transactions are operating effectively, control risk is increased.
A)True
B)False
Q2) The amount of time spent verifying owners' equity is frequently minimal for private companies because:
A) there are few if any transactions during the year for the owners' equity accounts, except for earnings and dividends.
B) the few owners all have access to the books, so the auditor spends more time on accounts like liabilities, which affect outsiders.
C) these companies are so small that it is not necessary to audit the capital section.
D) there is no public interest in these companies.
Q3) State each of the seven specific balance-related audit objectives for property, plant, and equipment additions, and, for each objective, describe one common test of details of balances.
Q4) Discuss the internal controls related to owners' equity that are of concern to the auditor.
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Chapter 17: Completing the audit
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Q1) After the financial statements have been issued, if a 'subsequent discovery of facts occurs' (the auditor becomes aware that some information in the statements is materially misleading), the auditor should ask the client to issue an immediate revision.This is required only if:
A) management makes the discovery and informs the auditor.
B) the discovery of facts relates to developments that occurred after the date of the auditor's report.
C) the facts discovered already existed at the audit report date.
D) the auditor makes the subsequent discovery of facts himself or herself.
Q2) Distinguish between a 'management representation letter' and a 'management letter', and state the primary purpose of each.
Q3) A letter of representation written by the client's management to the auditor formalises resolutions of disagreements about different matters throughout the audit. A)True
B)False
Q4) What is the purpose of a management representation letter?
Q5) State the three conditions required for a contingent liability to exist.
Q6) What is the purpose of a management letter?
Page 19
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Chapter 18: Audit reporting
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Q1) Of the two major categories of scope limitations, (1)those caused by client and (2)those caused by conditions beyond the control of either the client or the auditor, the effect on the auditor's report is:
A) negligible.
B) more serious for (1) than for (2).
C) the same for both.
D) more serious for (2) than for (1).
Q2) The phrase 'auditing standards require that we...plan and perform the audit to obtain reasonable assurance whether the financial report is free of material misstatement' is included in the opinion paragraph of an audit report.
A)True
B)False
Q3) It is usually more difficult to evaluate the materiality of potential errors resulting from a disagreement with management than from a scope limitation. A)True
B)False
Q4) Under what conditions is a disclaimer of opinion issued?
Q5) What are the two main causes of scope limitations?
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Chapter 19: Other auditing and assurance engagements
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Q1) Which one of the following is NOT one of the three phases in a performance audit?
A) planning
B) training and supervising employees
C) evidence accumulation and evaluation
D) reporting and follow-up
Q2) Which one of the following meets the definition of an examination?
A) a compilation of the financial statements
B) an audit of the financial statements
C) a review of the financial statements
D) preparing the annual tax returns
Q3) Independence of the auditor is not relevant to greenhouse gas emission assurance engagements.
A)True
B)False
Q4) Which of the following groups would NOT be involved in a performance audit?
A) public accounting firms
B) government auditors
C) internal auditors
D) none of the above
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