Auditing and Assurance Services
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Course Introduction
This course offers a comprehensive introduction to the principles and practices of auditing and assurance services. It covers the regulatory environment, professional standards, and the ethical responsibilities of auditors. Students learn about different types of audit engagements, evidence gathering techniques, risk assessment, internal controls, and the audit process from planning to final reporting. Emphasis is placed on understanding how auditors provide assurance to stakeholders regarding the fairness and reliability of financial statements, as well as contemporary issues such as fraud detection and the use of technology in auditing.
Recommended Textbook
Auditing Assurance Services and Ethics in Australia 10th Edition by Alvin Arens
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Page 2
Chapter 1: Demand for audit and assurance services
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Sample Questions
Q1) Providing quantitative information that management and others can use to make decisions is the function of:
A) auditing.
B) accounting.
C) finance.
D) management information systems.
Answer: B
Q2) To operate effectively, internal auditors:
A) report on the financial statements of the organisation.
B) are independent of the organisation.
C) are independent of the line functions in an organisation.
D) none of the above
Answer: C
Q3) Statements of auditing standards (ASAs)are issued by:
A) the Institute of Chartered Accountants in Australia.
B) the Australian Securities Exchange.
C) Australian Auditing and Assurance Standards Board.
D) CPA Australia.
Answer: C
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Page 3
Chapter 2: Auditors legal environment
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Sample Questions
Q1) The respective obligations of the client and auditor are outlined in:
A) a letter of recommendation.
B) an expert witness's testimony.
C) an engagement letter.
D) a confirmation letter.
Answer: C
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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4
Chapter 3: Audit quality and ethics
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Sample Questions
Q1) A set of moral principles or values is known as:
A) ethics.
B) independence in fact.
C) independence in appearance.
D) auditor competence.
Answer: A
Q2) Which one of the following statements is NOT correct? Expulsion from CPA Australia or the ICAA for disciplinary reasons:
A) prevents an individual from practising as a public accountant.
B) should be seen as a weighty social sanction.
C) might provide a basis for the Companies Auditors and Liquidators Disciplinary Board to suspend or cancel registration.
D) should be seen as a weighty economic sanction.
Answer: A
Q3) To preserve audit independence, the review partner must rotate every 5 years.
A)True
B)False
Answer: True
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5
Chapter 4: Audit responsibilities and objectives
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Sample Questions
Q1) 'Illegal acts,' as opposed to fraud, are defined as violations of:
A) law which would result in the arrest of the perpetrator.
B) laws or government regulations, other than fraud.
C) laws or government regulations, other than errors.
D) laws or government regulations, other than irregularities.
Q2) An intentional overstatement of sales is an example of:
A) fraudulent financial reporting.
B) misappropriation of assets.
C) an accounting error.
D) all of the above
Q3) Auditors have found that the most efficient way to conduct audits is to focus primarily on testing classes of transactions and performing minimal or no tests of ending account balances.
A)True
B)False
Q4) An audit generally provides no assurance that indirect-effect illegal acts will be detected.
A)True
B)False
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Chapter 5: Audit evidence
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Sample Questions
Q1) Physical examination is usually more costly than observation.
A)True
B)False
Q2) The list of audit procedures for an audit area or an entire audit is known as:
A) the audit conclusion
B) the audit program.
C) audit objectives.
D) all of the above
Q3) Which one of the following statements is NOT correct?
A) Analytical procedures use comparisons and relationships to determine which account balances are in error.
B) In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
C) Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.
D) For certain immaterial accounts, analytical procedures may be the only evidence needed.
Q4) What audit procedures are used to evaluate the client's going concern assumption?
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Chapter 6: Audit planning and documentation
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Sample Questions
Q1) What procedures should the auditor use to identify a related-party transaction?
Q2) Which is NOT a major type of supporting schedule working papers?
A) An audit program
B) A test of reasonableness schedule
C) A reconciliation
D) Outside documentation
Q3) Which one of the following items would NOT normally be included, in whole or in part, in the auditor's permanent file on a client?
A) analyses of accounts such as long-term debt and shareholders' equity
B) organisation charts and internal control questionnaires
C) the audit program
D) the company's constitution
Q4) Which of the following would NOT be classified as a related-party transaction?
A) loans or credit sales to the principal owner or client
B) an advance of one week's salary to an employee
C) sales of merchandise between affiliated companies
D) exchanges of equipment between two companies owned by the same person
Q5) There are three main reasons why an auditor should properly plan audit engagements.Please discuss each of these reasons.
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Chapter7: Materiality and risk
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Sample Questions
Q1) Inherent risk is reduced where the likelihood of misstatement is low.This would be true for accounts receivable if most balances in accounts receivable were:
A) from related parties.
B) overdue.
C) from overseas customers.
D) current.
Q2) Which one of the following statements does NOT apply to the preliminary assessment of materiality?
A) It is the maximum amount by which the auditor believes the statements could be misstated and still NOT affect the decisions of reasonable users.
B) It is a matter of auditor judgement.
C) It is a professional opinion, and it may NOT change during the engagement.
D) Auditors decide on the combined amount of misstatements in the financial statements that they would consider material early in the audit, when they are developing the overall strategy for the audit.
Q3) Auditors will vary the acceptable audit risk for each segment of the audit.
A)True
B)False
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9
Chapter 8: Internal control and control risk
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Sample Questions
Q1) A transaction walk-through involves:
A) touring the client's plant and operations.
B) reviewing the process of recording transactions.
C) reviewing and evaluating the client's accounting processes.
D) tracing a sample of documents through the accounting process.
Q2) Inquiry as a type of audit evidence is used extensively in procedures to gain an understanding of controls.
A)True
B)False
Q3) The primary emphasis of auditors is on internal controls over classes of transactions because:
A) the accuracy of the output of accounting systems is based on the accuracy of the input.
B) financial statements may not accurately reflect accounting standards correctly.
C) the accuracy of the output of accounting systems is based on the accuracy of the input and processing.
D) all of the above.
Q4) Describe the three key concepts (assumptions)in the study of internal control.
Q5) Describe three inherent limitations of internal control.
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Chapter 9: Fraud auditing
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Q1) Which of the following factors is the most significant contributor to fraud risk?
A) poor hiring practices
B) collusion between employees and third parties
C) the industry in which the entity operates
D) overriding of internal controls
Q2) Auditor responses to fraud risk include which of the following?
A) Change the overall conduct of the audit to respond to identified fraud risks.
B) Design and perform procedures to address the risk of management override of controls.
C) Design and perform audit procedures to address identified risks.
D) all of the above
Q3) Which of the following is an example of fraudulent financial reporting?
A) management's practice of making unrealistic forecasts to analysts
B) misappropriation of assets
C) both A and B
D) none of the above
Q4) Describe 'premature revenue recognition' and give an example.
Q5) What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?
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Chapter 10: The impact of information technology on the audit process
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Sample Questions
Q1) The accumulation of source documents and records that allows the organisation to trace accounting entries back to their initiation is the:
A) audit trail.
B) outsourcing code.
C) initialisation procedure.
D) substantiation record.
Q2) Which of the following is NOT an example of a test data approach?
A) testing authorisation of transactions
B) testing input data to final reports
C) testing online passwords
D) testing data access controls
Q3) Output controls focus on:
A) checking the accuracy of processing.
B) detecting errors after the completion of processing.
C) confirming that data has been processed in the correct order.
D) preventing errors before final reports are completed.
Q4) Discuss the four areas of responsibility under the IT function that should be segregated in large companies.
Q5) Provide five examples of different IT environments the auditor may encounter.
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Chapter 11: Overall audit plan and audit program
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Q1) Type(s)of evidence collected during substantive tests of transactions are:
A) inquiries of the client.
B) re-performance.
C) documentation.
D) all of the above
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) The audit client is a medium size business with some controls and a few inherent risks.Discuss the audit evidence mix appropriate for this client.
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13
Chapter 12: Audit of the sales and collection cycle: Tests of controls
and substantive tests of transactions
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Q1) 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
Q2) Which of the following is a document used to indicate to the customer the amount of a sales and payment due date?
A) sales order
B) sales invoice
C) purchase order
D) bill of lading
Q3) When designing tests of controls, the emphasis is on testing controls that:
A) the auditor intends to rely on to reduce control risk.
B) are associated with material account balances.
C) the auditor believes may not be functioning effectively.
D) are material.
Q4) Discuss what is meant by 'proof of cash receipts' and explain its purpose.
Q5) Explain what a sales return and allowance means.
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Chapter 13: Completing tests in the sales and collection cycle:
Accounts receivable
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Q1) What is the most important test of details of balances for accounts receivable?
A) obtaining confirmations from the client's customers
B) recalculating the aged receivables and uncollectible accounts
C) tracing credit memos for returned merchandise to receiving room reports
D) tracing from shipping documents to journals to the accounts receivable ledger
Q2) A positive confirmation is more reliable evidence than a negative confirmation because:
A) fewer confirmations can be sent out.
B) the debtor's lack of response indicates agreement with the stated balance.
C) the auditor has a document which can be used in court.
D) follow-up procedures can be performed if a response is not received from the debtor.
Q3) Explain two particular matters for the presentation and disclosure assertion for accounts receivable balances.
Q4) It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.
A)True
B)False
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) Even when non-sampling risk is zero, there is always a chance that a sample is not reasonably representative.
A)True
B)False
Q2) Which one of the following material occurrences would be most likely to attract the auditor's attention?
A) deviations from client's established control procedures
B) monetary errors or irregularities in populations of account balance details
C) deviations from client's budgeted values
D) both A and B
Q3) Discuss the advantages and disadvantages of monetary-unit sampling (MUS)over other sampling methods.
Q4) An increase in the sample size has the effect of decreasing the sampling error if the: A) actual sample deviation rate increases.
B) actual sample deviation rate does not increase.
C) number of deviations in the sample increases.
D) number of deviations in the sample does not increase.
Q5) Discuss what is meant by 'representative sample'.
Q6) Discuss what is meant by 'sampling error'.
Page 16
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Chapter 15: Audit of transaction cycles and financial statement balances I
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Q1) The internal control which requires that 'cheques are prenumbered and accounted for' satisfies which transaction-related audit objective for cash payments?
A) posting and summarisation
B) accuracy
C) existence
D) completeness
Q2) Which one of the following would NOT be a test used when auditing accrued sales commissions?
A) Test the detail tie-in in the commissions expense account at interim dates.
B) Test the calculation (recalculate) based on the agreement between client and employees.
C) Confirm the commissions directly with the employees.
D) Compare the method of accruing commissions with the previous years.
Q3) Discuss the key documents used in the processing of purchase orders and receiving goods and services functions in the acquisitions and payment cycle.
Q4) Describe the methodology for designing tests of details of balances for accounts payable.
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Q1) The most important audit objective for depreciation expense is completeness.
A)True
B)False
Q2) Which of the following is a balance-related audit objective for owners' equity?
A) obligations
B) realisable value
C) rights
D) none of the above
Q3) Kiting involves transferring money from one bank to another and incorrectly recording the transaction.
A)True
B)False
Q4) Cash account is primarily affected by which transactions in the acquisition and payment cycle?
A) payment of dividends
B) issue of shares
C) both A and B
D) none of the above
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Q5) Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures involved.
Chapter 17: Completing the audit
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Q1) Which type of subsequent event requires consideration by management and evaluation by the auditor?
A) subsequent events that have no direct effect on the financial statements but for which disclosure is advisable
B) subsequent events that have a direct effect on the financial statements and require adjustment
C) both A and B
D) none of the above
Q2) What is the purpose of a management representation letter?
Q3) Auditors approach obtaining evidence for presentation- and disclosure-related objectives differently than they approach obtaining evidence for transaction-related and balance-related objectives.
A)True
B)False
Q4) 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
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Chapter 18: Audit reporting
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Q1) Discuss the impact of e-commerce on audit reporting.
Q2) 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
Q3) An adverse opinion is used when there has been a material and pervasive misstatement.
A)True
B)False
Q4) Whenever an auditor discovers a material and pervasive violation of an accounting standard in the financial report, and the client refuses to correct it, the auditor should issue a disclaimer of opinion.
A)True
B)False
Q5) Under what conditions is a disclaimer of opinion issued?
Q6) What are 'significant uncertainties', and should they always be referred to in the audit report?
Q7) 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) Assurance represents the extent to which a practitioner can attest that an assertion is correct.
A)True
B)False
Q2) When performing a review of interim information for a public company, the accountant ordinarily does not perform tests of the accounting records, independent confirmations, or physical examinations.
A)True
B)False
Q3) The key issues for an external auditor evaluating a client's internal audit function are the:
A) competence and professionalism of internal audit staff.
B) timing and scope of the internal audit's work.
C) size of the internal audit function and its reporting independence.
D) quality of internal audit work and the independence of the internal audit function.
Q4) Describe the five types of reports that might be issued by an auditor of a service organisation (service auditors).
Q5) Discuss each of the three broad categories (types)of performance audits.
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