Ethics in Accounting and Auditing Textbook Exam
Questions
Course Introduction
This course explores the ethical principles and professional standards governing the fields of accounting and auditing. It examines the responsibilities and moral challenges faced by accountants and auditors in both public and private sectors, emphasizing the importance of integrity, objectivity, confidentiality, and due care in decision-making processes. Through case studies and real-world scenarios, students learn to identify ethical dilemmas, apply ethical frameworks, and understand regulatory requirements such as those set forth by professional bodies and government agencies. The course also discusses the implications of unethical behavior for individuals, organizations, and society, aiming to prepare students to uphold the highest ethical standards in their professional careers.
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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Q1) An attestation service is a type of assurance service in which the public accounting firm issues a written communication that expresses a conclusion about the reliability of a written assertion of another party.
A)True
B)False
Answer: True
Q2) Publicly traded companies have annual financial statement audits:
A) because external users rely on it.
B) because they are required to under the Corporations Act.
C) to obtain financing from banks.
D) all of the above
Answer: B
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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Chapter 2: Auditors legal environment
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Q1) Discuss some of the steps individual practising auditors can take to minimise their legal liability.
Answer: There are many steps individual practitioners can take to minimise legal liability:
.Deal only with clients possessing integrity.
.Hire qualified personnel and train and supervise them properly.
.Follow the standards of the profession.
.Maintain independence.
.Understand the client's business.
.Perform quality audits.
.Document the work properly.
.Obtain an engagement letter and a representation letter.
.Maintain confidential relations.
.Carry adequate insurance.
.Seek legal counsel.
Q2) A tort is a civil wrong, of which negligence is a good example.
A)True
B)False
Answer: True
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Chapter 3: Audit quality and ethics
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Q1) APES 110 Code of Ethics for Professional Accountants considers a material direct financial interest in an audit client to be:
A) providing taxation services to a client.
B) charging a fee contingent upon an outcome.
C) the auditor having a loan from an audit client who is a financial institution.
D) accepting commissions from an audit client.
Answer: C
Q2) Which one of the following is NOT one of the five fundamental principles of professional conduct set out in the Code of Ethics for Professional Accountants?
A) objectivity
B) continuing education
C) confidentiality
D) integrity
Answer: B
Q3) The annual audit is the cornerstone of corporate governance.
A)True
B)False
Answer: True
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Chapter 4: Audit responsibilities and objectives
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Q1) What are the responsibilities of management in regard to their declaration in the financial reports? Discuss.
Q2) Audits are conducted by performing tests of transactions and separate tests on closing balances in the balance sheet.
A)True
B)False
Q3) What are the two major classifications of fraud?
A) intent and rationalization
B) misappropriation of assets and materiality
C) misappropriation of assets and fraudulent financial reporting
D) fraudulent financial reporting and intent
Q4) An audit can be divided into transaction cycles.Identify the cycles and explain the relationships among the cycles.
Q5) Assessing the overall reasonableness of transactions and balances is the goal of: A) management assertions.
B) auditing.
C) analytical procedures.
D) fraud detection.
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Chapter 5: Audit evidence
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Q1) The evidence used by auditors is different from that used by scientists in that:
A) scientists use results of repeated experiments.
B) the certainty of conclusions drawn from the evidence can vary.
C) the party evaluating the evidence is a scientist.
D) all of the above
Q2) The most important difference between the 'quick' and 'current' ratios in assessing an entity's short-term debt-paying ability is the inclusion of:
A) cash at bank in one and not the other.
B) inventory in one and not the other.
C) current receivables in one and not the other.
D) prepayments in one and not the other.
Q3) 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
Q4) What are the benefits to auditors of using computer software?
Q5) Identify each of the five major types of analytical procedures and give an example of each.
Q6) Why are analytical procedures often called attention directing?
Page 7
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Chapter 6: Audit planning and documentation
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Q1) During the course of an audit engagement, an auditor prepares and accumulates audit working papers.The audit working papers should then be kept:
A) for a period not exceeding three years.
B) forever.
C) until the client ceases to exist.
D) until the end of seven years after the date of the audit report.
Q2) Auditors should plan engagements properly to:
A) ensure a cost-effective audit.
B) gain a clear understanding of the client.
C) avoid client misunderstandings.
D) all of the above
Q3) Reclassification entries are recorded in the:
A) general journal.
B) cash receipts journal.
C) sales journal.
D) financial statements but not in the general ledger.
Q4) What is the purpose of performing preliminary analytical procedures? Provide an example of an analytical procedure used.
Q5) List the steps in planning an audit.
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Chapter7: Materiality and risk
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Q1) When discussing control risk (CR)and the audit risk model, which one of the following statements is NOT true?
A) The relationship between CR and detection risk is inverse.
B) The relationship between CR and evidence is direct.
C) CR is a measure of the auditor's assessment of the likelihood that errors will not be prevented or detected by the client's internal control.
D) If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he or she would assign a 0% to CR.
Q2) Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus.
A)True
B)False
Q3) 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.
Q4) Discuss how auditors use the audit risk model when planning an audit.
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Chapter 8: Internal control and control risk
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Q1) There is a significant overlap between tests of controls and procedures to obtain an understanding of controls; however, discuss the main differences in the types of audit evidence.
Q2) A major control available in a small company, which might not be feasible in a large company, is:
A) a wider segregation of duties.
B) a voucher system.
C) the owner-manager's personal interest and close relationship with the personnel.
D) fewer transactions to process.
Q3) The most important type of protective measure for safeguarding assets and records is:
A) adequate documentation.
B) adequate separation of duties among personnel.
C) the use of physical precautions.
D) proper authorisation of transactions.
Q4) For IT equipment, there are three categories of controls related to safeguarding IT equipment, programs, and data files.Discuss the categories of IT-related controls, and for each category, give an example of a specific control.
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Chapter 9: Fraud auditing
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Q1) Which of the following is a common method of fraudulent financial reporting?
A) misappropriation of inventory
B) management's practice of making overly unrealistic forecasts to analysts
C) theft of assets
D) all of the above
Q2) To reduce the potential for theft, fixed assets should be:
A) engraved or otherwise permanently labelled.
B) periodically inventoried.
C) physically protected whenever possible.
D) all of the above
Q3) What is the most common area of employee payroll fraud?
A) understatement of social club deductions
B) omission of employees from records
C) overstatement of individual payroll hours
D) understatement of hourly wage rate
Q4) Which of the following is the most successful method of uncovering fraud?
A) internal controls
B) accident
C) third-party investigation
D) notification by supplier
Page 11
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Chapter 10: The impact of information technology on the audit process
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Q1) A site is allowed to retain the Webtrust seal if the auditor monitors compliance at least every:
A) 120 days.
B) 60 days.
C) 30 days.
D) 90 days.
Q2) The audit approach in which the auditor runs his or her own program on a controlled basis in order to verify the client's data recorded in a machine language is:
A) the generalised audit software approach.
B) the test data approach.
C) called 'auditing around the computer'.
D) the microcomputer-aided auditing approach.
Q3) If a control total were to be computed on each of the following data items, which would BEST be identified as a hash total for a payroll IT application?
A) department numbers
B) hours worked
C) total debits and total credits
D) net pay
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Chapter 11: Overall audit plan and audit program
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Q1) 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
Q2) Substantive tests of transactions and tests of controls are often conducted simultaneously.
A)True
B)False
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.
Q4) ASA 520 states that analytical procedures can be used as:
A) compliance tests.
B) tests of controls.
C) substantive tests.
D) helpful procedures not possessing the validity of other tests available to the auditor.
Q5) Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls.
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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) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
B) The cashier makes the daily deposit at a local bank.
C) The cashier prepares the daily deposit.
D) The cashier endorses the cheques.
Q2) The objective of prenumbering of documents is to:
A) prevent failure to record a sale or bill.
B) prevent the issue of duplicate bills.
C) ensure documents are correctly completed.
D) both A and B
Q3) A credit note is a document indicating a reduction in the amount due from a customer.
A)True
B)False
Q4) Monthly statements should be mailed by the accounts clerk.
A)True
B)False
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 a common reported type of difference regarding confirmations?
A) Goods have been returned.
B) Goods haven't been received.
C) Payment has already been made.
D) all of the above
Q2) Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.
Q3) A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the time the component parts have been outstanding, is the:
A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.
Q4) A high acceptable audit risk will permit a higher planned detection risk than if acceptable audit risk were low.
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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Q1) The use of monetary-unit sampling is most appropriate when the auditor expects to find many errors and when a monetary result is desired.
A)True
B)False
Q2) The allowable risk of overreliance (ARO)has a significant effect on sample size.The relationship of ARO to sample size is:
A) variable (sometimes larger, sometimes smaller).
B) nonexistent.
C) inverse (larger ARO = smaller sample).
D) direct (larger ARO = larger sample).
Q3) Which one of the following statements regarding the process of defining the population is NOT correct? The
A) population represents the body of data about which the auditor wishes to generalise.
B) auditor can define the population to include whatever data is desired.
C) auditor can randomly sample from whatever part of the population he or she chooses.
D) auditor may generalise only about that population which has been sampled.
Q4) Explain what is meant by 'directed sample selection'.
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Chapter 15: Audit of transaction cycles and financial statement balances I
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Q1) From which one of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?
A) written inventory representations from management
B) confirmation of inventories in a public warehouse
C) observation of physical inventory counts
D) auditor's recomputation of inventory extensions
Q2) The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the:
A) payroll journal.
B) summary payroll report.
C) payroll master file.
D) job time ticket.
Q3) A purchase order is often used to indicate authorisation of the acquisition.
A)True
B)False
Q4) State the primary determinants of the amount of time needed to perform the physical observation of inventory.
Q5) Discuss the procedures involved in, and the purpose of, a surprise payroll audit.
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Chapter 16: Audit of transaction cycles and financial statement balances II
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Q1) Which one of the following errors would be LEAST likely to be discovered during the tests of the bank reconciliation?
A) cash received by the client subsequent to the balance sheet date that was recorded as cash receipts in the current year
B) failure to include a cheque that has not cleared the bank on the unpresented cheque list, even though it has been recorded in the cash payments journal
C) the existence of payments on notes payable that were debited directly to the bank balance by the bank but were not entered in the client's records
D) payment to an employee for more hours than he or she worked
Q2) Cash account is primarily affected by which transactions in the payroll and personnel cycle?
A) payment of salaries
B) payment of payroll tax
C) both A and B
D) none of the above
Q3) The most important audit objective for depreciation expense is completeness.
A)True
B)False
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Chapter 17: Completing the audit
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Q1) Which of the following is NOT an example of a contingent liability?
A) income tax disputes
B) writing off a bad debt
C) product warranties
D) pending legal action for patent infringement, product liability, or other actions
Q2) The management letter:
A) is required by ASA 580 whenever there are 'reportable conditions'.
B) must follow the format prescribed by the ASIC.
C) spells out to the audit committee the auditor's responsibilities under generally accepted auditing standards.
D) is optional and is intended to help the client operate its business more effectively.
Q3) Identify and describe the four presentation and disclosure objectives.
Q4) Auditors do not need to design and perform procedures in every audit to review for contingent liabilities and subsequent events as part of their phase IV testing.
A)True
B)False
Q5) Discuss the circumstances in which an auditor would dual-date the audit report.
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Chapter 18: Audit reporting
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Q1) Whenever an auditor issues a standard unmodified opinion, the implication is that the auditor:
A) is satisfied that the report is prepared and presented fairly in all material respects in accordance with an applicable accounting framework.
B) does not believe the report is prepared or presented fairly in all material respects in accordance with an applicable accounting framework.
C) does not know if the report is prepared and presented fairly in all material respects in accordance with an applicable accounting framework.
D) is satisfied that the report is prepared and presented fairly except for a specific aspect of it.
Q2) Goods Pty Ltd's financial report shows a profit increase of 20% on the previous year.The chairman's report in Goods Pty Ltd's annual report boasts of a 50% increase in profit from the previous year.The auditor's report should include:
A) an 'except for' qualified opinion.
B) an adverse opinion.
C) an emphasis of matter section.
D) a qualified opinion.
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Chapter 19: Other auditing and assurance engagements
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Q1) Professional expertise and qualifications are important for those auditors undertaking greenhouse gas emission assurance engagements.Identify and describe the expertise and qualifications required.
Q2) Efficiency refers to the degree to which costs are reduced without reducing effectiveness.
A)True
B)False
Q3) The Institute of Internal Auditors Practice Standards regarding attributes include four categories of guidance that encompass both financial and operational auditing.List these categories of the Attribute Standards.
Q4) Projections are:
A) more hypothetical than forecasts.
B) forecasts that have been audited.
C) more reliable than forecasts.
D) management's best estimate of the future financial position.
Q5) Discuss each of the three broad categories (types)of performance audits.
Q6) A major difficulty in performance auditing is deciding on specific criteria for evaluating whether efficiency and effectiveness have occurred.Discuss two other sources of criteria that the operational auditor can use.
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