Financial Statement Auditing
Exam Preparation Guide
Course Introduction
Financial Statement Auditing introduces students to the concepts, standards, and procedures used by auditors to evaluate an organizations financial statements. The course covers the principles of audit planning, evidence gathering, risk assessment, internal controls, and materiality. Students learn about the regulatory framework governing audits, including professional ethics and auditing standards, as well as the auditors responsibilities in detecting fraud and reporting findings. Through case studies and practical exercises, learners gain experience in preparing audit reports and developing professional judgment necessary for effective audit decision-making.
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) Which of the following exists independently from an audit?
A) risk-free interest rate and business risk
B) information risk and the risk-free interest rate
C) business risk and information risk
D) risk-free interest rate and audit risk
Answer: A
Q2) Which one of the following services provides a moderate level of assurance about the client's financial statements?
A) forecasts and projections
B) review
C) audit
D) compliance
Answer: B
Q3) The primary role of the Auditor-General is the enforcement of the federal tax laws as defined by Parliament and interpreted by the courts.
A)True
B)False
Answer: False
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Chapter 2: Auditors legal environment
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Q1) A tort is a civil wrong, of which negligence is a good example.
A)True
B)False
Answer: True
Q2) The statutory requirements for independence mean an auditor is prohibited from engaging in audit activity if:
A) the auditor is aware of a conflict of interest situation in relation to the client but doesn't take all reasonable steps to resolve it.
B) the auditor is not aware of a conflict of interest situation in relation to the client and doesn't take all reasonable steps to resolve it.
C) there is a breach of the ethical requirements.
D) there is a breach of the auditor registration requirements.
Answer: A
Q3) The AWA case and the Pacific Acceptance case discussed:
A) client acceptance.
B) the duty to inform management.
C) privity letters.
D) management representation letters.
Answer: B
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Page 4
Chapter 3: Audit quality and ethics
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Sample Questions
Q1) A public accounting firm should decline an offer to perform management advisory services if:
A) the firm audits the financial statements of a subsidiary of the prospective client.
B) recommendations to be made by the firm are to be subject to review by the client.
C) the proposed engagement is not accounting-related.
D) acceptance would require the firm to make management decisions for an audit client.
Answer: D
Q2) One of the fundamental principles of the Code of Ethics for Professional Accountants deals with professional behaviour.This requires accountants to:
A) be straightforward and honest.
B) maintain their knowledge and AACSB at an appropriately high level.
C) refrain from any conduct that may bring discredit to their profession.
D) all of the above
Answer: C
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Chapter 4: Audit responsibilities and objectives
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Sample Questions
Q1) When the auditor believes an illegal act may have occurred, it is necessary to:
A) consult with the client's legal counsel.
B) inquire of management, at a level above those likely to be involved with illegality.
C) consider accumulating additional evidence to determine if there is actually an illegal act.
D) all of the above
Q2) There are five general transaction-related audit objectives.One is the existence objective, which deals with whether recorded transactions have actually occurred.Identify and discuss each of the remaining general transaction-related audit objectives.
Q3) '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.
Q4) There are eight general balance-related audit objectives.One is the existence objective, which deals with whether the amounts included in the financial statements should actually be included.Identify and discuss each of the remaining eight general balance-related audit objectives.
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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) Bank balances and receivables are commonly associated with which type of audit evidence?
A) confirmation
B) physical examination
C) Confirmation
D) inquiries of the client
Q3) Physical examination is usually more costly than observation.
A)True
B)False
Q4) An audit program:
A) normally exists for each component of the audit.
B) always includes a list of the audit procedures.
C) usually includes sample sizes, items to select, and the timing of the tests.
D) all of the above
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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Sample Questions
Q1) When an auditor decides there is higher inherent risk for an account, one potential effect is that less audit evidence will be required for that account.
A)True
B)False
Q2) When considering the desirability of staff continuity on an engagement, an audit partner must always:
A) be satisfied that the team has the appropriate competence and capabilities.
B) ensure the client is satisfied.
C) ensure confidentiality is not compromised.
D) ensure the audit staff is satisfied.
Q3) The permanent section of the auditor's working papers generally should include:
A) a copy of key customer confirmations.
B) a copy of the engagement letter.
C) time and expense reports.
D) names and addresses of all audit staff personnel on the engagement.
Q4) For prospective clients that have previously been audited by another firm, the new auditor is required to communicate with the previous auditor.
A)True
B)False
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Chapter7: Materiality and risk
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Q1) 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.
Q2) Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s)in which each step is performed.
Q3) If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.
A)True
B)False
Q4) Describe the audit risk model and each of its components.
Q5) Discuss how auditors use the audit risk model when planning an audit.
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Page 9
Chapter 8: Internal control and control risk
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Q1) Three steps must be completed by the auditor before he or she can conclude that control risk is low.Discuss these three steps.
Q2) The less control risk there is, the smaller the amount of planned substantive evidence required.
A)True
B)False
Q3) The procedures for proper record-keeping should be spelled out in:
A) run manuals.
B) minutes of the board of directors.
C) the corporate bylaws.
D) systems manuals.
Q4) One benefit of effective internal control is the guarantee that all employee frauds will now be detected.
A)True
B)False
Q5) For efficiency, if internal controls are ignored, then control risk is assumed to be maximum.
A)True
B)False
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Chapter 9: Fraud auditing
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Sample Questions
Q1) What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?
Q2) Which one of the following is NOT typically a type of audit evidence the auditor would use in assessing fraud risk?
A) documentation
B) analytical procedures
C) inquiry
D) observation
Q3) Fraud is more prevalent in smaller businesses because it is more difficult to maintain adequate separation of duties.
A)True
B)False
Q4) Lapping refers to applying:
A) payments from one customer to another customer's account.
B) fictitious credit adjustments to a customer's account.
C) fictitious receipts to a customer's account.
D) none of the above
Q5) When risks of material misstatements due to fraud are identified, how should auditors adjust their audit approach?
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Chapter 10: The impact of information technology on the audit process
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Sample Questions
Q1) In database management systems, many applications share files, whereas in non-database environments each application manages its own data file.
A)True
B)False
Q2) Discuss the major factors associated with complex IT systems that increase control risk and the likelihood of material misstatements in the financial statements.
Q3) Which of the following is a generalised audit software package?
A) ACL
B) MYOB
C) Visual Basic
D) none of the above
Q4) 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.
Q5) Identify the six categories of general controls and give one example of each.
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Chapter 11: Overall audit plan and audit program
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Sample Questions
Q1) The audit procedure re-performance always simultaneously provides evidence about both internal control effectiveness and monetary correctness.
A)True
B)False
Q2) Professional auditing standards recognise that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests.
A)True
B)False
Q3) Under normal circumstances, there should be no variation in the audit evidence mix from cycle to cycle for a given audit engagement.
A)True
B)False
Q4) 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.
Q5) Auditors follow a four-step approach to reduce assessed control risk.Identify and describe these steps.
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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) To test for nonexistent transactions, the direction of audit testing should be from the: A) journal entries.
B) ledger entries.
C) source documents.
D) externally generated documents.
Q2) Which one of the following procedures would ordinarily be expected to BEST reveal unrecorded sales at the balance sheet date?
A) Send accounts receivable confirmation requests.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace shipping documents to the sales journal.
D) Trace payments received subsequent to the balance sheet date.
Q3) Violations of the completeness objective for sales are of greater concern to the auditor than violations of the existence objective.
A)True
B)False
Q4) A bill of lading is a written contract of the receipt and shipment of goods.
A)True
B)False
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Chapter 13: Completing tests in the sales and collection cycle: Accounts receivable
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Sample Questions
Q1) The following audit procedure tests primarily which balance-related audit objective for accounts receivable: review the minutes of the board of directors meetings for any indication of pledged receivables.
A) existence
B) presentation and disclosure
C) rights and obligations
D) both B and C
Q2) Design and perform tests of controls for the sales and collection cycle is part of which phase of the audit?
A) Phase I
B) Phase II
C) Phase III
D) Phase IV
Q3) Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.
Q4) Explain whether it is equally as important to test the cutoff for sales and cash receipts.
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) Discuss two ways in which the auditor can control sampling risk.
Q2) Describe each of the four types of sample selection methods commonly associated with statistical audit sampling.
Q3) Acceptable audit risk (AAR)and acceptable risk of incorrect acceptance (ARIA)are inversely related; that is, as AAR increases, ARIA decreases.
A)True
B)False
Q4) In estimating the population misstatement, the first step in projecting from the sample to the population is to:
A) calculate the precision interval.
B) revise the upper error bound.
C) determine the population mean.
D) make a point estimate.
Q5) In monetary-unit sampling, the likelihood of high dollar items from the population being included in the sample is greater than the likelihood for small dollar items. A)True
B)False
Q6) 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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Sample Questions
Q1) The test of transactions, which requires 'compare paid cheques with the related acquisitions journal and cash payments journal', satisfies which transaction-related audit objective for cash payments?
A) existence
B) completeness
C) accuracy
D) posting and summarisation
Q2) What effect does the improper account classification of payroll have when payroll is a significant portion of inventory?
A) increase asset valuations
B) decrease asset valuations
C) either A or B
D) not affect asset valuations
Q3) Failure to record the acquisition of goods and services directly affects the balance in accounts payable and may result in an overstatement of net income and owner's equity.
A)True
B)False
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Page 17
Chapter 16: Audit of transaction cycles and financial statement balances II
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Sample Questions
Q1) The balance-related audit objective to determine that cash in bank is properly presented and disclosed can be met through which of the following tests of details of balances?
A) Trace outstanding cheques to subsequent period bank statement.
B) Examine minutes, loan agreements, and the bank confirmation for restrictions on the use of cash and compensating balances.
C) Foot the outstanding cheque list and deposits in transit.
D) Test for kiting.
Q2) The audit procedure 'foot the loans payable list and trace the totals to the general ledger' is performed when verifying the accuracy objective for loans payable.
A)True
B)False
Q3) Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.
A)True
B)False
Q4) Discuss the internal controls related to loan liabilities that are of concern to the auditor.
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Chapter 17: Completing the audit
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Sample Questions
Q1) ASA 570 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at LEAST:
A) one quarter beyond the date of the auditor's report.
B) one year beyond the date of the auditor's report.
C) one year beyond the reporting date.
D) one quarter beyond the balance sheet date.
Q2) Which one of the following auditing procedures is ordinarily performed last?
A) testing the purchasing function
B) confirming accounts payable
C) reading the minutes of the directors meetings
D) obtaining a management representation letter
Q3) Completing the audit is which phase of the audit?
A) four
B) two
C) one
D) three
Q4) What is the purpose of a management representation letter?
Q5) What are the five main aspects of the overall evaluation of results at the completion of the audit?
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Chapter 18: Audit reporting
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Sample Questions
Q1) Discuss the impact of e-commerce on audit reporting.
Q2) When an adverse, qualified, or disclaimer of opinion is issued, ASA 705 requires that the auditor's report includes:
A) a clear description of all the substantive reasons for the opinion.
B) where practicable, a quantification of the possible effect on the financial report.
C) both A and B
D) none of the above
Q3) The audit of a half-year financial report requires the same audit procedures as those performed during the annual financial report audit.
A)True
B)False
Q4) Explain the four circumstances under which an 'emphasis of matter section' should be included in the audit report.
Q5) What are the nine distinct parts of a standard audit report?
Q6) Discuss how materiality affects audit reporting decisions.
Q7) What are 'significant uncertainties', and should they always be referred to in the audit report?
Q8) Under what conditions is a disclaimer of opinion issued?
Page 20
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Chapter 19: Other auditing and assurance engagements
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Q1) When the auditor is engaged to report on the internal controls, five steps similar to those for a regular audit engagement are followed.Describe them.
Q2) A concise report sent to shareholders instead of a full report consists of:
A) the directors' report.
B) a statement by the auditor.
C) a concise financial report.
D) all of the above
Q3) The objectives of internal auditors are similar to the objectives of external auditors.
A)True
B)False
Q4) When the auditor is engaged to report on the internal controls, the auditor forms an opinion about management's assertion regarding the:
A) efficiency of internal control.
B) effectiveness of internal control.
C) completeness of internal control.
D) completeness of transactions.
Q5) Discuss each of the three broad categories (types)of performance audits.
Q6) Discuss each of the three phases of a performance audit.
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