Auditing A Practical Approach Robyn Moroney, Fiona Campbell, Jane Hamilton Test Bank by TBtutors

Type:

Test Bank

Resource:

Auditing A Practical Approach

Edition:

1st Edition

Author(s):

Robyn Moroney Fiona Campbell Jane Hamilton

Testbank to accompany

Auditing: a practical approach Prepared by Adrian Klamer

CHAPTER 1 Introduction and overview of auditing

John Wiley & Sons Australia, Ltd 2010

Testbank to accompany Auditing: a practical approach

True/False 1. An auditor can provide a reasonable level of assurance on information other than historical financial information. *a) true b) false 2. A negative expression of opinion is only given when there is a disagreement with management and the auditor. a) true *b) false 3. A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform *a) true b) false 4. An operational audit is an example of a compliance audit. a) true *b) false 5. All modified audit reports are qualified audit opinions. a) true *b) false 6. The most common types of assurance engagements are financial report audits, confirmation audits, performance audits, comprehensive audits and assurance on corporate social responsibility (CSR) disclosures. a) true *b) false 7. The nature of audit procedures refers to the reliance on evidence provided by the client and its management. *a) true b) false 8. A reasonable level of assurance is the highest level of assurance that an auditor can provide. *a) true b) false

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Chapter 1: Introduction and overview of auditing

9. A no assurance engagement is of little use as no assurance is given to the client. a) true *b) false 10. It is the auditors responsibility to prepare the financial statements. a) true *b) false 11. Only current investors (not potential investors) are considered to be users of the financial statements. a) true *b) false 12. Insurance hypothesis is a means whereby the investor can guarantee the success of their investment. a) true *b) false 13. International Auditing and Assurance Standards Board (IAASB) is not responsible for the redrafting of International Auditing Standards (ISAs) to Australian Auditing Standards (ASAs). *a) true b) false 14. You must complete further study after a bachelor’s degree to become a member of either the ICAA, CPA Australia or the NIA. *a) true b) false 15. The expectation gap is caused by unrealistic user expectations such as the auditor providing a moderate level of assurance. a) true *b) false

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Testbank to accompany Auditing: a practical approach

Multiple Choice 1. An example of the three parties in an assurance engagement would be: a. audit client, employee, customer *b. audit client, supplier, auditor c. auditor, shareholder, general public d. auditor, general public, employees. 2. A limitation of an audit is caused by: a. the nature of financial reporting b. the nature of audit procedures c. the need for the audit to be conducted within a reasonable period of time and at a reasonable cost *d. all of the above. 3. Which of the following is NOT true about Corporate Social Responsibility assurance? a. reporting is voluntary and is becoming more widespread. b. includes both financial and non-financial information. *c. is required to be performed by an auditor. d. disclosures include environmental, employee and social reporting. 3. Which of the following would be an example of a reasonable assurance engagement? a. the review of annual financial statements. *b. the audit of annual financial statements. c. the reporting of procedures performed by the auditor as agreed by the client. d. all of the above. 4. The wording of a negative expression of opinion generally states that: a. there is nothing wrong with the subject matter. b. there is something wrong with the subject matter. *c. there is nothing that has come to the auditors attention that would lead them to believe that the information being assured is not true and fair. d. there is something that has come to the auditors attention that would lead them to believe that the information being assured is not true and fair. 5. In a review engagement, which of the following is least likely to occur during the engagement? a. analytical procedures b. enquiries with management and other personnel *c. substantive audit procedures d. review of the internal controls of the entity.

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Chapter 1: Introduction and overview of auditing

6. An example of an unmodified audit opinion is: a. qualified audit opinion b. adverse audit opinion c. unqualified audit opinion with an emphasis of matter. *d. none of the above. 7. Which of the following is not a type of opinion? a. qualified opinion *b. modified opinion c. adverse opinion d. disclaimer of opinion 8. The following can be said about an emphasis of matter: a. it is included when the auditors opinion has changed and the auditor wants to bring the users’ attention to a particular matter. b. it is only used in unqualified audit opinions. *c. it is included when the auditor’s opinion has not changed and the auditor wants to bring the users’ attention to a particular matter. d. it can not be used when expressing audit opinion that has pervasive misstatements. 9. In addition to the preparation of financial statements, it is also the responsibility of those charged with governance to: a. identify the financial reporting framework to be used in the preparation and presentation of their financial report. b. establish and maintain internal controls that are effective in preventing and detecting material misstatements c. selecting and applying appropriate accounting policies and making reasonable accounting estimates *d. all of the above. 10. Which of the following is not true in relation to comparability? a. able to identify trends, that may influence their perception of how well the entity is doing. b. able to assess performance of the entity over time and with other entities c. able to evaluate *d. all of the above are correct. 11. Professional scepticism does not involve: *a. the professional requirement that all management representations be substantiated with supporting documentation. b. seeking independent evidence to corroborate information provided by their client c. being suspicious when evidence contradicts documents held by their client or enquiries made of client personnel d. none of the above.

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Testbank to accompany Auditing: a practical approach

12. The largest accounting firms in Australia are known collectively as the a. ‘Big-3’ *b. ‘Big-4’ c. ‘Big-5’ d. ‘Big-6’ 13. Under CLERP9, which of the following is not correct relating to specific disclosures in the directors report? a. details of the amount paid or payable to the company’s auditor for non-audit services (each non-audit service must be listed separately along with the amount paid or payable for that service) b. if the directors are satisfied that auditor independence has not been impacted by the provision of non-audit services, a statement of the directors’ reasons for being satisfied. *c. disclosure of material transactions between auditor and entity during the period under audit. d. a statement whether the directors are satisfied that the provision of non-audit services by the auditor impacts the auditor’s independence 14. Suppliers as a user of the financial statements would least consider which of the following aspects of the financial statements: a. solvency of the entity b. profitability of the entity *c. return on investment of the entity d .corporate social responsibility of the entity 15. Which of the following is incorrect? A government can be considered to be a user of the general purpose financial reports because: *a. it is the basis for the calculation of taxes owed to the government b. it can determine whether certain regulations have been complied with c. to gain a better understanding of the entities activities d. to assess the entity so that it can provide the entity with grants that will benefit society. 16. Agency theory can be described as the theory of: a. hiring an agency to review the work of the management, in this case it is the auditor. b. when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party’s work. *c. the relationship between the owner and the management of the business when the owner is not the manager of the business. d .none of the above.

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Chapter 1: Introduction and overview of auditing

17. Insurance hypothesis tells us that: *a. investors will demand that financial reports be audited as a way of insuring against some of their loss should their investment fail. b. investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail. c. investors cannot insure themselves against loss when investing in an entity. d. the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements. 18. Which of the following regulators do not impact on the audit process? a. Australian Securities and Investments Commission (ASIC) b. National Institute of Accountants (NIA) *c. Auditing Professional and Ethical Standards Board (APESB) d .all of the above have an impact on the audit process. 19. The objective of the Financial Reporting Council does not include: a. to oversee the process used for setting accounting and auditing standards b. to monitor and report regularly on matters concerning auditor independence *c. to be involved in the technical issues around the standard-setting process. d. all of the above are included in the objectives of the Financial Reporting Council 20. Which of the following is correct? The Accounting Professional Ethical Standards Board (APESB): *a. standards are required to be complied with by members of each of ICAA, CPA and NIA. b. issue technical standards to the members of the ICAA, CPA Australia and NIA. c. follows pronouncements issued by the International Accountants Ethics Standards Board (IAESB) d. have not approved any standards that are required by law. 21. Which of the following is incorrect? The Australian Securities and Investments Commission (ASIC) a. registers auditors and processes annual statements from registered auditors *b. requires all auditors’ financial statements to be independently audited annually c. provides a whistleblowing facility for the reporting of contraventions of the Corporations Act d. enforces independence requirements for auditors 22. The Companies and Liquidators Disciplinary Board can respond to applications made by: a. the Australian Securities and Investments Commission (ASIC) b. the Australian Prudential Regulation Authority (APRA) *c. the Australian Securities and Investments Commission (ASIC) or the Australian Prudential Regulation Authority (APRA) d. the general public

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Testbank to accompany Auditing: a practical approach

23. Auditor rotation in CLERP9 states that an auditor cannot perform a significant role in the audit of a client in more than a. two out of five years b. two out of seven years *c. five out of seven years d .six out of seven years 24. The expectation gap is caused by: a. realistic auditor expectations *b. unrealistic user expectations c. realistic user expectations d. unrealistic auditor expectations 25. The expectation gap can be reduced by: a. auditors performing their duties properly b. enhanced reporting to explain what processes have been followed in arriving at an audit or a review opinion c. assurance providers reporting accurately the level of assurance being provided *d. all of the above.

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Chapter 1: Introduction and overview of auditing

Short Answer Questions 1. The main assurance service the general public are familiar with are financial report audits. Briefly describe the other services that an auditor can provide. Correct Answer: A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform. Performance audits are concerned with the economy, efficiency and effectiveness of an organisation’s activities A comprehensive audit may encompass elements of a financial report audit, a compliance audit and a performance audit. Internal audits are conducted to provide assurance about various aspects of an organisation’s activities. Corporate social reporting disclosures include environmental, employee and social reporting.

2. Describe the three levels of assurance. Name the types of engagements they would come up in and the expression of opinions that would be provided by the assurance provider Correct Answer: Level of Assurance Reasonable Limited None

Type of Engagement Audit Review Agreed-Upon Procedures

Expression of Opinion Positive Negative None

3. What does pervasive mean? When would an auditor use an audit report that was material and pervasive? Correct Answer: ‘Pervasive’ refers to misstatements that are not confined to individual accounts or elements of a financial report, or, if confined, the misstatements impact an extensive portion of a financial report or are disclosures that are vital to a user’s understanding of the financial report. An auditor would use an audit report that identified material and pervasive misstatements either in a situation that the auditor was either able to identify (adverse) or not able to identify (disclaimer of opinion) through sufficient and appropriate audit procedures.

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Testbank to accompany Auditing: a practical approach

4. Outline the reasons for the demand for assurance services. Correct Answer: Remoteness – As most users do not have access to the entity under review, this makes it difficult to determine whether the information contained in the report is a fair presentation of the entity and its activities for the relevant period. Complexity – Most financial report users do not have the accounting and legal knowledge to enable them to assess the complex accounting and disclosure choices being made by the entity. Competing incentives – management may have their own incentives to present the information in a particular light which may help them achieve their own objectives. This may introduce bias in what is being presented. Reliability – As the information is being dependant upon to make important decisions, it is important that the information being presented is reliable

5. How is the expectation gap caused and how can the effects expectation gap be reduced? Correct Answer: In particular, the gap is caused by unrealistic user expectations such as: • the auditor is providing complete assurance • the auditor is guaranteeing the future viability of the entity • an unqualified (clean) audit opinion is an indicator of complete accuracy • the auditor will definitely find any fraud • the auditor has checked all transactions. The expectation gap can be reduced by: • auditors performing their duties appropriately, complying with auditing standards and meeting the minimum standards of performance that should be expected of all auditors; • peer reviews of audits to ensure that auditing standards have been applied correctly; • auditing standards being reviewed and updated on a regular basis to enhance the work being done by auditors; • education of the public • enhanced reporting to explain what processes have been followed in arriving at an audit (reasonable assurance) or a review (limited assurance) opinion (significant improvements have been introduced by standard setters improving assurance reporting); and • assurance providers reporting accurately the level of assurance being provided (reasonable, limited or none).

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Chapter 1: Introduction and overview of auditing

Essay Questions 1. There have been a number of high profile corporate collapses in the past decade both in Australia and overseas. What role does society expect from auditors in ensuring this does not happen? What can auditors do to manage this expectation?

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Testbank to accompany

Auditing: a practical approach Prepared by Peter Baxter

CHAPTER 2 Ethics, legal liability and client acceptance

John Wiley & Sons Australia, Ltd 2010

Testbank to accompany Auditing: a practical approach

True/False 1. Compliance with the fundamental ethical principles is mandatory for all members of the accounting profession. *a. True b. False 2. Independence in appearance is the ability to act with integrity, objectivity and professional scepticism. a. True *b. False 3. An example of an advocacy threat is encouraging others to buy shares or bonds being sold by the client. *a. True b. False 4. An effective audit committee will enhance the independence of the external audit function. *a. True b. False 5. A famous statement by Lord Justice Lopes in the Pacific Acceptance case was that an auditor "…is a watchdog, but not a bloodhound." a. True *b. False 6. A privity letter acknowledges that the third party intends to rely on the audited financial report. *a. True b. False 7. The key difficulty for third parties in successfully claiming against the auditor is establishing that the client's management contributed to the third party's loss. a. True *b. False © John Wiley and Sons Australia, Ltd 2010

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Chapter 2: Ethics, legal liability and client acceptance

8. Ensuring compliance with auditing regulations will not assist auditors to avoid litigation. a. True *b. False 9. Third parties are anyone other than the client and its shareholders that uses the financial report to make a decision. *a. True b. False 10. Being negligent means not exercising due care. *a. True b. False 11. The judgement in the Esanda case has made it far easier for third parties to establish that a duty of care is owed by the auditor. a. True *b. False 12. Auditors can avoid litigation by implementing policies and procedures that ensure all work is fully documented. *a. True b. False 13. When assessing client integrity, the auditor will consider the appropriateness of the client's interpretation of accounting rules. *a. True b. False 14. An engagement letter sets out the terms of the engagement letter. *a. True b. False

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Testbank to accompany Auditing: a practical approach

15. An engagement letter does not include an overview of the client's responsibility for the preparation of the financial report. a. True *b. False

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Chapter 2: Ethics, legal liability and client acceptance

Multiple Choice 16. Which of the following is a fundamental principle of professional ethics? a. a . confidentiality b. objectivity c. integrity *d. all of the above 17. Professional behaviour refers to the obligation that all members of the professional bodies: *a. ensure that they do not harm the reputation of the accounting profession b. not allow their personal feelings or prejudices to influence their professional judgement c. refrain from disclosing information to people outside of their workplace that is learned as a result of their employment d. be straightforward and honest 18. Objectivity refers to the obligation that all members of the professional bodies: a. be straightforward and honest b. refrain from disclosing information to people outside of their workplace that is learned as a result of their employment *c. not allow their personal feelings or prejudices to influence their professional judgement d. ensure that they do not harm the reputation of the accounting profession 19. Auditor independence is: a. defined as acting with integrity, objectivity and professional scepticism b. essential when complying with the ethical principles to act with integrity and objectivity *c. both a and b d. not fundamental to every audit 20. Independence in appearance is: a. the ability to act with integrity, objectivity and professional scepticism *b. the belief that independence of mind has been achieved c. the ability to make a decision that is free from bias, personal beliefs and client pressures d. also referred to as actual independence

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