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AUDITING MCQChapter 1: An overview of auditing1. Even if there were no statutory requirement for an audit, some people suggestthat self-interest would still impel management to engage auditors to audit thefinancial statements. What theory of auditing is this predominantly based on?(a)Information hyp...

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AUDITING MCQ Chapter 1: An overview of auditing

1. Even if there were no statutory requirement for an audit, some people suggest that self-interest would still impel management to engage auditors to audit the financial statements. What theory of auditing is this predominantly based on? (a)Information hypothesis (b)Agency theory (c)Insurance hypothesis (d)None of the above - if there were no statutory requirements, there would be no audits 2. Independent auditors are referred to as 'independent' because: (a) their offices are not at the entity’s place of business. (b)they are not employees of the entity being audited. (c) they are paid by parties outside of the audited entity. (d) they report to users outside of the audited entity.

3. Independent auditors perform audits on the financial reports of public companies. This type of auditing can best be described as: (a) a discipline that assures financial information presented by management. (b) an activity whose purpose is to search for irregularities. (c) a regulatory function that prevents the issuance of improper financial information. (d) a professional activity that measures and communicates financial and business data. 4. The body that is responsible for issuing international auditing standards is the: (a) International Auditing and Assurance Standards Board (IAASB). (b) Auditing and Assurance Standards Board (AUASB). (c) International Federation of Accountants (IFAC). (d) International Accounting Standards Board (IASB). 5. The body that is responsible for setting the auditing standards in Australia is: (a) Australian Accounting Standards Board (AASB). (b) Auditing and Assurance Standards Board (AUASB). (c) Financial Reporting Council (FRC). (d) International Auditing and Assurance Standards Board (IAASB).

6. The key reason for the radical audit reforms over the past decade is: (a) the disparity of revenues and practices between the big firms and the smaller accounting practices. (b) the inability of auditors to meet their liability claims. (c) the alleged accounting fraud and audit failures related to major corporate collapses. (d) the recommendations of the Company’s Auditors Disciplinary Board. 7. The purpose of the surveillance program undertaken by ASIC is to: (a) obtain evidence on the negligence of auditors and accountants. (b) develop a complete framework of creative accounting mechanisms. (c) evaluate the adequacy of compliance with respect to financial reporting. (d) ensure dividends are not paid from financial reports that have been misstated. 8. The term that best describes any situation where information is prepared by one party and then attested to its accuracy by another party is: (a) audit. (b) assurance. (c) insurance. (d) assertion.

Chapter 1(2): Governance and the auditor

1. According to the Sarbanes–Oxley Act and the SEC recommendations, an audit committee should not: (a) oversee the hiring and firing of external auditors. (b) consist of retired audit partners who had been involved in the client. (c) be subject to the recommendations of the Listing Rules. (d) meet with the internal auditors without the presence of the CEO.

2. Earnings management occurs when: (a) surplus funds are invested to obtain higher rates of return. (b) budgets are performed and regularly checked against actual figures by management. (c) financial statements and transactions are manipulated in order to influence people's perceptions of the performance of the entity. (d) directors hold discussions with managers. 3. Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of economy, efficiency and: (a) (b) (c) (d)

evaluation effectiveness compliance accuracy

4. The key benefit to management of an internal audit function is that it: (a) (b) (c) (d)

provides assurance to management that fraudulent activities will be detected. reduces external audit costs. aids management in the areas of risk management, control and governance processes. provides assurance to management that the organisation is complying with its legal requirements.

5. Which of the following statements best describes internal auditing? (a) An activity located within an entity, primarily to detect fraud. (b) An accounting function located within an entity. (c) An activity located within an entity that determines the fiscal integrity of a financial report. (d) An independent and objective assurance activity within an entity.

6. Which of these is a type of public sector performance audit? i) Audit of a program or activity in a single entity ii) Protective security audit iii) Follow-up audit (a) (b) (c) (d)

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

7. Which of these is not an important criterion in assessing the performance of the internal auditor by the external auditor? (a) (b) (c) (d)

Due professional care The age of the auditor Technical competence All of the above

8.__________ is using resources to maximise the ratio of outputs to inputs. (a) (b) (c) (d)

Economy Efficiency Efficacy Effectiveness

Chapter 2: Professional ethics, regulation and liability 1. APES 110: a) prohibits tendering for an audit currently done by another audit firm. b) encourages but does not require auditors to refrain from unwanted solicitation. c) requires auditors to act in the public interest. d) prohibits offers of employment to employees of another audit firm without notice. 2. Ethical relativism means: a) adopting an international standard of behaviour for organisations. b) moral values are relative to a particular environment. c) instituting company policies on gifts and hospitality. d) developing a system that international businesses can apply anywhere. 3. In pursuing the audit firm’s quality control objectives, the firm may maintain records indicating which partners or employees of the firm were previously employed by the firm’s clients. Which quality control objective would this be most likely to satisfy? a) Professional relationship. b) Supervision. c) Independence. d) Advancement. 4. Self-interest or self-review threats may result from the following, except: a) preparing source documents for the client to evidence the occurrence of transactions. b) reporting to the CEO on a system which you helped implement. c) executing authority on behalf of the client on transactions. d) writing a letter to the management to inform them of the discrepancies in the system. 5. The fundamental principles of professional conduct applicable to all professional accountants include: a) public interest, integrity, objectivity and confidentiality. b) professional competence and due care, professional behaviour and independence. c) both a and b. d) public interest, integrity, objectivity, confidentiality, staffing levels and fee structures.

6. Threats to auditor independence can come from various sources. Which of these is referred to in the Code of Ethics as a self-review threat? a) Pressure to reduce inappropriately the extent of work performed in order to reduce fees. b) Preparation of original data used to generate a financial statement that is the subject matter of the audit engagement. c) Concern on the part of the auditor about the possibility of losing the engagement. d) The possibility of potential employment with the audit client. 7. Using the same senior personnel on an assurance engagement over a long period may create what type of threat to audit independence? a) Advocacy. b) Intimidation. c) Familiarity. d) Self-interest. 8. Which of the following characteristics does not distinguish a profession from other occupations? a) A common code of conduct to be practised and monitored by an association b) Acceptance of a duty to society as a whole c) Mastery of particular intellectual skills through education and training d) Ability to command high fees in return for services 9. Which of the following is not a principle of professional conduct as defined by APES 110? a) Professional behaviour. b) True and fair reporting. c) Integrity. d) Professional competence and due care. 10. Which of the following statements is correct? a) Ethics is concerned primarily with the wellbeing of your client. b) Ethics is principally an attitude of mind. c) Ethics is principally concerned with having a set of rules that must be complied with. d) Ethics is concerned with creating an environment that allows entities to make an equitable profit.

Chapter 3(1): Quality and standard of assurance engagements 1. A special purpose financial report is one that relates to: a) on-financial information. b) reports that must comply with approved accounting standards. c) entities that are not reporting entities. d) entities that are listed on the securities exchange or have borrowed from the public. 2. The scope of sustainability assurance varies among organisations. Typically, sustainability assurance does not include: a) financial performance. b) social performance. c) environmental reporting. d) fraud audit. 3. Which of the following statements best describes the most-likely relationship between the fraudster and an organisation? a) A member of the management team b) A non-management employee c) Audit personnel d) A disgruntled junior staff member 4. Quality review should be practised: a) at all levels of the firm. b) at managerial level only. c) during staff performance review. d) during takeovers only. 5. The ISO 9000 series is concerned with: a) environmental management. b) quality management. c) audit requirements of specific businesses. d) marketing management. 6. Total quality management is a concept applicable to: a) non-executive directors only. b) independent directors only. c) accountants only. d) all assurance engagement providers.

7. The objective of assurance services is best described as: a) improving the firm's outcomes. b) comparing internal information and policies with those of other firms c) enhancing credibility of information. d) providing complete information. 8. Responding to a question such as ‘what would happen if …' is an attribute of which of the following types of engagements? a) Financial projection. b) Financial forecast. c) Financial forecast and financial projection. d) Review.

Chapter 3(2): Overview of the audit of financial reports 1. An independent auditor's primary reporting responsibility is to the: a) board of directors. b) Australian Securities and Investment Commission. c) creditors of the entity. d) members of the entity 2. Which of these is true? a) Representations by management are a substitute for other audit evidence that the auditor could reasonably expect to obtain. b) Representations by internal auditors are a substitute for other audit evidence that the auditor could reasonably expect to obtain. c) The chairperson of the board of directors should not be the chairperson of the audit committee d) Audit committees should be made up of executive directors to liaise with the auditors and to expedite the audit process wherever possible. 3. ASIC may grant audit relief, in certain circumstances, to which of the following types of entity? a) Large proprietary company b) Small proprietary company c) Public company d) Government company 4. The Corporations Act requires that auditors are competent. To be suitably qualified, the person must: i) be a member of CA ANZ, CPA Australia, the Institute of Public Accountants or other prescribed body. ii) hold a degree, diploma or certificate from a university. iii) be capable of performing the duties of an auditor and be a fit and proper person to be registered as an auditor. a) (i) and (ii) only b) (i) and (iii) only c) (ii) and (iii) only d) (i), (ii) and (iii) 5. Section 308 of the Corporations Act requires certain implied conditions to be reported if there is any deficiency or failure to comply. Which of the following is one of those implied conditions? a) Whether the auditor has obtained all information, explanations and assistance required b) Whether an audit has been carried out c) Whether the auditor is independent of the company d) Whether the financial reports are properly drawn up so as to give a true and fair view of the company’s financial affairs

6. The objective of the standard report format is to: i) state clearly the level of assurance provided by the opinion. ii) differentiate clearly between the responsibilities of the auditor and management in the audit. iii) communicate the work done by the auditor and limitations of the audit. a) (i) and (ii) only b) (i) and (iii) only c) (ii) and (iii) only d) (i), (ii) and (iii) 7. The internal auditor is: a) appointed by the shareholders. b) a substitute for the independent auditor’s work. c) a component of an entity’s control environment. d) always a qualified accountant. 8. Williams & Associates is a small firm with three partners. The audit partner, being the only registered company auditor in the firm, retired from the firm on 31 August 20X0. On this date the partner wrote a letter to the Australian Securities and Investments Commission (ASIC) requesting permission to resign as auditor of all of his clients. ASIC gave its consent to the resignation effective from 31 October 20X0. The auditor of the audit clients in the period from 31 August to 31 October is: a) the retiring partner. b) Williams & Associates. c) Australian National Audit Office as nominee. d) The next most senior partner of Williams & Associates.

Chapter 4: The auditor’s report 1. Which audit opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are both material and pervasive to the financial report? a) An unqualified opinion b) An adverse opinion c) A disclaimer of opinion d) A qualified opinion 2. A disagreement with management could be over: a) the appropriateness of the accounting policies selected. b) the method of application of accounting policies. c) the adequacy of disclosures in the financial statements. d) all of the above. 3. Which statement would not be found in a directors’ declaration? a) That the financial report gives a true and fair view. b) That the financial report is free from material misstatement whether due to fraud or error. c) That in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due. d) That in the directors’ opinion, the financial report is in accordance with the law. 4. When the auditor issues a disclaimer of opinion on a financial report, the audit report should: a) be unqualified. b) begin with the term ‘except for’. c) express an adverse opinion. d) have a paragraph headed ‘disclaimer of opinion’. 5. The issue of a ‘disclaimer of opinion’ by an auditor is most likely because of: a) the omission of the statement of cash flows. b) a material departure from applicable accounting standards. c) management’s refusal to provide written representations. d) a scope limitation in an extreme case.

6. Which of these would be considered a scope limitation? i) The client would not permit confirmation of receivables with their best customers for fear of annoying the customers. ii) The auditor is appointed to the engagement too late to observe the client’s counting of the inventory. iii) The auditor is forced to call upon an outside expert to properly value antiques that are held in the client’s vault as investments. a) (i) and (ii) only b) (i) and (iii) only c) (ii) and (iii) only d) (i), (ii) and (iii)

7. A ‘true and fair view’ is indicative that: a) the auditor has obtained a second opinion on the accounts. b) the auditor is satisfied with the reasonableness of the figures in the financial report. c) management’s assertions can be relied on. d) the accounting standards have been consistently applied in the preparation and presentation of the financial report. 8. Which of these items does not form part of the financial report, as defined in the Corporations Act (s. 295)? a) A statement of cash flows for the year b) Any additional disclosures necessary to give a true and fair view c) The directors’ report d) Notes required by Accounting Standards 9. When an auditor expresses an adverse opinion, the opinion paragraph should include: a) a direct reference to a separate paragraph in the auditor's report disclosing the basis for the opinion. b) the principal effects of the departure from generally accepted accounting principles. c) a description of the uncertainty or scope limitation that prevents an unmodified opinion. d) the substantive reasons for the financial statements being misleading. 10. If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial report, the auditor would issue a(n): a) adverse opinion. b) qualified opinion. c) disclaimer of opinion. d) unmodified opinion.

Chapter 5 : Client evaluation and planning an audit 1. The decision to accept an audit engagement requires the auditor to undertake a client evaluation. Client evaluations involve: (a) consideration of management's integrity. (b)identifying any special circumstances and unusual risks associated with the entity. (c) reviewing the auditing and accounting standards. (d) both a and b 2. Dealings between a predecessor and proposed auditor normally includes: (a) the predecessor auditor contacting the proposed auditor regarding undertaking the audit engagement. (b)the predecessor auditor being required to provide the proposed auditor with the working papers. (c) a supervised review of the previous auditor's working papers, given the client's permission. (d)discussions regarding the audit engagement independent of whether the client has given permission. 3. An auditor has been offered a new audit. What should the auditor do next? (a)The auditor should contact the client and discuss the risks associated with the audit for the purposes of planning. (b)The auditor should undertake a client evaluation to assess the integrity of management and to identify unusual risks as part of the process of deciding whether to accept the engagement. (c)The auditor should discuss with the client the possibility of performing 'other services' before accepting the engagement. (d) The auditor should ensure that adequate facilities will be available at the client office when the audit team starts the audit. 4. The exercise of 'due professional care' requires that an auditor: (a) examine all available corroborating evidence. (b) critically review the judgement exercised at every level on the engagement. (c) reduce control risk below the maximum. (d) attain the proper balance of professional experience and formal education. 5. The statement that is not correct concerning an audit engagement letter is: (a)it constitutes a legal contract between the auditor and the client. (b)a new letter must be prepared each year. (c)it outlines the responsibilities of management in the audit as well as the responsibilities of the auditor. (d)all of the statements are correct, i.e. no statement is incorrect.

6.Knowledge of related parties is important in obtaining an understanding of the client's business because: (a) there may be a large volume of transactions between related parties. (b) the value of transactions between related parties may be high. (c) the transactions may be between numerous related parties. (d) they may not be transactions that take place at arm's length. 7.ASA 520 requires that auditors apply analytical procedures at the planning stage of an audit: (a) to identify material weaknesses in the internal control structure. (b) to assess the predictability of financial data from individual transactions. (c) to test the various assertions that are embodied in the financial report. (d) to obtain a more detailed understanding and to identify areas of potential risk.

8.The greatest opportunities for fraudulent financial reporting exist with: (a) ineffective monitoring of management. (b) complex transactions and accounting estimates that are difficu...