Auditing and Internal Control

Please highlight the right answer or fill the appropriate gaps

Section A. Multiple choice questions. Please highlight the correct answer (any color)

1. What would be the impact on the audit report if the auditor believe the basis of
preparation of the financial statements is incorrect?

A. Unmodified opinion
B. Unmodified opinion with an emphasis of matter paragraph
C. Qualified opinion
D. Adverse opinion

2. In which of the following circumstances would a “Basis for opinion” paragraph be

included in the audit report?

A. All modified audit reports

B. Unmodified audit reports only
C. Audit reports with a modified audit opinion
D. All audit reports

3. Which of the following are elements of unmodified audit report as given in ISA 700
(Revised) Forming an Opinion and the Reporting Financial Statements?

1) Addressee
2) Basis for opinion
3) Auditor’s address
4) Emphasis of matter paragraph

A. 1, 2 and 3 only
B. 2,3 and 4 only
C. 1 and 3 only
D. All of them

4. When obtaining an understanding of the business of an audit client, which of the

following procedures MUST an external auditor use, as part of the risk assessment
process?

(1) Observation
(2
Reperformance
)
(3) Inspection
 A. 1 and 2
B. 1 and 3

C. 2 and 3
D. 3 only

5. Which of the following could result in reported material losses on disposal of plant
and machinery?
 
(1) Depreciation rates are too high
(2) Depreciation rates are too low
(3) Disposal proceeds are overstated
 

A. 1 only
B. 1 and 3

C. 2 only
D. 2 and 3

6. Which of the following matters is NOT relevant when auditors evaluate the
adequacy of work carried out by their own independent expert?

A. Published papers or books written by the expert 

B. The source data used
C. The relevance and reasonableness of assumptions used
D. The results of other audit procedures

7. The standardisation of audit working papers is LEAST likely to help with which of
the following?

A. Effective quality control

B. Review of audit work
C. Delegation of audit work
D. Use of professional judgement
 8. Which of the following statements most accurately summarises an auditor’s
obligations with regard to the use of analytical procedures on an audit engagement?

A. They MUST be used during the risk assessment process, and as

substantive procedures and during the final review stage
B. They MUST be used during the risk assessment process, and as
substantive procedures, and MAY be used during the final review stage
C. They MUST be used during the risk assessment process, and the final
review stage, and MAY be used as substantive procedures
D. They MUST be used as substantive procedures, and during the final
review stage, and MAY be used during the risk assessment process

9. Subsequent events procedures should be performed between the date of the

financial statements and WHICH DATE?

A. The date the subsequent events review is performed

B. The date of approval of the financial statements

C. The date of the auditor’s report
D. The date the financial statements are issued

10. Which of the following are analytical procedures?

1) Comparison with a company in a similar industry

2) Comparisons of current and prior year balances
3) Scanning analytics
4) Trend analysis
A. 1 and 2 only

B. 1, 2 and 4 only
C. 3 and 4 only
D. All of them

Section B. Scenario- based questions. Please highlight the correct answer in each question
or fill the gaps

The following scenario relates to questions 1–5

You are performing the audit of Daisy Co. Testing is currently being performed over receivables and
property, plant and equipment. An audit junior has been assigned to these sections and you are
responsible for reviewing his work. Receivables circularization (confirmation) letters have been sent out
to a sample of 15 customers. 11 responses have been received which confirms the balance on the client’s
receivables ledger. Two responses have been received which contain differences between the customer’s
ledger and Daisy Co. Two responses have not been received.

1. What is the most appropriate initial response in respect of the circularization

letters for which no response has been received?

A. Document the non-response and continue with other audit work

B. Send a follow up circularization request
C. Perform other receivables substantive procedures on the balance
 D. Request a written representation from the management

2. Which of the following are NOT appropriate substantive procedures for the
responses where differences are identified?

1) Discuss with the management the reason for the difference

2) Agree differences due to timing, such as cash in transit to post year-end cash receipts
3) Consider the need for a modified audit report for all differences identified
4) Request a written representation from management to confirm all differences noted are not
material

A. 1 and 2 only
B. 1,2 and 3
C. 2 and 3 only
D. 3 and 4

3. Which of the following substantive audit procedures would provide the best
evidence over completeness of additions to property, plant and equipment?

A. Obtain a breakdown of additions; cast the list and agree the total to
the non-current asset register
B. Review the list of additions and confirm they are assets rather than
repairs and maintenance
C. Inspect title deeds for property additions to ensure they are in the
name of the client
D. Select a sample of additions and agree the cost to supplier invoices

4. The audit junior has obtained the following evidence in respect of property, plant
and equipment:

1) Asset register reconciliation carried out by client management

2) Valuation report from independent appraiser
3) Depreciation proof in total carried out the audit junior
4) Verbal confirmation from the directors that they plan to dispose of one of the buildings

Rank the order of reliability of the audit evidence starting with the most reliable first?
A. 4, 2,1 and 3
B. 2, 3, 1 and 4
C. 2, 1, 4 and 3
D. 4, 3, 2 and 1
The following scenario relates to questions 6–10
You are an audit senior and are currently conducting the audit of Cats&Dogs Co for the year ended 30
June 20X9. Materiality has been set at $100,000, and you are carrying out the detailed substantive
testing on the year-end accounts receivable balance. Please refer to summary of audit plan for the
accounts receivable balance.

Customers Amount, $ Comment

Customer A 150,000 Confirmation was sent and received
Customer B 200,000 Confirmation was sent and received
Customer C 120,000 Confirmation was sent and received
Other customers 150,000 The audit sampling applied, 3 items were selected
and confirmations received.
Total 620,000

Result of confirmations process:

Customers Amount, per Amount, per Difference, S

receivables ledger $ confirmation
obtained $
Customer A 150,000 150,000 -
Customer B 200,000 190,000 (10,000)
Customer C 120,000 125,000 5,000
For audit sampling, 3 items with total balance of 25,000 were selected. As result of confirmations process
the difference in amount of 1,000 was obtained.

If no further procedures are to be performed, please evaluate the results of substantive audit procedures.

6- 8 Please make calculations and fill the following information in the table below:

Type of test Difference identified, $

Target testing 5 000
Audit sampling 6 000
Total 11 000

9. When deciding whether to use sampling which of the following should be considered?
1) Completeness of population
2) Appropriateness of the population
3) Size of the population
4) The time the auditor has available to perform the procedure

A. 1, 2 and 3
B. 2, 3 and 4
C. 1 and 4
D. All of them

10. Which of the following procedure would NOT be performed to follow up the
differences identified during confirmation process?

A. Review correspondence with the customer to assess whether there is

any source of differences
B. Discuss with management why they feel an adjustment is not
required in the financial statements being audited
C. Review post year-end bank statements to identified any payments
received from the customer from cash transit account
 D. Make to enquiry to other experts
Section C. Auditor’s reports scenario. Describe the impact on the audit report if matter
remains unresolved.

Scenario 1. Dummy Co

Dummy Co’ s year end is 30 September, however, subsequent to the year end the company’s sales ledger
has been corrupted by a computer virus. Dummy’ s financial director was able to produce the financial
statements prior to this occurring; however, the audit team has been unable to access the sales ledger to
undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected
and there are no backups available for the sales ledger. Dummy’s revenue is 15.6 mln, its receivables are
3.4 mln and the profit before tax is 2mln.

Scenario 2. Fusia Co

Fusia Co has experienced difficult trading conditions and as result is has lost significant market share. The
cash flow forecast has been reviewed during the audit field work and its shows a significant net cash
outflow. Management are confident that further funding can be obtained and so have prepared the
financial statements on going concern basis with no additional disclosures, the audit senior is highly
skeptical about it. The prior year financial statements showed a profit before tax of 1.2 mln, however, the
current year loss before tax is 4.4 mln and the forecast net cash outflow for the next 12 months is 3.2 mln.

Scenario 3. Minnie Co

During the audit of Minnie Co the following uncorrected misstatements has been noted. Profit before tax
is 10 mln.

Deprecation has been calculated on the total of land and building. In previous years it has been charged in
buildings. Total deprecation is 2.5 mln and the element charged to land is only 0.7 mln.

Comment: according to IAS 16, the land is not subject for deprecation.

Scenario 4. Bullfinch. com

Bullfinch. Com is a website company whose year end was 31 October 2019. The audit is almost complete
and the financial statements are due to be signed shortly. Revenue for the year is 11.2 mln and the profit
before tax is 3.8 mln. A key customer, with a receivable balance at the year end of 283,000 has just
notified Bullfinch. Com that they are experiencing cash flow difficulties and so are unable to make any
payments for the foreseeable future. The finance director has notified the auditor that he will write this
balance off as an irrecoverable debt in 2020 financial statements.

Answers:

Scenario Type of auditor’s Comment (only key points

report*(impact on relevant for decision making,
auditor’s report) can be in form of remarks like-
material, pervasive and etc.)
Dummy Co 2 Material, pervasive, unable to
obtain sufficient appropriate
audit evidence
Fusia Co 4/3 Please refer to slide for going
concern. In case if only
disclosure is missing it will be
qualified, if there are doubts
then adverse
Minnie Co 4/1 Material, but not pervasive if
materiality is 5% from PBT. If
 10% then unmodified
Bullfinch. com 3 Adverse, going concern matter,
as it is key customer

Reference*

1. Unmodified
2. Disclaimer
3. Adverse
4. Qualified

Section D. Matching definitions. Please match the following definitions with narratives.

Element Letter related to Explanation

explanation
1. Title D A. Provides a description of the
professional standards applied
during the audit to provide
confidence to users that the
report cane be relied on
2. Addressee B B. Identifies the intended user of
the report
3. Basis for A C. Identifies the person
opinion responsible for the audit
opinion in case of any queries
4. Key audit E D. Clearly identifies the report as
matters an Independent Auditor’s
Report
5. Name of C E. Draws attention to any other
engagement partner significant matters of which the
user should be aware

Element Letter related to Explanation

explanation
6. Occurrence I F. Transactions have been
recognized in the correct
accounting periods.
7. Accuracy H G. All transactions that were
supposed to be recorded have
been recognized in the financial
statements
8. Cut-off F H. Transactions have been
recorded accurately at their
appropriate amounts.
9. Classification J I. Transactions recognized in the
financial statements have
occurred and relate to the entity
10. Completeness G J. Transactions have been
classified and presented fairly
in the financial statements
Section E. True or false statements. Please mark if these statements are true (T) or false
(F).

Statement T or F? Tutor’s mark

Contingent audit fees are acceptable if F
appropriate safeguards are implemented
Audit risk is a function of two components, F
inherent risk and control risk.
At planning stage analytical procedures T
can assist in identifying the risks of
material misstatement.
Notes to the financial statement are F
considered as “Other information”
Higher levels of performance materiality F
should be set in areas where there is
higher risk of misstatement
Misstatements of small amounts may be T
material due to qualitative factors
For statistical sampling to be effective, the T
sample chosen should be typical of the
population
A familiarity threat arises where an T
engagement partner is associated with a
client for long period of time
Audit evidence is most reliable when the T
client’s internal controls are effective
Statutory audit is an example of negative F
assurance
Section F. Open questions discussion. Please critically evaluate of the extracts from audit
documentation. Please state at least 5 valid points for each case. Your answer should be in
the text box.

Background.
Please refer to two extracts from audit documentation of Purple Co.
Purple Co is a manufacturing company, has 6 difference locations. It is a listed entity.
In prior years the audit proposed the following adjustments, whose were corrected by
management:
- Allowance for doubtful debts – 600 thousand
- Allowance for obsolete inventory – 500 thousand.

Revenue for the current year 120 mln, PBT 5 mln. Forex exchange loss is 2.5 mln.
In prior years the audit team used PBT as benchmark for revenue calculation.

Extract 1. Materiality.

The audit team selected revenue as benchmark for the current year, as profit before tax has become
volatile due to fluctuation of foreign exchange rates. The rule of thumb applied is 2%.

The haircut applied is 10%.

The SUM de minimis level is determined as 10% from overall materiality

Then you suggestion for calculation of levels.

Extract 2. Accounts receivables documentation.

The client has 6 main customers, which represent 45% from overall accounts receivable balance. The
remaining population consists of 125 customers with different amount.

The audit team decided to use audit sampling and selected 7 items. The auditors have sent letters to each
counterparty asking for confirmation of the client’s year-end balance. 6 responses from counterparties
were received. There was difference is one response, but it was not considered for further analysis, as it
was not material.

No follow up procedures were performed to the remaining confirmation, as the balance with
counterparty is considered as not material.
Answers to previous tests

1. This is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material,
either individually or when aggregated with other misstatements.
Detection risk

2. Understanding of the entity and its environment is important for the auditor in order to
help identify the risks of material misstatement to provide a basis for designing and
implementing responses to assessed risk and to ensure that sufficient appropriate audit
evidence is collected.
True

3. The audit manager has asked you to review the results of some statistical sampling
testing, which resulted in 20% of the payables balance being tested.
The testing results indicate that there is a $45,000 error in the sample: $20,000 which is
due to invoices not being recorded in the correct period as a result of weak controls and
additionally there is a one-off error of $25,000 which was made by temporary clerk. What
would be an appropriate course of action on the basis of these results?
A different sample should be selected as these results are not reflective of the population

4. Which of the following statements, relating to the auditor’s reporting responsibilities for
going concern, if any, is/are correct?
(1) Where management is unwilling to make their assessment of the company ability to
continue as a going concern, the auditor should include an emphasis of matter
paragraph in the audit report.
(2) Where the use of the going concern assumption is inappropriate, the auditor should
include a qualified opinion in the audit report.
Neither 1 nor 2

5. Which of the following procedure are tests of control an auditor should perform in testing
the inventory cycle of their client whilst attending the inventory count?
(1) Observe whether the client’s staff are following the inventory count instructions
(2) Review inventory present in the warehouse for the evidence of damage or obsolescence
(3) Obtain a sample of the last goods received notes and goods despatched notes and
follow through to ensure inclusion in the correct accounting period
(4) Inspect and review management’s inventory count instructions
1 and 4

6. Which TWO of the following substantive procedures provide evidence over the
EXISTENCE of trade receivables?
(1) Agreeing a sample of goods despatched notes to sales invoices and to the sales ledger
(2) Undertaking a receivables circularization
 (3) Review of post year-end cash receipts, if these relate to year-end receivables follow
through to the sales ledger
(4) Recalculating the allowance for uncollectible accounts
2 and 3

7. Which of the following statements, relating to International Standards on Auditing (ISAs),

if any, is/are correct?
(1) International Standards on Auditing (ISAs) are issued by the International Accounting
Standards Board (IASB) and provide guidance on the performance and conduct of tan
audit
(2) In the event that ISAs differ from local legislation in a specific country, auditors must
comply with the requirements of the ISAs
Neither 1 nor 2

8. Which TWO of the following statements regarding the use of analytical procedures
during the PLANNING stage of the audit are correct?
(1) Analytical procedures are useful when forming an overall conclusion as to whether the
financial statements are consistent with the auditor’s understanding of the company
(2) Analytical procedures can be used to obtain relevant and reliable audit evidence
(3) Analytical procedures can assist in identifying the risks of the material misstatement
(4) Analytical procedures can assist in identifying unusual transactions and events
3 and 4

9. Which of the following audit procedures should be performed in relation to the balance
with counterparty to determine if the payables balance is understated (based on
received confirmation)?
Inspect the goods received to determine when the goods were received

10. When deciding whether to use sampling which of the following should be considered?
1) Completeness of the population
2) Appropriateness of the population
3) Size of the population
4) The time the auditor has available to perform the procedure
1, 2 and 3 only

11. Performance materiality – the amount set by the auditor at less than materiality for the
financial statements (overall materiality) as a whole to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality for the financial statements as a whole
True
 12. Is the following component of an intenal control system correctly explained? Risk
assessment Risk assessment is the engagement of independent third party experts to
assess the risk management processes and procedures in place in an organization and
to provide a written report on system deficiencies with appropriate recommendations
False

13. Is the following component of an internal control system correctly explained? Control
activities: Control activities are the policies and procedures that help ensure that
management directives are carried out
True

14. Which of the following would NOT appear in the audit strategy?
1) Risk assessment and materiality
2) Results of substantive analytical audit procedures
3) Consideration of quality control procedures such as supervision and review
4) Details of audit scope, direction and timing.
2 only

15. In respect of the payable testing, which of the following sampling method is described?
Payables: Trace a sample of invoices listed in the payables ledger back to the purchase
invoice to ensure they have been recorded at the correct amount in the ledger. Start at a
random point and test every $200th
Monetary unit sampling

16. Which of the following financial statement assertions is LEAST relevant to the audit of
inventory
Occurrence

17. Which of the following statements, if any, are correct?

1) Analytical procedures are required at the planning stage, but not as a substantive
procedure
2) Auditors are required to perform risk assessment procedures consisting of enquiries,
analytical procedures, observation and inspection
Neither 1 nor 2

18. Which of following assertions does relate to the definition? management has stated that
all data, transactions amounts, and account balances have been accurately recorded
and related disclosures have been appropriately measured and described. For example,
if a client receives an invoice for 100,000, it actually records it at the accurate number
100,000 and not 100,100.
Accuracy

19. Which of the following is NOT an advantage of using narrative notes (controls
documentation)?
Can be cumbersome for complex systems

20. What type of testing should the auditor apply in this case? The detailed breakdown of
accounts receivable includes 1200 balances with different counterparties as at 31
December XX. 10 of them represent 50% of outstanding balance. If the auditor selected
these 10 items for confirmation process, the remaining population will be still material for
audit
Targeted testing and audit sampling

1. Which TWO of the following substantive procedures provide evidence over the EXISTENCE
of trade receivables?
(1) Agreeing a sample of goods despatched notes to sales invoices and to the sales ledger
(2) Undertaking a receivables circularisation (confirmations)
(3) Review of post year-end cash receipts, if these relate to year-end receivables follow through
to the sales ledger (4) Recalculating the allowance for uncollectible accounts (2 Points)
Answer: 2 and 3

2. Please match the scenario and type of test of details The auditors obtained a revenue
transaction report from the client which consisted of 1050 transactions. All transaction from
different small counterparties (1 Point)
Answer: Audit sampling

3. It is the mахimum amount of misstatement that could exist before information in financial
statements is considered misleading
Answer: Overall materially

4. Please match the scenario and type of test of details. The client has 6 accounts, each with a
different customer. The auditors have sent letters to each counterparty asking for confirmation
of the client's yуear-end balancе (1 Point)
Answer: Targeted testing
5. Misappropriation of assets does not include (1 Point)
Answer: Fictitious and overstayed assets

6. Please match the scenario and type of test of details The auditor has received the report
containing duration of good delivery. The auditor wants to test the accuracy of data related to
dates. (1 Point)
Answer: accept-reject

7. Which of the following audit procedures for obtaining audit evidence is correctly described? (2
Points)
Answer: observation consists of looking at a procedure or process being performed by others

8. The audit junior has obtained the following evidence in respect of property, plant and
equipment:
(1) Asset register reconciliation carried out by client management
(2) Valuation rерort from independent Charter Surveyor (3) Depreciation proof in total carried
out the audit junior
(4) Verbal confirmation from the directors that they plan to dispose of one of the buildings Rank
the order of reliability of the audit evidence starting, with the most reliable first? (2 Points)
Answer: 2,3,1 and 4

9. It takes into асcount the aggregation risk of individually immaterial misstatements that may
cause the financial statements to be materially misstated (1 Point)
Answer: detection risk

10. The risk that the audit procedures will not detect a material misstatement that exists in the
financial statements. (1 Point)
Answer: inherent risk

11. Please match the scenario and type of test of details The auditors obtained a revenue
transaction report from the client which consists of 1050 transactions. All transactions from 1
сounterparty. (1 Point)
Answer: targeted testing
12. Please match the scenario and type of test of details The auditors want to confirm that the
invoices have been classified in the appropriate ageing ranges. (1 Point)
Answer: accept-reject

13. Which TWO of the following should be included in an audit engagement letter?
(1) Objective and scope of the audit
(2) Results of previous audits (3) Management s responsibilities
(4) Need to maintain professional skepticism (1 Point)
Answer: 1 and 3

14. Which TWO of the following statements regarding the usе of analytical pгосedures during
the PLANNING stage of the audit are correct?
(1) Analytical procedures are useful when fornming an overall conclusion as to whether the
financial statements are consistent with the auditor's understanding of the company
(2) Analytical procedures can be used to obtain relevant and reliable audit evidence
(3) Analytical procedures can assist in identifying the risks of material misstatement
(4) Analytical procedures can assist in identifying unusualytransactions and events (2 Points)
Answer: 3 and 4

15. When deciding whether to use sampling which of the following should be considered?
1) Completeness of population
2) Appropriateness of the population
3) Size of the population
4) The time the auditor has available to perform the procedure
Answer: 1, 2 and 3 only

16. According to ISA 240.11, its definition of: "An intentional act one or more individuals among
management, those charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage." (1 Point)
Answer: Fraud
17. The entity holds or controls the rights to assets, and liabilities are the obligations of the
entity. When an entity states that it owns an asset, for example, a building, it really actually has
the right to that particular asset. It also means that if an entity has a liability, for example, a loan,
it is actually responsible for it. (1 Point)
Answer: Rights and obligations

18. With respect to fraud and error which of these statements is not correct? (1 Point)
Answer: As part of their audit procedures the engagement team should discuss the audit client's
susceptibility to fraud

19. Transactions, events, and account balances have been recorded in the proper accounts,
resulting in an appropriate presentation and description of the financial statements.
Answer: Classification

20. Keeping an open mind about the honesty and integrity of management and those charged
with governance until inquiries are concluded
Answer: Professional skepticism

1. Except for… the financial statement given true and fair view (Qualified)
2. The Financial statement give true and fair view (Unmodified)
3. We do not express an opinion (Disclaimer)
4. The Financial statement do not give true and fair view (Adverse)

Being appointed internal as well as external auditors will create a confidentiality threat (F)
An auditor must have ten year’s post qualification experience before being allowed to sign an
audit report (F)

Which TWO of the following are reasons why an auditor would need to modify the audit
opinion?
  They conclude that the financial statements as the whole are not free from material
misstatement.
 They have been unable to obtain sufficient appropriate evidence to conclude that the
financial statement as the whole are free from material misstatement

Which of the following statement is correct regarding materiality of the matter?

 The matter is likely to be material as it is just under 5% of profit

Which of the following procedure would not be performed to allow the auditor to form the
conclusion as the level of adjustment required to be receivable balance?

 Perform a direct confirmation of the balance outstanding ay the year end

Assuming the matter is considered material and Pasific’s directors have refused to adjust th
financial statements, what would be the appropriate audit opinion?

 Disclaimer

If after the financial statements have been issued, Beat Audit becomes aware of a fact which
may have caused its report to be amended, the firm should consider several possible actions.
Which of the following are appropriate action for Best Audit to take?

 Discuss the matter with management and where appropriate those charged with
governance
 Enquire how management intends to address the matter in the financial statements where
appropriate.
Which of the following audit procedures should be performed to form a conclusion as to whether
the financial statements require amendment in relation to the unfair dismissal claim?

 Write to the finance director to confirm the claim and level of damages.

You are drafting the auditor’s report for Willson Co and the audit engagement partner has
reminded you that the report will need to reflect the requirement of ISA 701. According to ISA
701 which of the following should be included in the «Key Audit Matters» paragraph in the
auditor’s report.

 Matters which required significant auditor attention

Which of the following audit opinions will be issued if the unfair dismissal case is NOT adjusted
for or disclosed within the financial statements.

 An unmodified audit opinion