Audit & Insurance v6.0 (AA)

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Total 85 questions

The management of Tory Bank Ltd suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceed to his wifes accounts, and then the loan has been written-off as irrecoverable. Some significant facts about the loan officer include
A high standard of living, explained as the result of sound investments and not taking vacations
An expensive personal car obtained through business contacts
Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis)
Marked annoyance with questions from auditors
The above fraud would least likely be discovered by

  • A. Analyses of the number of loans made by each loan officer.
  • B. Analysis of total dollar volume of loans by loan officer.
  • C. External or internal audits of loan files.
  • D. Reconciliation of total loans outstanding to the general ledger balance.


Answer : D

A company hired a highly qualified accounts payable manager who had been terminated from another company for alleged wrongdoing. Six months later the manager diverted
$28,570 by sending duplicate payments of invoices to a relative.
A control that might have prevented this situation would be to

  • A. Adequately check prior employment backgrounds for all new employees.
  • B. Not hire individuals who appear overqualified for job.
  • C. Verify educational background of all new employees.
  • D. Check to see if close relatives work for vendors.


Answer : A

Robert Sen is performing the audit of financial statement of Loko Plc., the objective is to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
Which of the following statements is correct about the preliminary judgment about materiality of financial statements of Loko Plc?

  • A. This is the minimum amount by which Robert Sen believes the statements of Loko Plc could be misstated and still not affect the decisions of reasonable users.
  • B. This is the maximum amount by which Robert Sen believes the statements of Loko Plc could be misstated and still not affect the decisions of reasonable users.
  • C. This is the mean average amount by which Robert Sen believes the statements of Loko Plc could be misstated and still not affect the decisions of reasonable users.
  • D. This is the median average amount by which Robert Sen believes the statements of Loko Plc could be misstated and still not affect the decisions of reasonable users.


Answer : B

John has been given the following draft figures for Kulran Ltd for the year ended 30 June
2011 to analyse. Materiality has been set at $35,000 and the finance director has told John in a planning meeting that there have been few changes in the year. Budgets were set at
2010 levels and there have been no major movements in non-current assets.
20112010
$$

Revenue3,497,2843,487,286 -

Cost of sales1,867,2942,008,967 -

Salaries467,900420,975 -
Which of the following is normally designed to detect possible material monetary errors in the above figures of financial statements?

  • A. Test of control
  • B. Walk-through test
  • C. Analytical procedure
  • D. Observation of a procedure


Answer : C

ISA 315 Identifying and Assessing the Risks of Material Misstatement requires an understanding of the legal and regulatory framework applicable to the client and the industry sector in which it operates.
With respect to ISA 315, which one of the following procedures would not be used in understanding the entity and its environment?

  • A. Inquiries of management and others within the entity
  • B. Inquiries of third parties
  • C. Analytical procedures
  • D. Observation and inspection


Answer : B

The following is an extract from an independent accountant's unmodified report on a profit forecast:
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Which of the following is the most appropriate type of assurance provided by this statement?

  • A. Positive assurance expressed negatively
  • B. Negative assurance expressed positively
  • C. High level of assurance expressed negatively
  • D. Limited level of assurance expressed negatively


Answer : D

Allisons and Co is a firm of Chartered Accountants. It has a reputation for excellence in the banking and insurance industry and has been invited to accept engagements by various institutions. Recently it has been invited by Nationally plc, the leading building society in the
UK.
Which of the following usages would be the BEST use of an engagement letter for Allisons and Co?

  • A. Auditor will obtain sufficient appropriate audit evidence for the audit of Nationally plc.
  • B. Confirmation of management representation letter of Nationally plc.
  • C. Provides access to all books, accounts and vouchers required for audit purpose of Nationally plc.
  • D. Endorsement of cooperation from other auditors of Nationally plc.


Answer : C

Audit sampling is the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.
You are carrying out a review of payments to suppliers with the aim to identifying at least one instance of fraud. Which of the following would be the most appropriate sampling technique to use?

  • A. Discovery sampling
  • B. Haphazard sampling
  • C. Attributes sampling
  • D. Monetary unit sampling


Answer : A

Elody Gaindy was discussing about the contents of audit report produce on the audit of
ABC Ltd with his friend Evie Christoffelsen. Evie informed Elody the matters on which auditors are required to report by exception such as:
Adequate accounting records of ABC Ltd have not been kept, or returns adequate for the audit have not been received from branches of ABC Ltd not visited by Elody Gaindy; or
The financial statements of ABC Ltd are not in agreement with the accounting records and returns; or
Certain disclosures of directors remuneration of ABC Ltd specified by law are not made
Which of the following statements is not true about the audit report prepared by Elody
Gaindy?

  • A. A one-paragraph report is generally used when the auditor is not independent.
  • B. A three-paragraph report ordinarily indicates there are no exceptions in the audit.
  • C. More than three paragraphs in the report indicates there must be some type of qualification in the audit report.
  • D. An unqualified opinion with modified wording has three paragraphs.


Answer : C

Mark Freebairn has prepared an audit report based on the audit of financial statements of
Jaguar Plc. Scope paragraph of the report described that An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the companys circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
A qualified report, produced by Mark cannot take the form of a qualification of

  • A. The opinion alone.
  • B. The scope alone.
  • C. Both the scope and opinion.
  • D. None of the opinion and scope.


Answer : B

The internal auditing department has been assigned to perform an audit of a division.
Based on background review, the auditor knows the following about management policies:
Company policy is to rapidly promote divisional managers who show significant success.
Thus, successful managers rarely stay at a division for more than three years.
A significant portion of division managements compensation comes in the form of bonuses based on the divisions profitability.
The division was identified by senior management as a turnaround opportunity. The division is growing, but is not scheduled for a full audit by the external auditors this year.
The division has been growing about 7% per year for the past three years and uses a standard cost system.
During the preliminary review, the auditor notes the following changes in financial data compared to the prior year:
Sales have increased by 10%.
Cost of goods sold has increased by 2%.
Inventory has increased by 15%.
Divisional net income has increased by 8%.
It is November and the audit manager is finalising plans for a year-end audit of the division.
Based on the above data the audit procedure with highest priority would be to

  • A. Select sales transactions and trace shipping documents to entries into cost of goods sold to determine if all shipments were recorded.
  • B. Schedule a complete count of inventory at year-end and have the auditor observe and test the year-end inventory.
  • C. Schedule a complete investigation of the standard cost system by preparing cost build- ups of a sample of products.
  • D. Schedule a year-end sales cut-off test.


Answer : B

The financial statements are the management's responsibility. They should therefore inform the auditors of any material subsequent events between the date of the auditors report and the date the financial statements are issued. If, after the date of the auditor's report but before the financial statements are issued, the auditor becomes aware of a fact that, had it been known to the auditor at the date of the auditors report, may have caused the auditor to amend the auditors report.
In the above situation, which of the following may NOT be an appropriate action taken by the auditor?

  • A. Discuss the matter with the management
  • B. Consider whether the financial statements need amendment
  • C. Inquire how management intends to address the matter in the financial statements
  • D. Issue a new audit report dated no earlier than the date of approval of the amended financial statements


Answer : D

Rostar Ltd develops games for X-box and PCs. The unique gaming experience made the company outstandingly popular among the local customers and its last game release outperform its expectation. This popularity leads to sudden growth in revenues that quadrupled during the last period. As a result, Rostar Ltd is now obliged to have a statutory audit for the first time.
Which of the following is not a benefit that Rostar Ltd may obtain from the statutory audit?

  • A. Assurance of compliance with Companies Act
  • B. Recommendations on systems via management letter
  • C. Increased accountability of the IT department
  • D. Independent confirmation of profits earned/net assets


Answer : C

In exceptional circumstances, the auditor may judge it necessary to depart from a relevant

  • A. The auditor shall perform complex audit procedures for Xyl Ltd to achieve the aim of the requirement.
  • B. The auditor shall perform alternative audit procedures for Xyl Ltd to achieve the aim of the requirement.
  • C. The auditor shall perform local audit procedures to achieve the aim of the requirement.
  • D. The auditor shall not perform any audit activity for agricultural asset of Xyl Ltd.


Answer : B

The internal auditing department has been assigned to perform an audit of a division.
Based on background review, the auditor knows the following about management policies:
Company policy is to rapidly promote divisional managers who show significant success.
Thus, successful managers rarely stay at a division for more than three years.
A significant portion of division managements compensation comes in the form of bonuses based on the divisions profitability.
The division was identified by senior management as a turnaround opportunity. The division is growing, but is not scheduled for a full audit by the external auditors this year.
The division has been growing about 7% per year for the past three years and uses a standard cost system.
During the preliminary review, the auditor notes the following changes in financial data compared to the prior year:
Sales have increased by 10%.
Cost of goods sold has increased by 2%.
Inventory has increased by 15%.
Divisional net income has increased by 8%.
Assume the auditor found that there was a plan to overstate inventory and therefore increase reported profits for the division. If reported correctly, the division would not have shown an increase in net income. The auditor has substantial evidence that the divisional manager was aware of and approved the plan to overstate inventory. There is also some evidence that the manager may have been responsible for the implementation of the plan.
The appropriate audit action would be to

  • A. Continue to conduct interviews with subordinates until a clear-cut case is made and then report the case to the audit committee.
  • B. Inform management and the audit committee of the findings and discuss proper follow- up action and/or further investigation with them.
  • C. Inform the divisional manager of the audit suspicions and obtain the managers explanation of the findings before pursuing the matter further.
  • D. Document the case thoroughly and report the suspicions to the external auditor for further review and external reporting.


Answer : B

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Total 85 questions