Question 1

Auditors must consider whether there are any fraud risk factors present when they are obtaining an understanding of the entity and its environment. Which of the following is not considered a fraud factor?
A) incentives/pressures.
B) attitudes/rationalisation.
C) opportunities.
D) length of employment.

Accepted Answer

Fraud risk factors typically include incentives/pressures that might lead someone to commit fraud, opportunities for fraud to be perpetrated, and attitudes/rationalization that allow individuals to justify fraudulent behavior. Length of employment is not considered a standard fraud risk factor in the context of assessing the risk of fraud.

Question 2

When obtaining knowledge about the entity's objectives and strategies and the related business risks, an auditor should consider:
A) industry developments.
B) new products and services.
C) expansion of the business.
D) all of the above.

Accepted Answer

When obtaining knowledge about an entity's objectives and strategies and the related business risks, an auditor should consider all relevant factors that could significantly impact the entity's financial statements. This includes industry developments, new products and services, and expansion of the business, as all these factors can influence the entity's risk profile and financial performance.

Question 3

Which of these best describes the auditor's planning responsibilities concerning related parties?
A) review procedures for identifying related parties.
B) identify the existence of related parties
C) obtain a list of all board members and place in the working papers.
D) investigate the background of all related parties.

Accepted Answer

The answer of Which of these best describes the auditor's...

Question 4

When auditing for fraud the auditors should do all of the following except:
A) consider any unusual or unexpected relationships that have been identified in performing analytical procedures.
B) conduct a brainstorming session to discuss the risk of fraud.
C) only investigate areas where all three fraud risk factors are present.
D) examine journal entries and other adjustments for evidence of possible material fraud.

Accepted Answer

Auditors should investigate areas where there is a significant risk of fraud, which does not necessarily require the presence of all three fraud risk factors (incentive/pressure, opportunity, and rationalization). It's important to assess and investigate any area with potential fraud risk, even if not all factors are present.

Question 5

Which of these would not normally be included in the permanent file portion of the working papers?
A) extracts or copies of the company replaceable rules.
B) a copy of prior years' working trial balances.
C) analysis of accounts that are important to the audit each year.
D) analytical review schedules from previous years.

Accepted Answer

A permanent file typically includes documents that are relevant to multiple accounting periods, such as company rules or foundational financial statements. Prior years' working trial balances, which change each year and are specific to a single period, would not normally be included in the permanent file.

Question 6

A high risk condition for the fraud risk factor 'opportunity' would be:
A) known or expected future layoffs
B) that the company is close to its debt covenants.
C) behavior indicating displeasure or dissatisfaction with the company or its treatment of an employee
D) large amounts of cash on hand.

Accepted Answer

The opportunity for fraud is often related to the ease with which someone can misappropriate assets or manipulate financial statements without being detected. Large amounts of cash on hand can provide such an opportunity, as cash is more easily stolen or misused compared to other assets that might require more effort or collusion to convert into personal gain.

Question 7

Knowledge of the entity's financing activities includes understanding the entity's:
A) debt structure.
B) inventory management policies
C) location of property, plant and equipment.
D) all of the above

Accepted Answer

Understanding an entity's financing activities primarily involves knowledge of its debt structure, as this relates to how the entity finances its operations and growth through borrowing. Inventory management policies and the location of property, plant, and equipment are more related to the entity's operating activities rather than its financing activities.

Question 8

The purpose of using analytical procedures in auditing is to:
A) identify inefficiencies in operations.
B) test internal controls.
C) identify unexpected fluctuations and relationships.
D) none of the above.

Accepted Answer

Analytical procedures in auditing are primarily used to identify unexpected fluctuations and relationships in financial data. These procedures help auditors understand the financial statements better and identify any areas that may require further investigation.

Question 9

Working papers provide all of the following except:
A) evidence that the audit was properly planned and carried out.
B) a means of supervising the audit.
C) the principal support for the financial statements.
D) support for the conclusions reached.

Accepted Answer

Working papers are primarily used to document the audit process, including planning, execution, and conclusions, rather than serving as the principal support for the financial statements themselves. The financial statements are supported by the underlying accounting records and documents of the entity being audited.

Question 10

Williams, Sparks and Kent audit partners have been conducting the audit for Just Fine Ltd, an importer of fine chocolate. The auditors have requested the clients accounting staff to prepare some of the schedules and analyses. Who retains the property rights for these working papers?
A) ASIC, as all working papers must be lodged with them.
B) Just Fine Ltd, as it is their staff who performed the work.
C) the auditors, as they are the independent contractors.
D) the accounting staff, as they are acting as agents.

Accepted Answer

The answer of Williams, Sparks and Kent audit partners have...

Question 11

Which of these would be considered an audit adjusting entry?
A) a significant amount of inventory was found which had not been included in the accounts and subsequently was identified by the auditors.
B) payroll owing for the last five days of the financial year was recorded by management.
C) the accounts receivable balance is debited by the auditors to separately show customer accounts with credit balances relating to customer advances.
D) depreciation on the office equipment was recorded by the accountant.

Accepted Answer

The discovery of significant inventory not included in the accounts by auditors would require an audit adjusting entry to correct the financial statements.

Question 12

Working papers could be expected to contain all of the following except:
A) a working trial balance.
B) schedules and analyses.
C) audit memoranda and corroborating information.
D) a complete copy of all the auditing standards.

Accepted Answer

Working papers typically include a working trial balance, schedules and analyses, and audit memoranda and corroborating information, but they would not contain a complete copy of all the auditing standards. Auditing standards are referenced and applied during an audit, but the complete set of standards is not part of the working papers.

Question 13

The title of a certain working paper is "Proposed adjusting and reclassifying entries." The use of the word "proposed" indicates that the:
A) listed adjustments are not considered necessary.
B) listed adjustments are not considered material.
C) client disagrees with the adjustments listed.
D) client must first approve them.

Accepted Answer

The use of "proposed" in the title suggests that the adjustments and reclassifications listed in the working paper are suggestions that require the client's approval before being implemented. This implies that the client's consent is needed to proceed with these adjustments, indicating they are not final until approved.

Question 14

The least likely source of information for the auditor in obtaining an understanding of the client's industry conditions is:
A) industry Audit Guides.
B) trade journals.
C) industry statistics compiled by government or private agencies.
D) data accumulated by the audit firm

Accepted Answer

The answer of The least likely source of information for...

Question 15

Which of the following would not be considered an analytical procedure?
A) comparing payroll costs with the number of employees.
B) comparing actual sales to budgeted sales
C) comparing financial ratio results with industry averages.
D) comparing source dockets with journal entries.

Accepted Answer

The answer of Which of the following would not be...

Question 16

Identify the primary considerations that apply to accepting an audit engagement. For each consideration, indicate the primary steps involved in the decision to accept or reject the engagement.

Accepted Answer

The answer of Identify the primary considerations that apply to...

Question 17

Which of these would not be of direct interest to an auditor who was obtaining knowledge of the entity's business operations?
A) method of obtaining revenues.
B) employment.
C) stock exchange listing requirements
D) transactions with related parties.

Accepted Answer

Auditors are primarily interested in aspects directly related to the financial statements and internal controls of a company. While stock exchange listing requirements (C) can indirectly affect a company's operations and financial reporting, they are generally more of a concern for the company's legal and compliance teams rather than auditors who are focused on financial transactions, revenue recognition, employment costs, and relationships with related parties which have direct implications on financial statements.

Question 18

Which of these would be considered a reclassifying entry?
A) a significant amount of inventory was found which had not been included in the accounts and subsequently was by the auditors.
B) payroll owing for the last five days of the financial year was recorded by management.
C) the accounts receivable balance is debited by the auditors to separately show customer accounts with credit balances relating to customer advances.
D) depreciation on the office equipment was recorded by the accountant

Accepted Answer

Reclassifying entries are made to reorganize or correct the classification of accounting entries. Option C, which involves debiting the accounts receivable balance to separately show customer accounts with credit balances relating to customer advances, is an example of a reclassifying entry because it changes how specific balances are presented in the financial statements without altering the overall financial position.

Question 19

How long does the Corporations Act require audit working papers to be kept for?
A) it is not specified in law.
B) for as long as they are useful.
C) for 7 years.
D) permanently.

Accepted Answer

The Corporations Act requires audit working papers to be kept for 7 years. This is to ensure that there is a sufficient record of the audit work performed to support the auditor's conclusions, should they need to be reviewed or referred to at a later date.

Question 20

Anne has been preparing the audit working papers for the audit of XYZ Company and she is being very careful to use all of the basic techniques. She has given each section a heading, documented evidence and summarised the conclusions. What basic technique has Anne not included in the working papers?
A) index numbers.
B) cross-referencing.
C) signatures and dates.
D) all of the above.

Accepted Answer

The answer of Anne has been preparing the audit working...

Quiz 8: Client Evaluation and Planning the Audit

Auditors must consider whether there are any fraud risk factors present when they are obtaining an understanding of the entity and its environment. Which of the following is not considered a fraud factor?

When obtaining knowledge about the entity's objectives and strategies and the related business risks, an auditor should consider:

Which of these best describes the auditor's planning responsibilities concerning related parties?

When auditing for fraud the auditors should do all of the following except:

Which of these would not normally be included in the permanent file portion of the working papers?

A high risk condition for the fraud risk factor 'opportunity' would be:

Knowledge of the entity's financing activities includes understanding the entity's:

The purpose of using analytical procedures in auditing is to:

Working papers provide all of the following except:

Williams, Sparks and Kent audit partners have been conducting the audit for Just Fine Ltd, an importer of fine chocolate. The auditors have requested the clients accounting staff to prepare some of the schedules and analyses. Who retains the property rights for these working papers?

Which of these would be considered an audit adjusting entry?

Working papers could be expected to contain all of the following except:

The title of a certain working paper is "Proposed adjusting and reclassifying entries." The use of the word "proposed" indicates that the:

The least likely source of information for the auditor in obtaining an understanding of the client's industry conditions is:

Which of the following would not be considered an analytical procedure?

Identify the primary considerations that apply to accepting an audit engagement. For each consideration, indicate the primary steps involved in the decision to accept or reject the engagement.

Which of these would not be of direct interest to an auditor who was obtaining knowledge of the entity's business operations?

Which of these would be considered a reclassifying entry?

How long does the Corporations Act require audit working papers to be kept for?

Anne has been preparing the audit working papers for the audit of XYZ Company and she is being very careful to use all of the basic techniques. She has given each section a heading, documented evidence and summarised the conclusions. What basic technique has Anne not included in the working papers?