AUDITING THEORY

1ST PRE BOARDS (MAY 2021)

[SET A]

1. The assurance that is given on the absence of an indication to the contrary

LIMITED

2. Which of the following is NOT one of the five elements of an assurance engagements?
ASSURANCE FILE

3. The misconceptions about the role of an auditor of financial statements are referred to as
“expectations gap”. Which of the following not one of those?
The auditor provides reasonable assurance

4. Profession, skepticism must be applied by auditors during the audit. Which of the
following is not an application of professional skepticism
Don't believe anything the client tells you

5. Following managements request for information regarding the different roles of internal and
eternal audit, you have collated a list of key characteristics.
(1) Appointed by audit committee
(2) Reports are publicly available to shareholders
(3) Review efficiency and effectiveness of operations to improve operations
(4) Express an opinion on the truth and fairness of the financial statements

Which of the following options correctly allocates the above statements to the relevant
auditor?
External Internal
2&4 1&3

6. Which of the following assertions are relevant to the audit of tangible non-current
assets?
(1) Occurrence
(2) Existence
(3) Classification
(4) Presentation
2,3 AND 4
7. Which of the following is not a source of evidence?
Financing structure

8. Which of the following procedures will provide appropriate audit evidence in

respect of the existence of non-current assets?
For a sample of non-current assets listed on the non current assets
register, physically inspect the asset

9. Select which of the following statements is false

Working papers must only be prepared in electronic form to ensure

confidentiality and security.

10. Which of the following does not need to be performed prior to determining
whether' a new client is acceptable?

Signing the engagement letter

11. Which of the following is least likely considered or performed in accepting a

new client?

WRITING A LETTER TO INCOMING AUDITOR

12. Which of the following must be included in the audit engagement letter?

Expected form and content of any reports

13. Which of the following is not part of the planning stage of the audit?

Overall review analytical procedures

14. Which of the following is not a purpose of Planning the audit

To ensure the audit is as profitable as possible

15. Which of the following sets the scope, timing, and direction of the audit

Audit program

16. Which matters will not be included in the audit strategy?

Specific audit procedures to respond to the risks assessed
1 7 . Which of the following is false in relation to materiality?

A balance which is omitted from the financial statements cannot be material to the
financial statements

1 8 . Misstatements can arise from error or fraud. Which of the following statements is correct
regarding the auditor's accumulation of identified misstatements?

The auditor must accumulate misstatements identified during the audit, other than those
that are clearly trivial.

19. Which of the following statements is NOT an explanation of by ISA 315

Identifying and assessing the risks of material misstatement through
understanding the entity and its environment requires a risk assessment to be
carried out at the planning stage?
The risk assessment will enable the audit senior to produce an accurate budget
for the audit assignment

20. It was decided that analytical procedures should be used at the planning stage of the audit
of ABC Co. is unsure what analytical procedure mean. Which of the following
assertions are example of analytical procedures?

(1) Comparing the actual revenue for the year with the forecast revenue from the yearly budget
(2) Cast and cross-cat the aged trial balance of accounts payable selecting any sample to test
(3) Comparing the gross profit margin calculated from the 2018 draft financial statements with
the gross profit margin for 2017
(4) Calculating the average salary per employee by dividing total payroll cost of the number of
employees in ABC’s workforce, and comparing tis with the industry average
1,3 AND 4

21. At which of the following stages of the audit MUST analytical procedures be used?
(1) Interim audit
(2) Audit planning
(3) Audit fieldwork
(4) Final review

2 and 4
22. When gaining an understanding of the specific investment of an audit client which of the
following matters would an auditor need to consider?
Acquisitions or disposals of the client's business activities

23. Which of the following procedures must you use to obtain an understanding of the entity
and its environment in accordance with PSA 315 Identifying and assessing the risk of
material misstatements through understanding the entity and its environment?
(1)Analytical procedures
(2)Confirmation
(3)Reperformance
(4)Inquiry

1 and 4

2 4 . Which of the following statements does not relate to having w e a k c o n t r o l environment

of an entity?

A high proportion of the income is cash

25. As this is the first year you are auditing ABC Co., it is necessary to understand and
evaluate the company's system of internal control. The audit firm's policy requires
the following steps to be taken when performing first year audits:

(1) Perform walkthrough tests

(2) Complete flowcharts and internal control evaluation questionnaires
(3) Revise the audit strategy and audit plan
(4) Perform tests of control
Which of the following correctly summarises the order in which the above steps would take
place?
2,1,4,3

26. During the course of the audit, the audit team identified numerous significant deficiencies in
internal control which must be reported to management. Which of the following statements is
correct regarding the report to managements?
(1) The report must include a description of the deficiencies and an explanation of their potential
effects.
(2) The report states that the results of the audit work have enabled the auditor to express an
opinion on the operating effectiveness of internal control.
(3) The report includes an explanation of the purpose of the audit.

1 and 3 only
27. Which of the following internal control activities would satisfy the objective of
preventing/detecting a material misstatement if it is operating effectively?

To ensure completeness of orders, a sequence check is performed on the sales invoices

manually by the sales clerk and any missing documents investigated

28. You instruct the audit junior to confirm whether the post is opened by more than one
individual. Over which of the following internal control objectives would this provide
assurance?
Cash receipts are not misappropriated

29. ABC Co., your audit client, is a large unlisted construct company (building houses, offices and
hotels) employing a large number of workers on various construction sites. Hours worked
are recorded using a clocking in/out system. On arriving for work and at the end of each days
work, each worker enters their unique employee number on a keypad. Workers on each site are
controlled by a foreman. The foreman has a record of all employee numbers and can issue
temporary numbers for new employees. Which of the following is likely to introduce the
highest risk of material misstatement?

Occurrence of wages

30. A client purchases its raw materials from a wide range of approved suppliers. When
production supervisors require raw materials, they complete a requisition form and this is
submitted to the purchase ordering department. Requisition forrns do not require
authorization and no references made to the current inventory levels _ of the materials being
requested. Which of the following are the most. likely consequences of the internal control
deficiency described here?

(1) Fraudulent purchases may be made, leading. to funds being diverted to third parties for
illegal purposes
(2) Stock-outs may occur, resulting in the company being unable to meet orders and lost
revenue
(3) Unnecessary purchases may be made, resulting in excess obsolescent raw materials
accumulating in inventory requiring to be written down
(4) Raw materials of poor quality may be purchased, resulting in low-quality products being
produced, customer goodwill being lost and going concern risks

2 and 3
31. Which of the following statements is correct regarding audit procedures concerning the
non-current asset cycle?
Because there are likely to be less capital purchases than standard purchases in the
year, it may not be cost-efficient to undertake tests of controls.

32. One of the control objectives of the sales system of ABC Co. is to ensure that goods
and services are sold to credit-worthy customers. Which of the following control
activities would assist ABC Co. in achieving this objective

Credit limits are checked before sales orders are accepted

33. In planning an audit of certain account, an auditor may conclude that specific
procedure used to obtain an understanding of an entity’s internal control need
NOT to be included because of the auditors judgements about materiality and
assessments of

INHERENT RISK

34. Mason also holds around P2 million of aircraft spares which are included within
inventory. Mason sells the aircraft spares to amateur flying associations. Aircraft
spares which are not sold after three years are scrapped. Approximately a quarter of
this value is made up of specialist equipment taken out of aircraft when it was
replaced by newer or more advanced equipment. Such specialist equipment is
transferred from non-current assets to inventory without adjustment, and
continue to be recognized at amortized cost. Which of the following
summarizes the key audit concern arising from the matter described?
Accuracy, valuation and allocation of inventory

35. Which of the following is an example of control risk?

Lack of a finance director