Multiple Choice Questions: Please choose one correct answer for each of the following questions. Each is worth 1 mark.

Question 1.

If the lower assessed control risk approach is used, the control risk and planned detection risk in the audit risk model should be (     ), respectively.

A.  low and high

B.  high and low

C.  low and low

D.  high and high

E.  medium and medium

Question 2.

Which of the following is compatible with a high level of inherent and control risk?

A.  A larger sample is used, the materiality is set at a lower level, and test of details of balance are performed around 6 months into the financial year.

B.  A larger sample is used, the materiality is set at a higher level, and tests of details of balance are performed closer to the year end.

C.  A smaller sample is used, the materiality is set at a lower level, and tests of details of balance are performed closer to the year end.

D.  A smaller sample is used, the materiality is set at a higher level, and test of details of balance are performed around 6 months into the financial year.

E.  A larger sample is used, the materiality is set at a lower level, and tests of details of balance are performed closer to the year end.

Question 3.

Please determine the audit objective for each of the following audit procedures

1.   Review all purchase invoices received one month after the end of the financial year to see if they are not related to the financial year under audit.

2.   Recalculate the total sales and collate it with the accounts receivable balances. 3.   Select a sample of non-current assets and sight them.

A.  1. Classification of purchase, 2. Detail tied-in of sales, 3. Rights and obligations of non- current assets.

B.  1. Timing of purchase, 2. Posting and summarisation of sales, 3. Existence of non-current assets.

C.  1. Timing of purchase, 2. Detail tied-in of sales, 3. Existence of non-current assets.

D.  1. Timing of purchase, 2. Posting and summarisation of sales, 3. Rights and obligations of non-current assets.

E.   1. Classification of purchase, 2. Posting and summarisation of sales, 3. Existence of non- current assets.

Question 4.

Which of the following statements in relation to audit sampling is/are correct?

1.   When the systematic sample selection method is applied, it’s impossible to measure the probability of an item being selected.

2.   The results cannot be evaluated statistically if the systematic sample selection method is used.

3.   Haphazard sample selection is more likely to produce a biased sample than random sample selection.

A.  1 only.

B.  2 only.

C.  3 only.

D.  1 and 3.

E.  2 and 3.

Question 5.

Assuming other factors remain constant, how could a change in each of the following parameters affect sample size when performing attribute sampling?

1.   Increase tolerable deviation rate from 8% to 10%.

2.   Decrease expected population deviation rate from 3% to 2%.

3.   Decrease the risk of overreliance from 10% to 5%.

A.  1. Decrease, 2. increase, 3. increase.

B.  1. Decrease, 2. decrease, 3. increase.

C.  1. Decrease, 2. increase, 3. decrease.

D.  1. Increase, 2. decrease, 3. decrease.

E.   1. Increase, 2. increase, 3. decrease.

Question 6.

Extensive tests of details of balances are least likely to be required when,

A.  Inherent risk is high.

B.  Control risk is high.

C.  Acceptable audit risk is high.

D.  Planned detection risk is low.

E.  Analytical procedures reveal some unexpected fluctuations.

Question 7.

Which of the following evidence is more reliable and can be used to collate unit price and purchase quantity in the purchase journal?

A.  Purchase requisition form.

B.  Purchase order.

C.  Purchase invoice.

D.  Approval from the purchase manager on the purchase requisition form.

E.  Receiving report.

Question 8.

After performing ratio analysis at the planning stage, the auditor finds the inventory turnover ratio is 4.5. This is significantly lower than the value last year. Based on the analysis, which  of the following audit objectives and accounts are at risk?

[Note: Inventory turnover = COGS/[(Opening balance of Inventory + Closing balance of inventory)/2]

1.   Occurrence of COGS

2.   Completeness of COGS

3.   Realisable value of inventory (closing balance)

4.   Completeness of inventory (closing balance)

5.   Existence of inventory (closing balance)

6.   Accuracy of inventory (closing balance)

A.  1, 4 and 6.

B.  1, 3, 4 and 6.

C.  2, 5 and 6.

D.  2, 3, 5, and 6.

E.  2, 3, 4 and 6.

Question 9.

For each of the following audit procedures, determine the type of audit test.

1.   Accounts receivable confirmation.

2.   Tracing a shipping document to the sales journal to see if the quantity is accurately recorded.

3.   Reperform bank reconciliation.

4.   Take a sample of 100 paid purchase invoices to see if they have been approved by the department manager.

A.  1. Dual purpose test, 2. test of details of balance, 3. dual purpose test, 4. test of control.

B.  1. Dual purpose test, 2. substantive test of transaction, 3. dual purpose test, 4. test of details of balance.

C.  1. Test of details of balance, 2. substantive test of transaction, 3. dual purpose test, 4. test of control.

D.  1. Test of details of balance, 2. test of details of balance, 3. test of control only, 4. test of details of balance.

E.   1. Test of details of balance, 2. substantive test of transaction, 3. test of control only, 4. test of control

Question 10.

The auditor manager has asked you to review the following audit differences from audit working papers to determine their treatment.

The various materiality thresholds are listed below:

A.  1. A material misstatement that goes into the Summary of Misstatement. 2. A material misstatement that goes into the Summary of Misstatement.

3. An immaterial misstatement that is excluded from the Summary of Misstatement. B.  1. An immaterial misstatement that goes into the Summary of Misstatement.

2. A material misstatement that goes into the Summary of Misstatement.

3. A immateriality misstatement that is excluded from the Summary of Misstatement. C.  1. A material misstatement that goes into the Summary of Misstatement.

2. An immaterial misstatement that is excluded from the Summary of Misstatement.

3. An immaterial misstatement that is excluded from the Summary of Misstatement. D.  1. A material misstatement that goes into the Summary of Misstatement.

2. An immaterial misstatement that goes into the Summary of Misstatement.

3. An immaterial misstatement that is excluded from the Summary of Misstatement. E.   1. A material misstatement that goes into the Summary of Misstatement.

2. An immaterial misstatement that goes into the Summary of Misstatement.

3. An immaterial misstatement that goes into the Summary of Misstatement.

Question 11.

Select the option(s) that indicate the occurrence of sales has a higher risk of material misstatement.

1.   Some sales invoices have been sent to customers that are not on the approved customer list.

2.   Some of the shipping documents are missing, and these transactions have not been recorded in the sales journal.

3.   A sales transaction of $20,000 has been recorded twice in the sales journal.

4.  New sales personnel applied the outdated sales price to some sales transactions.

A.  1, 2, 3 and 4.

B.  1, 2 and 3.

C.  2, 3 and 4.

D.  1 and 3.

E.  3 only.

Question 12.

Which of the following statement(s) about inventory stocktake is/are correct?

1.   At the warehouse, auditors not only observe how client staff perform stocktake, but also perform test count themselves on a sampling basis.

2.   The main purpose of auditors’ presence is for auditors to show client staff how to perform inventory stocktake.

3.   The main purpose of inventory stocktake is for the client to work out their inventory

level and whether it is consistent with the inventory ledger.

4.   Inventory stocktakes are run by and administrated by auditors.

A.  1 and 2.

B.  1 and 3.

C.  1, 2 and 4.

D.  3 only.

E.   1, 2, 3 and 4.

Question 13.

For the following misstatements below, identify the type of misstatement.

1.   An auditor reperformed the age analysis of accounts receivable and find the client’s allowance for doubtful debt balance is significantly lower than his calculation.

2.   A sales transaction of $20,000 has been recorded twice in the sales journal.

3.   An auditor estimates the total misstatement of purchase account is $30,000 after testing a sample of purchase transactions.

A.  1. Factual misstatement, 2. Factual misstatement, 3. Judgement misstatement

B.  1. Judgement misstatement, 2. Factual misstatement, 3. Judgement misstatement C.  1. Projected misstatement, 2. Factual misstatement, 3. Judgement misstatement

D.  1. Judgement misstatement, 2. Projected misstatement, 3. Projected misstatement E.   1. Judgement misstatement, 2. Factual misstatement, 3. Projected misstatement

Question 14.

Which of the following factors indicates that the client might be struggling to remain going concern?

1.   The forecast for the coming 12 months shows that the cash position, especially the operating cash flows, is worsening.

2.   Due to the concerns about a potential economic recession in the next 12 to 18 months, Australian banks have tightened their lending conditions. As a result, the company is   struggling to roll over a long-term debt due in 8 months.

3.   One of the client’s new products has been popular and the sales have increased by 14% in the past year.

A.  1 only.

B.  2 only.

C.  1 and 3.

D.  1 and 2.

E.   1, 2 and 3.

Question 15.

What is the appropriate sampling unit for each of the following audit tests?

1.   Apply attribute sampling and trace a sample of 100 purchase transactions to purchase invoices.

2.   Apply attribute sampling and observe 30 items of fixed assets to see whether they are included in the fixed asset register.

3.   Use the dollar unit sampling to identify 50 customers with outstanding accounts receivable by the end of the year and send them confirmation letters.

A.  1. A purchase transaction, 2. A dollar, 3. A customer

B.  1. A purchase transaction, 2. A physical fixed asset, 3. A customer

C.  1. A purchase invoice, 2. A physical fixed asset, 3. A dollar

D.  1. A purchase invoice, 2. A fixed asset in the register, 3. A dollar

E.   1. A purchase transaction, 2. A physical fixed asset, 3. A dollar

Question 16 Sampling (4 marks)

Short Answer Question. Please write your answer in the space below.

1.   When performing attribute sampling, which of the two risks is more important, the  risk of over-reliance or the risk of under-reliance? Justify your choice by listing the consequence of each risk. (2 marks)

2.   As the audit manager, you are evaluating the results from some tests of controls. If  you set the tolerable deviation rate to 8% and find the sample deviation rate is 15%, what is your likely conclusion about the effectiveness of the internal control? (2 marks)

Question 17 Audit Risk Model (9 marks) Short Answer Question. Please write your answer in the space below.

State whether the acceptable audit risk, the inherent risk and the control risk would increase, decrease, or not change in response to the following factors. Briefly explain the reason for each factor. Note: Each factor should be considered independent from others.

1)        A material misstatement was identified in the previous financial year’s audit, where cut-off of sales was not correctly implemented for the 2021 financial year resulting in a $4 million misstatement.

2)        The company is planning to take out a new loan from ANZ.

Question 18 Subsequent Event (13 marks]

Short Answer Question. Please write your answer in the space below.

For the following separate and material events,

1) identify auditors’ responsibilities,

2) list the proper accounting treatment with justification, and

3) analyse the impact of the event on the audit report.

Your client, Vaccine Limited, runs a biotechnology company developing new vaccinations    for viral infections in Brisbane. The financial year under audit ended on 31 December 2022.  The audit report was signed off by the audit partner on 28 March 2023, whereas the financial report was issued on 29 March 2023.

a) On 4 April 2023, the auditor discovered a competitor lodged a legal case against Vaccine Ltd on 21 March 2023 for patent infringements. The patent in question covers a unique

method of producing a chemical compound that is used in vaccine manufacturing, which has  been used by Vaccine Ltd since early 2021. This involves a probable payout of $11 million,   which is material enough to affect audit opinion. A discussion with the company’s legal team and an external patent attorney suggested the company is likely to lose the case. (8 marks)

b) On 19 March 2023, the auditor discovered that the client has signed a new loan contract on

16 March 2023 with ANZ to borrow $5 million. The purpose of the loan is to provide

additional working capital for a new plant in Rockhampton. Information about the new loan is not reported in the financial report for the year ended 31 December 2022. (5 marks)

Question 19 Audit Objective, Internal Control, Test of Control and Substantive Testing (9 marks)

Please write your answer in the space below.

For each of the following internal controls:

(a) identify the most relevant general audit objective(s) for the control activity, (b) design an appropriate test of control for the control activity,

(c) choose one of the general audit objectives identified in (a) and design an appropriate substantive test for it.

Please note: Do not use analytical procedures unless an accounting estimate is involved.

(1)       The audit client’s internal purchase requisition forms are serially numbered/pre- numbered.

(2)       Sales staff use a barcode scanner to obtain the product name and selling price to avoid potential price errors in a manual process.

(3)       Security cameras are installed in all warehouses, where inventories are stored, to prevent and identify theft.