Which is the best way of describing a material item?
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1 .Two examples of internal controls operated at Fairweather Co include the financialaccountant signing the bank reconciliation (which had been prepared by a member of hisstaff) and the finance director comparing monthly expenditure on consumables to budgetedexpenditure.Control activities include:(1) Authorisation(2) Performance reviews(3) Information processing(4) Physical controls(5) Segregation of dutiesWhat TWO control activities do the examples at Fairweather Co illustrate?
A 1 and 5 B 1 and 2 C 3 and 4 D 5 and 3
2 .The auditor’s preliminary evaluation of the internal control system of a company is that it iseffective in ensuring the completeness and accuracy of the accounting records because thecompany has implemented multiple controls, including good segregation of duties. However,the auditor is aware that the effectiveness of the company’s internal controls is limited by thepossibility of collusion.What level of reliance on internal controls and what types and extent of testing wouldthe auditor normally plan to carry out?
A Level of reliance on controls is low;Extent of tests of control is nil;Extent of substantive procedures is extensive. B Level of reliance on controls is moderate;Extent of tests of control is reduced;Extent of substantive procedures is reduced. C Level of reliance on controls is high;Extent of tes...
3 .Which of the following statements is FALSE?
A Materiality depends on the monetary amount of an item B Materiality may depend on either the nature of an item or its monetary amount C Materiality is a matter of professional judgment
4 .The external auditor of Aaron Co has set a planning materiality threshold of $40,000 and aperformance materiality of $30,000. The audit testing approach to the following financialstatement items is being considered:(1) Harry, a director of Aaron Co, owes $1,000 to the company (borrowed during the year).(2) Sundry income of $35,000Which of the two items should be tested?
A Neither 1 nor 2 B Both 1 and 2 C 1 only D 2 only
5 .As an audit team member with two years of experience, you were assigned to carry out asubstantive test on directors’ expenses. The result of the test showed that in several casesinvolving the same director, the Chief Financial Officer (CFO) had authorised the overpayment of his expenses. Each expense item was less than the performance materiality level.What action should be taken?
A Draw conclusion B Discuss with a senior member of the audit team C Extend sample D Discuss with the CFO
7 .“The materiality level calculated at the planning stage should NOT be revised during laterstages of the audit.”Is this statement true or false?
A True B False
8 .The auditor of Woodferns Agencies Co is facing a legal claim for negligence. It is allegedthat a fraud was perpetrated by the manager at one of the smallest of the company’s 80branches. The auditor had not visited that branch for three years as he had adopted arotational testing approach. As a consequence the fraud had gone undetected for two years.What is the auditor’s BEST defence against the claim?
A Audit documentation shows that the audit was carried out in accordance withInternational Standards on Auditing B An up-to-date letter of engagement which points out to the directors that the auditshould not be relied upon to detect all frauds which may exist C Written representations from manageme...
9 .Which of the following procedures is NOT likely to result in the discovery of possiblenon-compliance with laws and regulations?
A Making inquiries of management or the entity’s lawyer B Reviewing internal control questionnaires C Performing tests of details of transactions
10 .A material fraud was discovered at Conner Co shortly after the auditor had presented anunmodified audit report to the annual general meeting. His standard letter of engagementindicated that he “would plan the audit so as to have reasonable expectation of detectingmaterial misstatements in the financial statements resulting from errors or fraud”, but alsostated that the primary responsibility for the prevention and detection of fraud lay withmanagement.Which of the following statements most accurately reflects the likelihood of the auditorbeing held liable for the failure to find the fraud?
A He is likely to be liable because his engagement letter accepted specificresponsibility to find material misstatements B He is likely to be found liable if he found indications of a possible fraud butdismissed them as immaterial having failed to adequately investigate them C He is likely to be hel...
