Which of the following types of assumptions would an auditor be concerned about whenevaluating the reasonableness of an entity’s accounting estimates?
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1 .For what purpose will the external auditor most likely use analytical procedures at theplanning stage of the audit?
A To determine the extent of substantive procedures which will be necessary duringthe audit B To identify areas of potential audit risk or new developments to give direction to theaudit C To assess the adequacy of the performance of the entity and the efficiency andeffectiveness of its operations
2 .What is the general audit objective when assessing accounting estimates?
A Consistent with industry guidelines B Based on objective assumptions C Reasonable under the circumstances
3 .A review of the revenues and expenses in the detailed profit and loss account of acompany, involving investigation of significant variations in comparison with theequivalent figures for the previous year, is most likely to detect which of the followingsignificant problems?
A The fact that a line of inventory has become obsolete during the year and should bewritten off B A misallocation of distribution costs as advertising expenses C The fact that the costs of some exceptional repairs to the company’s premises havenot been included in the profit and loss account D Fa...
4 .Which of the following approaches to evaluating the reasonableness of an accountingestimate would provide insufficient audit evidence?
A Review subsequent events or transactions occurring prior to audit completion B Develop an independent expectation of the estimate C Review and test the process used to develop the estimate D Review the minutes of board of directors and shareholder meetings for discussion ofthe estimate
5 .Hardware Co has a fixed mark-up of 50% on cost. The external auditor’s analytical review ofthe current financial statements has revealed a gross profit margin of 40% of sales.What could this indicate?
A Some sales have not been invoiced B Some purchases have not been recorded C Closing inventory has been undervalued D Goods used for personal consumption have been included in purchases
7 .As the new auditor of Elm Co (a listed company) you note that the company’s gross profitpercentage as per the draft accounts has fallen from 30% in the previous year to 20% in thecurrent year.Which of the following explanations is the most plausible?
A Errors in computation led to opening inventory being overvalued and this has beencompounded by the inclusion for the first time (so as to comply with IAS 2) ofindirect overheads in the closing inventory valuation B Errors in computation led to opening inventory being overvalued and the companyhas ...
8 .Which of the following assists an auditor in gaining assurance that a company’sfinancial statements are consistent with his knowledge of the business?
A Adequate planning of the audit B Documenting all audit procedures in detailed working papers C Carrying out an overall review of the financial statements
9 .Which of the following is NOT a factor that may influence estimation uncertainty?
A Management judgement B Observable or unobservable inputs C The length of any forecast period D The auditor’s professional judgement
10 .Which of the following procedures would an auditor NOT ordinarily perform inevaluating management’s accounting estimates for reasonableness?
A Develop an independent expectation of management’s estimates B Gather evidence to restate prior year estimates C Test the calculations used by management to develop the estimates
