Testbank to accompany Audit and assurance 2 nd edition Leung (1) GRADED A+

Testbank to accompany Audit and assurance 2 nd edition by Leung et al. © John Wiley & Sons Australia, Ltd 2023 Chapter 1: Auditing and governance © John Wiley & Sons Australia, Ltd 2023 1.2 Chapter 1: Auditing and governance Multiple-choice questions 1. The three major professional accounting bodies in Australia are: a. CAANZ, CPA and ASIC. b. CPA Australia, IPA and AARF. c. ATO, AUASB and ASIC. *d. CAANZ, CPA Australia and IPA. The correct option is d. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 2. Which of these was not an Australian corporate collapse? a. Harris Scarfe. b. HIH Insurance Ltd. c. One.Tel. *d. All were Australian corporate collapses. The correct option is d. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 3. In relation to auditing the information hypothesis relates: a. To ‘does the audit meet the demands of users’. *b. To why there is a demand for audits. c. To what auditing is. d. To which auditing standards are produced. The correct option is b. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 4. Under ASA 200/ IAS 200 the primary objective of a financial report audit is to: a. Ensure that the company is free from all fraud. b. Provide assurance about the future viability of the entity. *c. To express an opinion as to whether the financial report is prepared in all material aspects, in accordance with a financial reporting framework. d. Ensure the company complies with all aspects of Corporations Law. The correct option is c. Learning objective 1.1 ~ explain the fundamental nature and value of audits. Testbank to accompany Auditing and assurance 2e © John Wiley & Sons Australia, Ltd 2023 1.3 5. It is not a requirement to be registered as an auditor in Australia to: a. Be a fit and proper person. b. Be a member of CPA Australia, CAANZ or other approved body. c. Has a degree or diploma from a course in accounting (including auditing) of not less than 3 years duration and in commercial law (including company law) of not less than 2 years duration or have other equivalent qualifications acceptable to ASIC. *d. All are requirements to be registered as an auditor in Australia. The correct option is d. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 6. Investors shift financial responsibility for audited financial information to the auditor in order to lower the expected loss from litigation or related settlements. This describes which theory of auditing? a. Agency. b. Explanatory. *c. Insurance hypothesis. d. Information hypothesis. The correct option is c. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 7. In Australia, the auditor’s opinion in the audit report must state: a. Whether the financial report is presented fairly, in all material respects, in accordance with the applicable financial reporting framework. b. Whether the financial report presents a true and fair view, in all material respects, in accordance with the applicable financial reporting framework. c. Whether the financial report provides a reasonable level of assurance, in all material respects, in accordance with the applicable financial reporting framework. *d. a or b. The correct option is d. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 8. In Australia, all of the following are required to have an annual audit, except: a. Not-for-profit organisations. b. Statutory authorities. *c. Small proprietary companies. d. All of the above are required to have an annual audit with no exceptions. The correct option is c. Learning objective 1.1 ~ explain the fundamental nature and value of audits. Chapter 1: Auditing and governance © John Wiley & Sons Australia, Ltd 2023 1.4 9. Which theory of auditing focuses more towards the decision usefulness role of accounting? a. Insurance hypothesis. b. Agency theory. *c. Information hypothesis. d. None of the above. The correct option is c. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 10. The separation of ownership and control in large organisations has resulted in: *a. An agency problem. b. The insurance hypothesis. c. CLERP. d. An audit expectation gap. The correct option is a. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 11. Any situation where information is prepared by one party and then attested as to its accuracy by another party is known as: a. Agency theory. b. An audit engagement. c. An assertion engagement. *d. An assurance engagement. The correct option is d. Learning objective 1.2 ~ describe the nature of assurance and how it relates to auditing. 12. Auditing bears what relationship to assurance? *a. Auditing is a sub-category of assurance. b. Assurance is a sub-category of auditing. c. They are different names for the same thing. d. Public accounting firms perform auditing engagements but not assurance engagements. The correct option is a. Learning objective 1.2 ~ describe the nature of assurance and how it relates to auditing. 13. Governance is a concept that can be applied to: Testbank to accompany Auditing and assurance 2e © John Wiley & Sons Australia, Ltd 2023 1.5 a. Not-for-profit organisations. b. The public sector. c. Corporations. *d. All of the above. The correct option is d. Learning objective 1.3 ~ describe the nature of governance. 14. The overall objectives of an auditor are: a. To obtain a reasonable assurance about whether the financial report as a whole is free from material misstatement. b. To report on financial reports. c. To communicate the findings as required by Australian Auditing Standards. *d. All of the above. The correct option is d Learning objective 1.4 ~ discuss the role of the auditor in governance. 15. Earnings management occurs when: a. Income and expenses are managed to influence the performance of the entity. *b. Financial statements and transactions are manipulated to influence perceptions about the entity. c. Executive salaries are increased surreptitiously by including the raises in late night meetings. d. Earnings are manipulated to improve the company’s tax position. The correct option is b. Learning objective 1.5 ~ evaluate the issues relating to governance. 16. Incentives for earnings management are inherent in the management structure but are least likely to originate from: a. Executive remunerations. b. Situations including financial distress. c. Political considerations. *d. High positive cash flows. The correct option is d. Learning objective 1.5 ~ evaluate the issues relating to governance. 17. The COSO enterprise risk management integrated framework covers five components of internal control. Which of the following is not a component? a. Governance and culture. b. Strategy and objective-setting. c. Performance. Chapter 1: Auditing and governance © John Wiley & Sons Australia, Ltd 2023 1.6 *d. Risk management. The correct option is d. Learning objective 1.5 ~ evaluate the issues relating to governance. 18. The SEC proposal on audit committees did not require: a. The audit committee to be directly responsible for the hiring of an independent auditor. b. The audit committee to be directly responsible for the oversight of an independent auditor. *c. The audit committee to be directly responsible for the internal auditor. d. The names of the committee members to be disclosed in the annual report. The correct option is c. Learning objective 1.5 ~ evaluate the issues relating to governance. 19. The Australian Stock Exchange (ASX) listing rules require an audit committee to be established by: *a. All companies on the S&P/ASX All Ordinaries Index. b. All companies on the S&P/ASX 500 Index. c. All companies on the S&P/ASX 300 Index. d. All companies. The correct option is a. Learning objective 1.6 ~ explain the role and objectives of an audit committee. 20. The best practice recommendations for audit committees states that the audit committee should consist of: *a. At least one member with financial expertise. b. Both executive and non-executive directors. c. At least one independent director. d. At least five members. The correct option is a. Learning objective 1.6 ~ explain the role and objectives of an audit committee. 21. The audit committee should report to the board of directors on which of these matters? a. The use of experts by the independent auditor. *b. Recommendations for the appointment or removal of an auditor. c. Audit procedures carried out by the independent auditor. d. All of the above. Testbank to accompany Auditing and assurance 2e © John Wiley & Sons Australia, Ltd 2023 1.7 The correct option is b. Learning objective 1.6 ~ explain the role and objectives of an audit committee. 22. An effective audit committee: a. Improves the credibility and objectivity of the accountability process. b. Assists the directors in discharging their responsibilities with due care, diligence and skill. c. Fosters an ethical culture throughout the organisation. *d. All of the above. The correct option is d. Learning objective 1.6 ~ explain the role and objectives of an audit committee. 23. Which body has a mission ‘to develop, in the public interest, high-quality auditing and assurance standards and related guidance to enhance the relevance, reliability and timeliness of information provided to users of audit and assurance services’? a. The FRC. b. The IAASB. c. The AASB. *d. The AUASB. The correct option is d. Learning objective 1.7 ~ appreciate the audit environment in Australia. 24. The body that is responsible for setting the auditing standards in Australia is: a. AASB. *b. AUASB. c. FRC. d. IAASB. The correct option is b. Learning objective 1.7 ~ appreciate the audit environment in Australia. 25. The true statement is: a. Most countries in the world have auditing standards that are legally enforceable. *b. Few countries in the world have auditing standards that are legally enforceable. c. Australia is the only country in the world that has auditing standards that are legally enforceable. d. The IAASB produces accounting standards which are legally enforceable in each country which adopts them. The correct option is b. Chapter 1: Auditing and governance © John Wiley & Sons Australia, Ltd 2023 1.8 Learning objective 1.8 ~ gain an overview of auditing standards. Testbank to accompany Auditing and assurance 2e © John Wiley & Sons Australia, Ltd 2023 1.9 Short answer questions 26. Describe the principal – agent relationship and how it is used to explain the development of auditing. Correct answer: When one or more of the principals engage others as agents to perform a service on their behalf, a principal-agent relationship arises. In the case of companies, the shareholders are considered the principals and management is the agent. The managers are employed to conduct the business in the interests of the shareholders. However, management may pursue self-interest which is to the detriment of the shareholders. As management also produces information regarding the performance of the company that information’s reliability is questionable. The theory suggests that auditors are used to align the interests of management with the shareholders. Auditors evaluate the credibility of a company’s financial information which restores confidence in the financial information. It is suggested that the existence of the principal-agent relationship and the problems associated with it caused the demand for auditing. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 27. Identify three arguments for the existence of a demand for auditing and briefly explain each. Correct answer: Agency theory: this theory recognises that there are costs involved in aligning the principal and the agent’s interests. External auditing is considered a monitoring cost and it allows the principal to assess the agent’s performance. The agent also recognises the benefit of audit as it can lower the cost of capital. Information hypothesis: investors demand audited financial information because it is useful for decision making. An audit improves the quality of financial information making it more reliable for investors to use in assessing the expected returns and risks associated with their investment. Audited information is also useful for internal decision making as it can detect errors and motivate employees to exercise more care in preparing records. Insurance hypothesis: an audit allows management to shift the financial responsibility for the reported information to the auditors. Using auditors indicates that management exercised reasonable care. Therefore, the expected loss from litigation for management is lower than if the statements were not audited. Learning objective 1.1 ~ explain the fundamental nature and value of audits. 28. Describe the two sides of the enterprise governance framework. Correct answer: Enterprise governance comprises on one side, the corporate governance concept of conformance and assurance and on the other the strategic direction concept of performance and resource use. Chapter 1: Auditing and governance © John Wiley & Sons Australia, Ltd 2023 1.10 The conformance aspect is based mainly on corporate governance best practice and covers issues such as: The roles of the chair of the board and top management to ensure accountability and independence. The composition, skills base, remuneration and training of the board and its committees, such as the roles of the non-executive directors. The adequacy and reasonableness of compensation schemes for executives. Internal control structures, risk management, and the role of internal audit. The financial reporting and disclosure regime. The independence of the audit function and the reporting mechanisms. The conformance aspect is directly related to the role of the auditor, in that the audit function provides the verifiability, assurance of compliance and accountability of the organisation. The performance dimension refers to the different tools and practices that are applied to enhance the value of the organisation. It includes setting strategic directions, comprehending and managing risk, and the key drivers of performance and decision-making processes. Auditing and assurance services can add significant value to the organisation particularly through the identification of risks and the assessment of risk management processes, or through due diligence audit and assurances. Learning objective 1.3 ~ describe the nature of governance. 29. Describe the essential components of enterprise risk management (ERM) as put forward by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). Correct answer: The COSO framework for ERM consists of five interrelated components derived from the way management runs a business. 1. Governance and culture: the board of directors provides oversight and supports management in achieving strategy and business objectives by establishing operating structures in pursuit of such strategy and object gives. the organisation specifies the desired ethical behaviours and demonstrates a commitment to their core values by building human capital aligned with the entity’s strategy and business objectives. 2. Strategy and objective-setting: ERM, strategy and objective-setting are intertwined in the strategic-planning process. The desired level of risk is established and aligned with strategy and operationalised through business objectives which identify, assess and respond to risk. 3. Performance: the organisation identifies risks likely to impact on the performance of strategy and business objectives, assesses the severity of risk, prioritises risks, identifies and selects risk responses, and develops and evaluates a portfolio view of risk. 4. Review and revision: the organisation identifies and assesses changes likely to substantially affect strategy and business objectives by reviewing performance and considering risk in order to improve ERM. 5. Information, communication, and reporting: the organisation leverages the entity’s information and technology systems to support ERM by using communication channels to report on risk, culture and performance at multiple levels including access the entity. Testbank to accompany Auditing and assurance 2e © John Wiley & Sons Australia, Ltd 2023 1.11 The assessment of inherent and control risks can be helped by the ERM framework. Learning objective 1.5 ~ evaluate the issues relating to governance. 30. 1. What is meant by the term Earnings Management? 2. Why has the focus on earnings management increased in recent years? 3. What incentives might there be for companies to engage in earnings management? Correct answer: 1. Earnings management is when financial statements and transactions are manipulated in order to influence people’s perceptions about the performance of the company, with the aim of showing a desirable outcome rather than the economic substance. Extreme cases can amount to fraud. 2. Failed companies such as Enron and WorldCom used earnings management techniques, and so have increased the focus. 3. Incentives can be inherent in the management structure and may include political considerations, executive remuneration, the ambiguity and inability of accounting standards to deal with complex transactions, or situations including financial distress or related party transactions. Learning objective 1.5 ~ evaluate the issues relating to governance. 30. What are the main objectives of the audit committee? Companies listed on the S&P/ASX All Ordinaries Index are subject to a listing rule obliging them to have an audit committee. What does the ASX suggest should be the makeup of an audit committee? Correct answer: The main objectives include: •Assisting the directors in discharging their responsibilities with due care, diligence and skill •Improving the credibility and objectivity of the accountability process •Improving the effectiveness of the internal and external audit functions and providing an objective forum for improving communication between the board and the internal and external auditors •Facilitating the independence of the internal and external auditors •Strengthening the role and influence of the non-executive directors •Fostering an ethical culture throughout the organisation. The ASX suggests that an audit committee should consist of only non-executive directors, a majority of independent directors and an independent chairperson, who is not the chairperson of the board, members who are all financially literate, at least one member with financial expertise and some members who have an understanding of the industry. Learning objective 1.6 ~ explain the role and objectives of an audit committee. Testbank to accompany Audit and assurance 2 nd edition by Leung et al. © John Wiley & Sons Australia, Ltd 2023 Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.2 Chapter 2: Sustainability and contemporary assurance engagements Multiple-choice questions 1. Under the Framework for Assurance Engagements which of these is one of the types of assurance engagements? a. Partial assurance. b. Absolute assurance. *c. Reasonable assurance. d. All are types of assurance engagements. The correct option is c. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 2. An assurance engagement as compared to a non-assurance engagement, requires: *a. An opinion to be provided. b. A positive not a negative opinion. c. The assurance practitioner to reduce the assurance risk to a level that is appropriate to the engagement. d. All of the above are required. The correct option is a. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 3. It is incorrect that the Framework for Assurance Engagements: a. Is based on the International Framework issued by the IFAC. b. Defines and describes the elements of an assurance engagement. c. Shows the concepts of an assurance engagement. *d. Establishes standards. The correct option is d. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 4. Which of these possible engagements by a firm with their accountants is an assurance engagement? *a. An assessment of the internal control system. b. Preparing financial reports. c. A management consulting service. d. All are assurance engagements. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.3 The correct option is a. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 5. A negative opinion in a limited assurance engagement: a. Is not as strong an opinion as a positive opinion. b. Normally is not based on detailed substantive or control testing. c. Expresses the opinion that nothing has come to the attention of the practitioner to suggest that the outcome is not in compliance with the criteria. *d. All of the above are true concerning negative opinions. The correct option is d. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 6. The suitability of criteria is the basis on which the information about the subject matter is prepared and measured. It is normally based on: a. Relevance and reliability. b. Neutrality and completeness. c. Understandability. *d. All of the above. The correct option is d. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 7. The assurance engagement that the normal auditing standards (ASAs 100-799) apply to is: *a. An audit of annual general purpose financial reports. b. A part only of a financial report, rather than the full report. c. AA summarised financial report. d. They apply to all of the above. The correct option is a. Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 8. When an auditor performs a review of an interim financial report which of the following steps would not be part of the review? a. Review of ratios and trends. *b. Testing of the computer controls. c. Reading the minutes of the shareholders' meetings. d. Inquiry of management. The correct option is b. Learning objective 2.2 ~ discuss assurance engagements for historical financial information other than those relating to general purpose financial report audits. Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.4 9. During a review of a financial report, the auditor would be least likely to: a. Read the financial report and consider its conformance with generally accepted accounting principles. b. Obtain reports from other accountants who reviewed a portion of the total entity. *c. Obtain written confirmation from management regarding loans to officers. d. Perform analytical procedures designed to identify relationships that appear to be unusual. The correct option is c. Learning objective 2.2 ~ discuss assurance engagements for historical financial information other than those relating to general purpose financial report audits. 10. The basic elements of an assurance report include the following a. A summary of the work performed. b. The practitioner’s conclusion in accordance with the type of assurance. c. Statement that the report is an independent assurance report. *d. All of the above. The correct option is d. Learning objective 2.3 ~ understand the features and conduct of assurance engagements other than those relating to historical financial information. 11. Auditors may be asked to give an audit opinion on only one part of a financial report based on historical financial information. These include all of the following except for: a. A statement of financial position. *b. Forecast information in support of a bank loan application. c. Accounts receivable. d. Provision for income taxes. The correct option is b. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 12. Which of these is not an assurance engagement? a. A review of historical financial information. b. A performance audit. *c. A consulting engagement to help an organisation meet its tax obligations. d. All are assurance engagements. The correct option is c. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.5 13. According to a KPMG 2016 survey: a. The dollar value of the typical fraud has increased. b. The number of instances of detected fraud has increased. *c. The total dollar value lost to fraud has increased. d. The total dollar value lost to fraud has decreased. The correct option is c. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 14. Performance engagements may give rise to: a. Limited assurance. b. Reasonable assurance. *c. Either a or b. d. Limited assurance, reasonable assurance or complete assurance. The correct option is c. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 15. Evidence should be obtained for which of the following in a prospective financial information assurance engagement report (PFI) such as a forecast or projection? *a. That the assumptions used by management are appropriate. b. That the PFI was prepared at the same time as the historical financial statements. c. That the PFI gives a true and fair view. d. Evidence should be obtained for all of the above. The correct option is a. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 16. Performance engagements investigate: a. Compliance with regulations and contractual obligations. b. The causes and effects of possible fraudulent activities. c. The full range of organisational sustainability performance. *d. The economy, efficiency and effectiveness of business activities. The correct option is d. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.6 17. Which of the following factors is a driver for the current electronic environment? a. The increasing amount of interconnectivity among organisations. b. The reliance of business on technology. c. The complexity of the information economy. *d. All of the above. The correct option is d. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 18. In a continuous audit client information is released in a very short timeframe, and auditors’ reports on that information follow the release almost immediately. One of the issues for auditors is: a. There is enough time for the auditor to gather evidence. *b. The auditor cannot rely on normal audit procedures. c. The auditor cannot use fully automated audit software. d. The auditor cannot check the internal control system. The correct option is b. Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 19. A set of official guidelines published by the United Nations Environmental program is known as: *a. The Global Reporting Initiative. b. The World Sustainability Guidelines. c. Triple bottom line reporting. d. The AA1000 Assurance Standard. The correct option is a. Learning objective 2.5 ~ understand the scope of assurance engagements over sustainabilityrelated information. 20. In research conducted by CPA Australia and the University of Sydney it was found that in Australia: a. 80% of companies in the private sector had their sustainability reports audited or verified. b. Just under 15% of companies in the private sector had their sustainability reports audited or verified. *c. 60% of companies in the private sector had their sustainability reports audited or verified. d. Less than 25% of companies in the private sector had their sustainability reports audited or verified. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.7 The correct option is c. Learning objective 2.5 ~ understand the scope of assurance engagements over sustainabilityrelated information. 21. Which of the following was not identified in a research study by Hargroves and Smith as a principle of sustainable development? a. Equal opportunity. b. Ensuring intergenerational equity. c. Conservation of biodiversity. *d. All were identified as principles of sustainable development. The correct option is d. Learning objective 2.5 ~ understand the scope of assurance engagements over sustainabilityrelated information. 22. A forensic audit in an organisation with an electronic environment may feature: a. Investigating employee emails and addresses, log-on times and messages. b. Searching for duplicate numbers of payments or receipts. c. Scanning lists of suppliers. *d. All of the above. The correct option is d. Learning objective 2.6 ~ understand the features and conduct of related services including agreed-upon procedures. 23. The conformance aspect of enterprise governance covers all these issues except: a. The roles of the chair of the board and top management. *b. Resource use. c. Internal control structures. d. The adequacy and reasonableness of compensation schemes for executives. The correct option is b. Learning objective 2.7 ~ understand the roles of internal and operational audits. 24. The statement that best describes internal auditing is: a. An activity to reduce risk. b. An activity located within an entity, primarily to detect fraud. *c. An independent and objective assurance activity within an entity. d. An accounting function located within an entity. The correct option is c. Learning objective 2.7 ~ understand the roles of internal and operational audits. Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.8 25. The key benefit to management of there being an internal audit function is that: a. It provides assurance to management that the organisation is complying with its legal requirements. b. External audit costs are reduced. c. It provides assurance to management that fraudulent activities will be detected. *d. It aids management in the areas of risk management, control and governance processes. The correct option is d. Learning objective 2.7 ~ understand the roles of internal and operational audits. 26. The types of operational audit reports issued by an internal auditor are: a. Financial report or compliance report. *b. Varied, and are based on auditor judgment of how best to present the findings. c. Examination report, review report or compilation report. d. Unqualified, qualified, adverse or a disclaimer of opinion. The correct option is b. Learning objective 2.7 ~ understand the roles of internal and operational audits. 27. Whose role is it to assist management to improve operational efficiency and effectiveness by monitoring the internal control and risk management systems? a. The audit committee. b. The external auditors. *c. The internal auditors. d. All of the above. The correct option is c. Learning objective 2.7 ~ understand the roles of internal and operational audits. 28. Operational auditing: a. Refers to an entity’s financial operations. b. Is historical in focus. *c. Has a main purpose of helping management to improve the entity’s effectiveness and efficiency. d. All of the above are correct. The correct option is c. Learning objective 2.7 ~ understand the roles of internal and operational audits. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.9 29. The approach that has been suggested for operational audits is: a. The risk based audit approach. b. The value-for-money audit approach. c. The process audit approach. *d. All three of the above approaches have been suggested for operational audits. The correct option is d. Learning objective 2.7 ~ understand the roles of internal and operational audits. 30. Which of these is not one of the key trends in internal auditing as identified by the 2017 PricewaterhouseCoopers study? a. A lack of alignment in views on the criticality and management of risks between management, the board and the internal audit. b. The foundational capabilities of many internal audit functions are not strong enough to add sufficient value in today’s areas of risk. *c. Fewer younger people entering the audit profession. d. Internal audit does not have adequate tools to analyse business disruption or recommend resolution. The correct option is c. Learning objective 2.7 ~ understand the roles of internal and operational audits. 31. The Auditor General has a legislative mandate to: a. Audit the financial statement of all entities controlled by the government except government business enterprises. b. Conduct a performance audit of all government agencies, authorities and companies other than government business enterprises. *c. Audit the financial statement of all entities controlled by the government. d. a and b. The correct option is c. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 32. Which of these is a type of public sector performance audit? a. Audit of a program or activity in a single entity. b. Cross-entity audit, reviewing the same activity in a number of entities. c. Audits of one or more Commonwealth partners. *d. All of the above are types of public sector performance audits. The correct option is d. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.10 33. The Australian National Audit Office (ANAO) reports directly to: *a. The Commonwealth Parliament. b. The ASIC. c. The Commonwealth Parliament. d. The ATO. The correct option is a. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 34. Which of these is not a function of the Australian National Audit Office (ANAO)? a. Auditing the statements of government bodies. b. Carrying out performance audits. *c. Commenting on government policy. d. All are functions of the ANAO. The correct option is c. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 35. The Joint Committee of Public Accounts and Audit (JCPAA) is not charged with: a. Inquiring into matters raised by the auditor-general and referred to it by the houses of Parliament. b. Examining the accounts of the receipts and expenditure of the Australian government. c. Examining the financial affairs of Australian government authorities. *d. Reporting to the Prime Minister. The correct answer is d. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 36. The independence of the Auditor General is: a. Approved by the Governor General. b. Assured by the houses of Parliament. *c. Prescribed by the Auditor General Act 1997 (Cwlth). d. Prescribed by the Australian Constitution. The correct option is c. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.11 37. The Auditor General is appointed by: a. The Parliament. b. The Prime Minister. c. The Joint Committee of Public Accounts and Audit. *d. The Governor General on the recommendation of the responsible minister. The correct option is d. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 38. The Auditor General’s powers to gather information are legislated. These powers do not include the power to: *a. Access private property. b. Direct a person to provide any information. c. Obtain information under oath. d. All of the above are legislated powers of the Auditor General. The correct option is a. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 39. The Auditor General must report on an exception basis if: a. Proper accounting records have been kept. b. All the necessary information and explanations were obtained. c. Records have been retained for at least 10 years. *d. Records have not been made available for inspection. The correct option is d. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. 40. For consolidated financial statements, the Auditor General must report: *a. The name of a subsidiary for which he/she has not acted as an auditor. b. The name of a subsidiary for which the financial statements have not been qualified. c. The procedures and methods used in arriving at amounts for consolidations. d. All of the above. The correct option is a. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.12 41. What type of auditing helps management to improve effectiveness, efficiency and economy? a. Functional auditing. *b. Operational auditing. c. Financial statement auditing. d. Performance auditing. The correct option is b. Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.13 Short answer questions 42. Define an assurance engagement and list its characteristics. Correct answer: An assurance engagement is ‘an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement for a subject matter against criteria’. An assurance engagement has the following characteristics: • An identifiable subject matter which is capable of consistent evaluation or measurement against a set of identified and suitable criteria; the subject matter should be in a form suitable for the gathering of evidence • A set of suitable criteria, available to the intended user(s) • Sufficient evidence in support of the practitioner’s conclusion • A written assurance report of the practitioner’s conclusion, in a form appropriate to either an audit-level engagement or a review-level engagement. Reference: Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 43. Describe the differences between a reasonable assurance engagement and a limited assurance engagement. Correct answer: The objective of both a reasonable and a limited assurance engagement is the reduction in assurance engagement risk to a level that is acceptable to the circumstances of the engagement. A reasonable assurance engagement will have a lower level of acceptable engagement risk as the basis for a positive form of the practitioner's conclusion. Both forms of engagement use evidence gathering procedures to obtain sufficient appropriate evidence. However, a reasonable assurance engagement will require more procedures in order to support the positive form of expression of the practitioner’s conclusion. The main difference between the two engagements is in the assurance report. A reasonable assurance engagement will have a positive form of expression of the conclusion. A limited assurance engagement will have a negative form of the expression of the conclusion. The procedures necessary to support the positive expression result in a higher level of assurance for the reasonable assurance engagement. Reference: Learning objective 2.1 ~ identify categories of assurance and assurance-related engagements. 44. What is a forensic audit, and (briefly) what would the auditor be looking for? When might it be used? What would an audit involving the electronic environment feature? Correct answer: Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.14 A forensic audit investigates the causes and effect of possibly fraudulent activities or system failures that may be the consequences of fraud. The forensic auditor may look for evidence of fraud and document system failures and identify the extent of losses incurred. A forensic audit may be used in response to a claim against a company as a result of intentional or unintentional failures of electronic systems for processing transactions. An insurer may use a forensic audit to evaluate the liability of a claim. An audit involving the electronic environment might feature: • Comparisons of employee emails and addresses, log-on times and messages. • Searching for duplicate numbers on payments or receipts. • Scanning lists of suppliers, customers and inventory movements. • Analysing the sequence of transactions to identify the intervention by unauthorised personnel. • Finding users of the same addresses and signalling phantom users. Reference: Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.15 45. What is continuous auditing and where might it be used? What are some of the problems associated with the continuous audit? Correct answer: Continuous auditing is a process or method that enables independent auditors to provide written assurance on subject matter using a series of auditor’s reports issued simultaneously with the occurrence of events underlying the subject matter. It might be used for financial statements available on demand via a website, for specific financial information in conjunction with a debt covenant agreement, compliance with published policies and practices regarding e-commerce transactions, or for the effectiveness of controls operating in key systems or processes. Issues include: there is little or no time to gather audit evidence for verification or substantiation. The auditor cannot rely on normal audit procedures, so a well-controlled application system is vital. Reference: Learning objective 2.4 ~ discuss examples of assurance engagements other than those relating to historical financial information. 46. Research conducted by CPA Australia and the University of Sydney identified a number of observations in relation to firms providing sustainability reporting. Outline the main findings of the research. Correct answer: Not all companies reporting sustainability-type information used a recognised framework like the GRI. 60% of the companies in the private sector had their sustainability reports audited and verified. The majority of these companies, however, included a reference to their discrete report in the annual report. Australian companies listed on the stock exchange were more likely to produce an integrated report in lieu of the sustainability report rather than replacing the annual report. Larger, multi-national firms in all jurisdictions showed higher levels of sustainability disclosures, with governance and environment ranking the highest. Companies operating in the materials and energy industry produced more sustainability information than other sectors. Whereas, human rights, society and product responsibility had the least disclosures. UK companies produced more diverse sustainability information covering more GRI indicators than companies in Hong Kong and Australia. In Australia, most environment disclosures are in the resources sector. Industry membership influences sustainability reporting behaviour, particularly where there is a requirement to report on certain activities. The analyses of the association between sustainability disclosure and financial performance show the following: • The higher scores of sustainability disclosures were positively associated with higher levels of operating cash flow to total assets, return on equity, return on assets and market capitalisation. • Sustainability disclosures, however, were found to be negatively associated with the quick and gearing ratios. • Profitability and cash flow return are strongly correlated with GRI scores, including analyst projections of future return on equity (ROE). Chapter 2: Sustainability and contemporary assurance engagements © John Wiley & Sons Australia, Ltd 2023 2.16 Reference: Learning objective 2.5 ~ understand the scope of assurance engagements over sustainability-related information. 47. Briefly outline the difference between compliance engagements and performance engagements. Correct answer: Organisations may have obligations to follow requirements imposed by law or regulation, by contract or internally imposed through accounting policies and procedures. Compliance engagements provide assurance that regulations, contractual obligations or other requirements have been complied with. An example of this would be reporting on whether an entity has complied with certain aspects of a bank loan agreement relating to interest payments and maintenance of predetermined financial ratios. Performance engagements involve obtaining and evaluating evidence about the efficiency, economy and effectiveness of an entity’s operating activities in relation to specified objectives. The organisation may wish for any of their processes to be investigated to ensure they are maximising performance. The difficulties for the auditor in these engagements relate to the appropriateness of the subject matter and the suitability of the criteria. The auditor needs to determine if the activity being tested (the subject matter) is capable of consistent measurement to ensure that procedures can be applied to allow sufficient and appropriate evidence to be obtained. The other issue is the criteria against which the activity is to be measured; it may be difficult to establish what actually constitutes appropriate benchmarks against which to compare the activity Reference: Learning objective 2.6 ~ understand the features and conduct of related services including agreed-upon procedures. 48. How has the role of the internal auditor changed since the advent of the Sarbanes-Oxley Act in the USA in 2002? Correct answer: Prior to 2002, most internal auditors used a risk-based approach to performing a range of audits of controls over operational effectiveness, compliance with applicable laws and regulations and the integrity of financial reporting. Value was added by identifying areas of operational improvement as well as opportunities to improve controls and reduce risk. With the introduction of the Sarbanes-Oxley Act, many internal auditors shifted their work to a compliance driven controls focus. In addition to focusing on financial reporting compliance, internal auditors had to also cover a wider range of risks, including fraud, major programs, contracts and transactions. Internal auditors are also charged with improving their organisation’s overall performance. Reference: Learning objective 2.7 ~ understand the roles of internal and operational audits. 49. What is the definition of internal auditing put forward by the Institute of Internal Auditors? Discuss the key components of the definition. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 2.17 Correct answer: The definition of internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, governance and control processes. The key parts of the definition are as follows: ‘Internal’ indicates that the auditing is carried on within an organisation by employees of the organisation or by personnel contracted for that purpose. ‘Independent and objective’ suggests that internal auditing is an activity carried out without bias or prejudice with unrestricted access to people, records, facilities and products. ‘Assurance and consulting activity designed to add value and improve operations’ notes that the internal auditing function provides a certain level of assurance for subject matters that assist in better management decisions and operations. ‘A systematic, disciplined approach to evaluate and improve the effectiveness of risk management, governance and control processes’ refers to the structure and approach of internal auditing. The nature of internal auditing involves a search for facts and a systematic process of evaluating the results of operations, identifying risks, giving risk-reduction advice, assessing the adequacy of controls, implementing improvements in control procedures and ensuring an effective governance structure. Reference: Learning objective 2.7 ~ understand the roles of internal and operational audits. 50. Explain the difference between external and internal auditors. Correct answer: External auditors are either individual practitioners or members of public accounting firms who render professional auditing services to clients. The clients of external auditors include profitmaking business enterprises, not-for-profit organisations, government agencies and individuals. Internal auditors are employees of the entities they audit, and they are involved in an independent appraisal activity within an organisation, as a service to the organisation. Reference: Learning objective 2.7 ~ understand the roles of internal and operational audits. 51. What is the objective of a performance audit of a public-sector entity? Correct answer: To provide the parliament with assurance relating to the administration of government programs and to assist public sector managers by identifying and promoting better administrative and management practices. Reference: Learning objective 2.8 ~ describe the public sector environment and types of audits in the public sector. Testbank to accompany Audit and assurance 2 nd edition by Leung et al. © John Wiley & Sons Australia, Ltd 2023 Chapter 3: Financial report audits © John Wiley & Sons Australia, Ltd 2023 3.2 Chapter 3: Financial report audits Multiple-choice questions 1. Place these phases of an audit in chronological order: A. Assess the risk of material misstatement B. Respond to assessed risks C. Perform risk assessment procedures D. Evaluate audit evidence a. A, B, C, D. *b. C, A, B, D. c. A, C, D, B. d. D, C, B, A. The correct option is b. Learning objective 3.1 ~ describe the overall audit process for audits of financial reports. 2. During phase I of the audit, the auditor performs risk assessment procedures. Which of the following is not one of the tasks undertaken during this phase of the audit? a. Understand internal control. *b. Assess the risk of material misstatements. c. Develop preliminary audit strategies. d. Make decisions about materiality. The correct option is b. Learning objective 3.1 ~ describe the overall audit process for audits of financial reports. 3. Which of the following is part of phase III of the audit process, which is responding to assessed risks? *a. Determine the nature, timing and extent of audit tests. b. Conduct tests of controls. c. Assess the risk of material misstatement. d. Identify significant inherent risks. The correct option is a. Learning objective 3.1 ~ describe the overall audit process for audits of financial reports. 4. Which of the following is not a benefit arising from having the financial reports audited? a. Auditors suggest how controls can be improved. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 3. 3 b. Auditors suggest how greater operating efficiencies may be achieved. c. Audits have a favourable effect on employee efficiency and honesty. *d. Audits provide access to less favourable borrowing terms. The correct option is d. Learning objective 3.2 ~ describe the benefits and limitations of audits of financial reports. 5. Which of the following is not an inherent limitation of an audit? a. Audit testing of selective samples. b. Forming professional judgements in highly specialised areas. c. Time lapse between the balance date and the presentation of the audit report. *d. All are inherent limitations. The correct option is d. Learning objective 3.2 ~ describe the benefits and limitations of audits of financial reports. 6. Which assertion is defined as: ‘transactions and events that have been recorded or disclosed, have occurred and such transactions and events pertain to the entity’? a. Completeness. *b. Occurrence. c. Accuracy. d. Cut-off. The correct option is b. Learning objective 3.3 ~ understand the importance of audit risk assessment and why it is linked to financial report assertions. 7. Which assertion relates mainly to the possible understatement of financial statement balances through the omission of items that exist or of the effects of transactions that occurred? a. Existence. b. Rights and obligations. *c. Completeness. d. Accuracy, valuation and allocation. The correct option is c. Learning objective 3.3 ~ understand the importance of audit risk assessment and why it is linked to financial report assertions. 8. Qualitative factors are applicable to materiality levels for particular classes of transactions, account balances or disclosures. The auditor considers the nature and other related matters of the items that might give risk to the risk of material misstatement such as: Chapter 3: Financial report audits © John Wiley & Sons Australia, Ltd 2023 3.4 a. The circumstances of the entity. b. The applicable financial reporting framework. c. Qualitative disclosures that are important to users of the financial report because of the nature of the entity. *d. All of the above. The correct option is d. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 9. In planning the audit, the auditor should assess materiality at two levels: a. The preliminary level and the final level. b. The company level and the divisional level. *c. The financial report level and the account balance level. d. The account balance level and the transaction level. The correct option is c. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 10. During the audit of XYZ Ltd the auditor found a misstatement that equated to 7% of the base amount. Based on historical practice, this amount is deemed to be: *a. A matter of professional judgement whether it is considered material. b. Material. c. Not material. d. None of the above. The correct option is a. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 11. “Tolerable error” (or tolerable misstatement) is the term used to indicate materiality at the: a. Balance sheet level. b. Income statement level. *c. Account balance level. d. Transactions level. The correct option is c. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 3. 5 12. The recorded balance in an account generally represents: *a. The upper limit on the amount by which it may be overstated. b. The lower limit on the amount by which it may be overstated. c. The upper limit on the amount by which it may be understated. d. The lower limit on the amount by which it may be understated. The correct option is a. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 13. In making judgements about materiality at the account balance level, the auditor must consider the relationship between it and overall materiality. This should lead the auditor to plan the audit to detect misstatements that: a. Are individually material to the statements taken as a whole. b. Are individually immaterial to the statements taken as a whole. c. Bring the cumulative total of known misstatements to the level of materiality established by management. *d. May be immaterial individually, but may aggregate with misstatements in other accounts to a material level. The correct option is d. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 14. Which of the following is not a course of action an auditor may take if they discover material misstatements in the accounts? *a. Consider issuing an unqualified audit opinion. b. Consider issuing a qualified audit opinion. c. Perform additional audit procedures. d. Ask management to correct the errors. The correct option is a. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 15. All else being equal, as the level of materiality decreases, the amount of evidence required will: a. Decrease. *b. Increase. c. Change in an unpredictable fashion. d. Remain the same. The correct option is b. Chapter 3: Financial report audits © John Wiley & Sons Australia, Ltd 2023 3.6 Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 16. In general, as an account balance decreases, the amount of evidence required will: a. Increase. *b. Decrease. c. Remain the same. d. Change in an unpredictable fashion. The correct option is b. Learning objective 3.4 ~ define the concept of materiality and its relationship with audit evidence. 17. If the bank reconciliation is incorrect the assertion violated would be: *a. Accuracy, valuation and allocation. b. Existence. c. Rights and obligations. d. Completeness. The correct option is a. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 18. The completeness assertion would be violated if: a. The allowance for doubtful accounts was understated. *b. Unbilled shipments had occurred during the period. c. The balance of accounts payable was overstated. d. All of the above would violate the completeness assertion. The correct option is b. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 19. On each engagement, the specific audit objectives will normally be: a. The same for all clients in the same industry. b. Equal to the number of categories of management’s financial report assertions. c. Similar for all clients in the same industry. *d. Tailored to fit the individual client. The correct option is d. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 3. 7 20. Which of the following would not be considered underlying accounting data? a. Related accounting manuals. b. Books of original entry. c. The general ledger. *d. Sales invoices. The correct option is d. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 21. Which of these would not be considered corroborating information? *a. The accountant’s work sheet. b. Cancelled cheques held by the client. c. Confirmation from vendors. d. Oral evidence obtained from client personnel. The correct option is a. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 22. Assertions about account balances and related disclosures include all of the following except: *a. Occurrence. b. Completeness. c. Rights and obligations. d. Classification. The correct option is a. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 23. In determining the sufficiency of evidential matter, which of the following would not normally be a factor? a. Materiality of the account. b. Audit risk. *c. The sampling technique used. d. The size of the population. The correct option is c. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. Chapter 3: Financial report audits © John Wiley & Sons Australia, Ltd 2023 3.8 24. Which of these would generally be considered the least appropriate form of evidence? a. The auditor’s computation of earnings per share. *b. Pre-numbered sales invoices prepared by the accounts receivable clerk. c. The auditor’s inspection of new machinery acquisitions for the current year where the client is a computer manufacturer. d. Correspondence from the client’s solicitor concerning litigation. The correct option is b. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 25. The appropriateness of audit evidence does not refer to: a. The quality of audit evidence. *b. The quantity of audit evidence. c. The sufficiency of the evidence with respect to the auditor’s objectives. d. The relevance and reliability of the audit evidence. The correct option is b. Learning objective 3.5 ~ indicate the factors that affect the sufficiency and appropriateness of audit evidence. 26. Use of the auditing procedure ‘confirmation’ would normally involve all of the following except: a. Auditor control of the mailing. *b. Written request and an oral response. c. A high degree of reliability. d. Direct evidence being obtained from outsiders. The correct option is b. Learning objective 3.6 ~ describe the classifications and types of auditing procedures that may be used in an audit. 27. The statement that is most accurate about the procedures that can be performed by computer-assisted audit techniques is: a. They can physically check the quantity of inventory on hand. b. They can check for the existence of non-current assets. c. They can observe the operation of control procedures throughout the period under audit. *d. They can re-perform a variety of calculations and perform calculations and comparisons used for analytical procedures. Testbank to accompany Audit and assurance 2e © John Wiley & Sons Australia, Ltd 2023 3. 9 The correct option is d. Learning objective 3.6 ~ describe the classifications and types of auditing procedures that may be used in an audit. 28. The subject of the auditing procedure ‘observation’ is least likely to be: a. Procedures. b. Inventory taking. *c. Physical assets. d. Processes. The correct option is c. Learning objective 3.6 ~ describe the classifications and types of auditing procedures that may be used in an audit. 29. What is the purpose of tests of control? a. To obtain an understanding of the control over assets. b. To provide evidence as to the fairness of management’s financial statement assertions. *c. To provide evidence about the effectiveness of the internal control structure, policies and procedures. d. None of the above. The correct option is c. Learning objective 3.6 ~ describe the classifications and types of auditing procedures that may be used in an audit. 30. Which of these is not a substantive procedure? *a. Tests of controls. b. Analytical procedures. c. Tests of details of transactions. d. All are substantive procedures. The correct option is a. Learning objective 3.6 ~ describe the classifications and types of auditing procedures that may be used in an audit. 31. An auditor contacts an accounts receivable of the client directly in order to confirm the balance owing. This is an example of: a. Test of co