AUI3702 EXAM PACK 2024

MAY/JUNE 2014 QUESTION 1 MULTIPLE CHOICE 1-D 2-A 3-A 4-C 5-D 6-D 7-D 8-B 9-C 10-B QUESTION 2 2.1. Weaknesses Controls Overtime hours are not approved by section head of supervisors and employees work overtime as the feel. Having to work overtime should be approved by the section head or the supervisors The security personal who mans the entrance is only in place during busy periods. Security personnel should be present at all times to ensure that employees clocks only once with the clock card There is no segregation of duties as Apple Smith now almost everything in the department There should be segregation on duties in respect to duties carried out by apple smith probably a senior personnel who reviews the duties carried out by him The clock cards are not made in terms of authorized employee list The personnel department should prepare the clock cards in terms of the authorized employee list No segregation of duties Apple smith should not perform all the duties, there should be segregation of duties in respect to duties performed by apple smith There are no independent reconciliations and reviews on the work performed by apple smith and there are only random Independent reviews and checks on the work performed by apple smith should be carried out regularly and not on random 3 checks basis Granny tree cashes the cheque, prepares the pay packets and updates the accounting records Segregation of duties is more essential at this level as fraud can be facilitated by having one person performing all functions Employees are not required to present their identification when collecting their payment Employees are required to present their identification when collecting their payment The two senior personnel who have conducted the payment have not reconciled the unclaimed wages with the register The two senior personnel should have reconcile the unclaimed wages with the register Question 3 3.1 Explain step by step how you would select a sample Establish the objectives of the sampling plan -define the extent and composition of the population -select a sampling method -determine the sample size to be taken -evaluate and report results 3.2. Calculate sample size Sample size = total value of population J,Factor = 500 000 10869,6 = 46.10 Calculation of J Factor = precision Reliability factor =(0,05 x 500 000) 2.3 =10869,6 Sample interval = total value of PP Sample size S - The Marketplace to Buy and Sell your Study Material 4 REED TUTORIAL (PTY) LTD 500 000 46,10 =10845,99 3.5. Ratio analysis will be used by an auditor when performing analytical procedures. During the performance stage an auditor when auditing transactions and account balances, for different classes of transactions NB Analytical procedures are classified as substantive procedures. 3.6. Calculate the following ratios 36.1 Inventory turnover rate /ratio = cost sales Average invent =21 000/1100 000 + = 20 There is a remarkable improvement 36.3. Gross profit Ratio 2014 Gross profit Sale X 100 = – x 100 =25% 2013 – X100 =26,67% The gross profit percentage deteriorated during the current year this is attributable to a decline in sales in relation to increase in cost of sales. Q37 The short comings on the working Paper S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 5 REED TUTORIAL (PTY) LTD -the letter is not dated, does not show dates when it was prepared -it does not contain names of the preparers and reviewers -dates of the reviews -there is no isolation of responsibility no signatures use of signatures by the preparers -it doesn’t contain the subject matter It does not contain significant deficiencies internal controls and the possible effects to the entity -it does not contain audit procedures used to gather sufficient and appropriate evidence. Q 4. Inspect the requisition forms and purchases order for the buyer signature confirms authorization. Inspect the purchases orders once the requisition to confirms whether the goods are of as type used by the company (ii). Select a sample of supporting documentations and trace for orders with material amounts in the purchases journal and the creditors control in the general ledger and trial balance -Inspect the goods received, note last number and confirm whether is it lower than date number (ii) Select a sample of purchase orders and recalculate costs, extensions discounts and vat extensions -reperform edge analysis -compare the opening balances of the individual credits list against the creditors ledger balances and confirm whether there are no significant fluctuations. Question 5 Audit findings Condition Inability to find a correlation between the stock items on the 1st and the sales in either branch. -the number of stock write offs, due to obsolete stock at these branches has increased annually at approximately 5% and 3% for both. Criteria S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 6 REED TUTORIAL (PTY) LTD Each branch is required to hold tyres and sets of brake pads in stock based on a list sent to the branches annually. Cause The operational managers stated that they were instructed to keep a minimum stock based on a list sent to the branches by the head office Effect The volume of stock on hand is causing operational problems at the two branches. OCT NOV 2014 QUESTION 1 1.1 D 1.2 A 1.3 C 1.4 D 1.5 C 1.6 C 1.7 A 1.8 A 1.9 B 1.10 B 1.11 C 1.12 C 1.13 C 1.14 B QUESTION 2 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 7 REED TUTORIAL (PTY) LTD 2.1 Weakness 2.2 Internal controls 1. Orders are being made without receiving an authorized requisition 1. Orders should be made after receiving authorized requisition, prior to the requisition being made the ordering department should confirm whether the goods are really needed 2.The responsibility of deciding on which new toy line should be ordered is done by Given Khumalo 2. The decision on which new toy lines to order should be designated to a senior personal or senior buyer 3. No supervisory checks are being done on the order to the requisition for accuracy and authority 3. Supervisory checks should be performed by senior buyer, before order can be placed 4. The ordering clerks do not seek quotes from various suppliers when ordering from a supplier who’s not on the list of approved suppliers 4. The entity should seek quotes from various suppliers when ordering from a non-approved supplier 5. No segregation of duties, as the ordering clerks are performing all the duties 5. The responsibility of making amendments to the Masterfile should be designated to the senior personal / manager in the department 6. Senior personal are not frequently reviewing the files, which gave not been cross referenced to the order 6. senior personal should frequently review the files for requisitions which have not been cross referenced. 7. The receiving clerk changes the details on delivery note 7. The receiving clerk can accept goods that are delivered, bit identify such goods clearly on the delivery note, and purchase order, reject all incorrect delivery and clearly identify all rejections 8. The receiving clerk didn’t perform a superficial test of the condition of the goods received 8. Perform at least a superficial test of the condition of goods received e.g.: broken boxes QUESTION 2.3 1. Attempt to enter a fictitious password and confirm whether it is not accepted (authorization). 2. Attempt to enter a fictitious user ID, and confirm whether it is not accepted (authorization). S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 8 REED TUTORIAL (PTY) LTD 3. Attempt to capture the created purchase orders module, leaving out compulsory fields and confirm whether it is not accepted (accuracy and completeness). 4. Observe whether purchase orders have their own numerical sequence (completeness). 5. Attempt to access the credit goods received note, and confirm whether the screen comes up formatted as the goods received notes. QUESTION 3 3.1 RISK 3.2 CONTROL 1. A sale may be made to a customer who is not creditworthy, resulting in loss to the company. 1. Select a sample of recorded sales, obtain the ISOs and check for a valid authorising signature of the credit manager. 2. Theft of goods due to inadequate security checks Observe whether gate controller actually checks (counts) goods leaving the premises against the delivery note or invoice . Select a sample of recorded sales; check the delivery note for the date stamp of the security guard and proof of his check. 3. Payments to fictitious employees 3. Select a sample of employees from the wages register and compare the employee’s signature in the wages register to the signature in the employee’s personnel file. OR For wages payout, observe the wage payout process. Check that the employee provides proof of identification and sign the wages register as proof of S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 9 REED TUTORIAL (PTY) LTD acknowledgment 4. Unauthorized changes in wage rates. Wages fraudulently claimed. 4. Obtain the employee’s personnel file and check that the payroll amendment form has been signed by the human resources manager 5. Paying unnecessarily high prices for goods 5.Trace a selection of higher value purchases to ensure that quotes have been obtained from a number of suppliers before the purchase was made. 6. Unauthorized loan processed. Financial losses to the company. 6. Obtain a copy of the loan contract and check whether the signatories on the loan contract are those of the persons authorised by the minutes of the general meeting to have power of attorney QUSTION 4 4.1.1 Inventory turnover rate: 2014 Cost of Sales/Average inventory (1) = 40 600(½)/22 600 (½) = 1.80 times (1) Inventory turnover has increased. This is to the advantage of the organisation. Stock has been converted into profit more frequently than was the case in 2013. 4.1.2 Average collection period for debtors: 2014 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 10 REED TUTORIAL (PTY) LTD Account receivables turnover = Credit Sales/Average accounts receivables = 62 500(½)/35 650 = 1.75 times Therefore, average collection period = 365/Accounts receivables turnover = 365(½)/1.75 = 208.2 days The increase in collection period of accounts receivable is a big risk for the organisation. The longer the collection period is, the less likely the possibility of receiving that money. In turn, this increases the risk of bad debt and places the company’s cash flow under strain 4.1.3 Gross profit ratio: 2014 Gross profit/Sales x 100 = 29 900(½)/70 500 (½) x 100 = 42.41% The decrease in the gross profit ratio is an important indicator of the organisation’s results. It may point to a deviation from the selling price policy or may be an error in any of the ratio components 4.2.1 Sample interval • Reliability factor = 2.3 (from table A) • Sample interval = Monetary precision (P)/Reliability factor = R48 300 (½)/ 2.3 = 21 000 4.2.2 Sample size Sample size = Population/Sample interval S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 11 REED TUTORIAL (PTY) LTD = /21 000 = 240 items 4.2.3 Sample selection Invoice number Invoice amount (R) Accumulated amount Selected Invoice First three invoices selected are invoice numbers 561, 562 and 564 Question 5 5.1 Steps in reporting phase of audit Step 1: Do meaningful analysis, interpretation and classification of the information collected Step 2: Process the audit findings Step 3: Discuss the findings with the auditee Step 4: Draw up the draft report Step 5: Get final approval of the audit report 5.2 Audit finding 5.3 Criteria S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 12 REED TUTORIAL (PTY) LTD The tender committee should have an approved written charter. Condition No approved written charter exists to govern the functioning of the tender committee. Cause The board of directors deemed it not necessary for an approved written charter. Effect This may result in disputes as the actions, powers and responsibilities of the tender committee may be questioned. Recommendation The tender committee should liaise with the board of directors and other relevant stakeholders and compile a charter which must be presented to the Board for approval. MAY/JUNE 2015 Question 1 Multiple choice Question 2 2.1. The following are the five steps an auditor should follow when reporting an audit engagement Step 1- set objectives for audit Step 2- conduct a preliminary survey Step 3 – develop an audit program and budget Step 4 – conduct the field work Step 5 – determine findings and conclusions S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 13 REED TUTORIAL (PTY) LTD Step 6 – communicate results to the appropriate parties. Step 7 – follow up 2.2 2.3 Weaknesses and related risks Controls there are3 entry points which are not supervised Entry points should be limited to one and be supervised all the time There is no formalized way of recording overtime hours worked and overtime is not approved by senior personnel Overtime hours should be approved by the section head and be formalized and recorded Appointments are not made by the section head with reference to the budget Appointments are not made by the senior personnel with reference to the budget 3.2.1. Sample size = Total Value Population J. factor 800 000 13333,33 =60000 J. Factor = Precision/Reliability Factor (0.05 x 800 000) 3.0 =13333.33 3.2.2 Sample Interval =Total Value of Population Sample size = 800 000 60000 =13 333 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 14 REED TUTORIAL (PTY) LTD 3.2.3 Conclusion It did not reveal any problems as all the variables were given for calculation purposes Q 4 Audit findings Criteria The timelines of the submission of the annual financial statement to the auditor general for auditing and the relevant treasures to prepare consolidated financial statement. Condition The department submits its annual financial statement four months after the year end of the financial year. Cause This is due to the fact that financial statements are not submitted on a timely basis once that are not prepared according to recognized accounting practice within two months after year end Effect Financial statements are not prepared in time and subsequently submitted four months after the year end. Recommendations Hire additional staff members to take up the responsibility, in preparing the annual financial statements, thereby completing complete work within the required time Question 5 5.1 Audit objectives refer to what the audit seeks to achieve in terms of findings out sufficient and appropriate evidence. Audit procedures are tools used by the auditor to obtain that sufficient and appropriate evidence, this may refer to tests of controls risk assessment processes and substantive procedures S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 15 REED TUTORIAL (PTY) LTD 5.2 a). Sales made might not be recorded b). orders might be made to invalid customers c). a sale may be made to a customer who is not credit worthy d). incorrect goods might be picked and delivered e). goods may be dispatched for fictious purposes f). customers might deny receiving goods delivered to them 5.3. Inspect the internal sales orders to confirm whether they are sequentially numbered b). enquire from the credit managers whether customers are assed as proof of validity. c). inspect the ISO for credit controller signatures as proof of authorization. d). inspect the picking slip for the warehouse clerk signature to confirm carrying out his responsibilities. e). observe the gate controls to confirm whether there are security checks before the goods are dispatched. f). inspect the delivery notes for the customs signature as proof of receipt of goods delivered. 2014 S1 A1 1.1 Which one of the following types of audit tests would be the most persuasive if an internal auditor wanted assurance of the existence of inventory stored in a warehouse? 1. Physically inspecting the inventory in the warehouse. 2. Obtaining written confirmation from management as to the existence of the inventory. 3. Examination of the warehouse receipts contained in the auditee's records. 4. Examination of the shipping documents supporting recorded transfers to and from the warehouse. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 16 REED TUTORIAL (PTY) LTD 1.2 Which one of the following is the best source for an internal audit team to use in identifying common external risks faced by a company? 1. Questionnaires. 2. Current research reported in professional journals and textbooks. 3. Flowcharts. 4. Review lists or reminder lists. 1.3 Working papers should include … 1. All working papers prepared during a previous audit. 2. Documentation substantiating the examination and evaluation of the adequacy and effectiveness of the system of internal control. 3. Copies of all procedures that were reviewed during the internal audit. 4. Copies of all source documents examined in the course of the internal audit. 1.4 An internal auditor found that the supervisor does not properly approve employee time records in one department. Which one of the following errors can result from this? 1. Duplicate pay cheques might be issued. 2. The wrong hourly rate could be used to calculate gross wages. 3. Employees might be paid for hours they did not work. 4. Payroll cheques might not be distributed to the appropriate payees. 1.5 Which one of the following is an audit objective? 1. Recalculate each month's bank reconciliation. 2. Analyse the pattern of any cash shortages. 3. Observe the deposit of the day's cash receipts. 4. Evaluate whether cash receipts are adequately safeguarded. 1.6 Which of the following conduct violates the integrity principle of the Code of Ethics? 1. The internal auditors perform a detailed risk assessment and identify the key controls with regard to credit sales before they decided on the tests to be performed. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 17 REED TUTORIAL (PTY) LTD 2. An internal auditor is assigned to an audit of controls in the procurement section, which is headed by his father. 3. While auditing the controls over wage pay-outs, an auditor finds that some controls have been circumvented. She discusses her finding of a possible fraud with her colleague in the canteen over lunch. 4. The internal auditor uses an unrevised audit programme, used three years ago, to conduct an organisation-wide audit on credit sales. 1.7 Observation is considered a reliable audit procedure, but one that is limited in usefulness. However, it is used in a number of different engagement situations. Which of the following statements is true regarding observation as an engagement technique? 1. It is the most effective audit method to use in filling out internal control questionnaires. 2. It is the most persuasive technique for determining if fraud has occurred. 3. It is rarely sufficient to satisfy any assertion other than existence. 4. It is the most persuasive methodology to learn how transactions are really processed during the period under review. 1.8 An internal auditor has set an engagement objective of determining whether mail room staff is fully productive. Which of the following engagement techniques will best meet this objective? 1. Inquiry. 2. Observation. 3. Analytical review entailing comparison between this mail room staff‘s productivity levels with similar organisations. 4. Inspection of documents. 1.9 Which of the following does not describe one of the functions of the audit working papers? 1. Facilitates third-party reviews. 2. Aids in the professional development of the operating staff. 3. Aids in the planning, performance and review of audits. 4. Provides the principal support for audit communications. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 18 REED TUTORIAL (PTY) LTD 1.10 Which of the following are elements included in the control environment described in the COSO internal control framework? 1. Integrity and ethical values, management‘s philosophy and operating style, and human policies. 2. Organisational structure, commitment to competence and planning. 3. Competence of personnel, backup facilities, laws and regulations. 4. Risk assessment, assignment of responsibility and human resource practices. 1.11 The policies and procedures helping to ensure that management directives are executed and actions are taken to address risks to the achievement of objectives describes... 1. Control activities. 2. Risk assessments. 3. Control environments. 4. Monitoring. 1.12 In a final audit report, which attribute should be addressed by the recommendation? 1. Condition. 2. Cause. 3. Effect. 4. Criteria. 1.13 According to the IIA Standards, final engagement communication should be distributed to those members of the organisation who are able to ensure that engagement results are given due consideration. For higher-level members of the organisation, that requirement can be usually satisfied with... 1. Oral reports. 2. Interim reports. 3. Summary reports 4. Final written reports only. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 19 REED TUTORIAL (PTY) LTD 1.14 Which option best describes why, during an internal audit assignment, an internal auditor compares the inventory turnover rate of a company with established industry standards? 1. To evaluate the accuracy of internal financial reports of the company. 2. To test the company's controls designed to safeguard assets. 3. To assess the reasonableness of the disclosed performance (profits) of the company and to determine where additional audit work may be needed. 4. To determine whether the company is complying with established procedures regarding inventory levels. 1.15 An internal auditor has set an audit objective of determining whether all cash receipts are deposited daily. To achieve this objective, the internal auditor interviewed the supervisor, who assured him that all cash receipts are deposited as soon as is reasonably possible. The assurance of the supervisor can be used as evidence that is... 1. Sufficient but not reliable or relevant. 2. Sufficient, reliable and relevant. 3. Not sufficient, reliable or relevant. 4. Relevant but not sufficient or reliable. 1.16 The identification of damaged and obsolete inventory is important when valuing inventory. The best auditing procedure to discover damaged inventory included in closing inventory is to... 1. Compare the physical quantities of slow-moving items with corresponding quantities of the previous year. 2. Review management's inventory certificate for accuracy. 3. Test the overall fairness of the inventory values by comparing the company's inventory turnover ratio with the industry average. 4. Inspect inventory during the physical inventory count. 1.17 Statistical sampling differs from other sampling methods in the sense that... 1. An auditor does not have to exercise professional judgement when applying statistical sampling as he/she must when applying other sampling methods. 2. Statistical sampling produces representative samples, whereas the other methods do not. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 20 REED TUTORIAL (PTY) LTD 3. Statistical sampling can deliver absolute assurance, which is not possible with other sampling methods. 4. Statistical sampling is based on the theory of probability, which is not the case with other sampling methods. 1.18 Which form of audit evidence would the internal auditor consider to be the most reliable? 1. A sales invoice of the organisation together with a delivery note signed by the customer. 2. Direct confirmation from a debtor of his account balance after the internal auditor has mailed the account personally to the debtor. 3. A crossed cheque and bank statement submitted by the auditee to the internal auditor upon his request during the audit. 4. A pay sheet prepared by the wage clerk and checked and approved by the accountant. 1.19 The main reason for issuing an internal audit report is to... 1. Give auditees an opportunity to respond to the matters addressed by the report. 2. Report to interested parties on audit findings and recommendations. 3. Give management an opportunity to take corrective action for reported findings. 4. Provide the external auditors with a basis for relying on the work of the internal auditor. 1.20 All the members of your audit team received training that enables them to discuss the conclusions and recommendations during an exit interview with the appropriate manager before the final audit report is issued. What is a primary reason for such an exit interview? 1. The notes on the interview can be a valuable aid if disputes arise during the discussion of the final audit report. 2. The notes of the interview become a basis for follow-up audits. 3. The IIA Standards require an exit interview. 4. The information learnt can be used to utilise scarce audit resources better in future audits. 2014 S1 A2 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 21 REED TUTORIAL (PTY) LTD 1.1 Which one of the following options violates the objectivity principle of the Code of Ethics? A. The internal audit activity publishes an informative article on the organisation„s intranet, setting out the advantages of introducing a time-management clock-in system for the administrative staff. B. Since everyone in the organisation is aware of the IT department‘s inability to arrange suitable back-up facilities for the financial systems of the organisation, the internal auditor makes no mention of the fact in his report following an audit of the general IT controls. C. An internal audit activity appoints a chartered accountant who has recently completed her articles with an auditing firm and assigns her to lead an audit of control of the purchasing and implementation of new IT systems. D. While auditing controls over wage pay-outs, an auditor finds that some controls have been circumvented. She discusses her finding of a possible fraud with the internal audit manager in his office. 1.2 Two organisations have recently merged. The audit committee has asked the internal auditors from both organisations to assess risks that should be addressed after the merger. One manager has suggested that the engagement teams jointly examine the organisational culture and the tone at the top to identify control risks associated with the proposed merger. Which one of the following statement is true? A. The organisational culture is not a part of the control environment and therefore should not be considered for a proposed engagement. B. Although the organisational culture could be considered part of the control environment, the assessment of such an environment would be highly subjective and therefore not useful. C. Differences in the organisational culture should be systemically identified because the difference may present major risks to the success of the merger. However, identifying difference is not an appropriate activity because it is political and subjective. D. None of the answers are correct. 1.3 The primary purpose of an engagement working paper prepared in connection with payroll expense is to… A. Verify the work done by the internal auditor. B. Record the names of all the employees. C. Record payroll data and analyses to support reported recommendations. D. Provide documentation to support payroll taxes due. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 22 REED TUTORIAL (PTY) LTD 1.4 An internal auditor„s working paper should support the observations, conclusions and recommendations to be communicated. One of the purposes of this requirement is to… A. Provide support for the internal audit activity„s financial budget. B. Provide control over working papers. C. Permit the audit committee to review observations, conclusions and recommendations. D. Facilitate quality assurance reviews. 1.5 An organisation„s directors, management, external auditors and internal auditors all play important roles in creating a proper control environment. Senior management is primarily responsible for… A. Establishing a proper organisation culture and specifying a system of internal control. B. Ensuring that external and internal auditors adequately monitor the control environment. C. Implementing and monitoring controls designed by the board of directors. D. Designing and operating a control system that provides reasonable assurance that established objectives and goals will be achieved. 1.6 There are certain types of IT risks that tend to be common across organisations and industries. Which one of the following risks can be defined as unauthorised disclosure of business partners‟ proprietary information or individual„s personal information that may result in loss of business, lawsuits and reputation impairment? A. Access risk. B. B. Availability risk. C. Confidentiality and privacy risk. D. System reliability and information integrity risk 1.7 The internal audit activity customarily has a dual relationship with management and the audit committee. This means that... A. Management should help the internal audit activity by revising and forwarding engagement communications to the audit committee. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 23 REED TUTORIAL (PTY) LTD B. The accuracy of engagement communications should be verified with management and the internal audit activity should then report to management and the audit committee. C. The internal audit activity should report directly to the audit committee without corroborating engagement communications with management. D. Ideally, the internal audit activity works under the audit committee but reports to the chief operating officer on all engagement relating to operations. 1.8 When planning an attribute sampling application, the difference between the expected error rate and the maximum tolerable error rate is the planned... A. Skewness. B. Dispersion. C. Reliability. D. Precision. 1.9 In preparing a sampling plan for an inventory pricing test, which of the following describes an advantage of statistical sampling over non-statistical sampling? A. Requires non quantitative expression of sample results. B. Provides a quantitative measure of sampling risk. C. Minimises non-sampling risk. D. Reduces the level of tolerable error. 1.10 A specified range is based on an estimate of a population characteristic calculated from a random sample. The probability that the range contains the true population value is the... A. Error rate. B. Confidence level. C. Standard error of the mean. D. Lower precision limit. 2014 S2 A1 1.1 Which one of the following alternatives violates the integrity principle of the Code of Ethics? S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 24 REED TUTORIAL (PTY) LTD 1. In loyalty to her organisation which is experiencing financial difficulty, a chief audit executive (CAE) ignores the scheduled audit of the final tax return for the current tax year, knowing that management is understating taxable income. 2. While auditing controls over wage pay-outs, an auditor finds that some controls have been circumvented. She discusses her finding of a possible fraud with her colleague in the canteen over lunch. 3. An internal auditor is assigned to an audit of controls in the procurement section, which is headed by his father. 4. While auditing controls over wage pay-outs, an auditor finds that some controls have been circumvented. She discusses her finding and the possibility of fraud with the internal audit manager in his office. 1.2 When reviewing the average collection period of the debtors‟ accounts of the company, the internal auditor observes an increase from 30 to 60 days in the collection period for the current financial year. Which one of the following alternatives is the most likely cause of this happening? 1. Slackening of the organisation‘s credit control. 2. Rising of the profit margin on sales. 3. An increase in the organisation„s sales volume. 4. A smaller incidence of slow-moving inventory. 1.3 Due professional care implies reasonable care and competence, not infallibility or extraordinary performance. Thus, which of the following is unnecessary? 1. The conduct of examinations and verifications to a reasonable extent. 2. The conduct of extensive examinations. 3. The reasonableness assurance that compliance does exist. 4. The consideration of possibility of material irregularities. 1.4 An internal auditor observes that a receivables clerk has physical access to and control of cash receipts. This has alerted him but he worked with the clerk several years before and has a high level of trust in the individual. Therefore, the auditor notes in the working papers that controls over receipts are adequate. Has the auditor exercised due professional care? 1. Yes, reasonable care has been taken. 2. No, irregularities were not noted. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 25 REED TUTORIAL (PTY) LTD 3. No, alertness to conditions most likely indicative of irregularities was not shown. 4. Yes, the working papers were annotated. 1.5 In evaluating the effectiveness and efficiency with which resources are employed, an internal auditor is responsible for... 1. Verifying the existence of assets. 2. Determining the extent to which adequate operating criteria have been established. 3. Reviewing the reliability of operating information. 4. Verifying the accuracy of asset valuation. 1.6 Controls should be designed to ensure that... 1. Management„s plans have not been circumvented by worker collusion. 2. Management„s planning, organising and directing processes are properly evaluated. 3. Operations are performed efficiently. 4. The internal audit activity„s guidance and oversight of management„s performance is accomplished economically and efficiently. 1.7 Developing engagement observations, conclusions and recommendations involves comparing the condition with the relevant standard or criterion. Which of the following choices best represents an appropriate standard or criterion to support engagement observations, conclusions and recommendations? 1. An internal accounting control principle cited and copied from a public accounting reference. 2. A sound industry practice, based on the internal auditor„s knowledge and experience obtained during many engagement assignments within the organisation. 3. A quality standard operating procedure (number and date) for the department. 4. All the answers represent an appropriate standard or criterion to support engagement observations, conclusions and recommendations. 1.8 According to King III Report, which of the following is not the audit committee„s responsibility regarding combined assurance? 1. Monitoring the appropriateness of the company„s combined assurance model. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 26 REED TUTORIAL (PTY) LTD 2. Ensuring all the significant risks facing the company are adequately dealt with. 3. Monitoring the relationship between the external assurance providers and the organisation. 4. Providing an independent assurance on risk management and systems of internal control. 1.9 In combined assurance, which of the following is not an external assurance provider? 1. Sustainability assurance providers. 2. External auditors. 3. The risk management function. 4. Regulators. 1.10 For good internal control in the revenue and receipts cycle, company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the… 1. Sales clerk. 2. Inventory control clerk. 3. Goods receiving clerk. 4. Accounts receivable clerk. 1.11 The use of incorrect audit procedures in a sample for a given internal audit objective is an example of.... 1. Alpha risk. 2. Sampling risk. 3. Non-sampling risk. 4. Beta risk. 1.12 Which one of the following analytical trends indicates the possibility of an increase in obsolete inventory on hand? 1. A decrease in the ratio of inventory to accounts payable. 2. A decrease in the inventory turnover rate. 3. A decrease in the ratio of inventory to accounts receivable. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 27 REED TUTORIAL (PTY) LTD 4. A decrease in the ratio of gross profit to sales. 1.13 The cash receipts function should be separated from the related recordkeeping function in an organisation in order to... 1. Physically safeguard the cash receipts. 2. Minimise undetected misappropriations of cash receipts. 3. Prevent paying cash disbursements from the cash receipts. 4. Establish accountability when cash is first received. 1.14 Which one of the following situations represents an internal control weakness in the payroll department? 1. Pay cheques are distributed by employees’ immediate supervisors. 2. Payroll department personnel are rotated in their duties. 3. Payroll records are reconciled with quarterly tax reports. 4. The timekeeping function is independent of the payroll department. 1.15 Select the correct option to complete the following sentence: Controls are only effective and useful if … 1. They are developed and implemented in order to achieve a specific objective. 2. They are recommended by internal and external auditors. 3. They are applied to financial transactions of an organisation. 4. They eliminate the possibility that irregularities can occur. 1.16 Which one of the following statements is an appropriate internal audit objective? 1. To determine whether inventory on hand is sufficient to meet the projected sales targets. 2. To observe the physical inventory count. 3. To include information about stock-out situations in the internal audit report. 4. To search for the existence of obsolete inventory by computing inventory turnover by product line. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 28 REED TUTORIAL (PTY) LTD 1.17 Which one of the following activities may be performed by an internal auditor? 1. Drafting procedures for systems of control. 2. Designing systems of control. 3. Reviewing systems of control before implementation. 4. Installing systems of control. 1.18 The International Standards for the Professional Practice of Internal Auditing, Standard 2420 states seven qualities for good communications. Avoiding unnecessary technical language is best associated with which of the following qualities of communication? 1. Concise. 2. Complete. 3. Clear. 4. 4 Accurate. 1.19 During an audit of the receiving operations of a manufacturing organisation, an internal auditor will be most concerned with the risk that the function has... 1. Received goods that were ordered. 2. An insufficient staff complement to perform all the tasks. 3. Failed to detect the receipt of goods of poor quality 4. Paid inflated prices for goods from related parties. 1.20 An internal auditor is observing cash sales to determine if customers are given written receipts. The objective of this test is to ensure that... 1. Cash received equals the total of the receipts. 2. Customers are charged authorised prices. 3. Cash balances are correct. 4. All cash sales are recorded.