Au ing 300 Mock Examination Paper PART A: MULTIPLE CHOICE QUESTIONS (25 MARKS) ANSWER ALL QUESTIONS. EACH QUESTION IS WORTH 1 MARK. Part A consists of twenty-five (25) multiple-choice questions. On the General Purpose Answer Sheet provided, please indicate the answer you believe to the best response to each multiple-choice question. 1. What type of audit activity enables the auditor to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an identified financial reporting framework? a. compliance audit, b. financial report audit, c. performance audit. 4d. comprehensive audit. 2. An assurance engagement has all of the following characteristics except: a. an identifiable subject matter which is capable of consistent evaluation or measurement against a set of identified and suitable criteria. b. a probability assessment of the practitioner's conclusion. c. sufficient evidence in support of the practitioner’s conclusion. d. a written assurance report of the practitioner's conclusion. 3. Which of the following bodies monitors the operation of the Auditing and Assurance Standards Board? a. Financial Reporting Counci b. Companies Auditors and Liquidators Di c. Australian Securities Exchange. d. Alloftthe given answers are correct, iplinary Board. 4, Independence is the cornerstone of the auditing profession, Which of the following is self-review threat? a. a guarantee from an officer of an assurance client. b. performing services for an assurance client that directly affects the subject matter of the assurance engagement, ¢. long association of a senior member of an assurance team with the assurance client. pressure to reduce inappropriately the extent of work performed in order to reduce fees. 5. 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. explanatory. b. agency. c. information hypothesis, 4d. insurance hypothesi Page 1 of 1110. Auditing 300 Mock Examination Paper ‘The work of an internal auditor can be used to complement, but not substitute for, the work of the independent auditor. Which of the following factors is not relevant in determining the effect of an internal auditor’s work on the audit? a. the organisational status, b. the due professional care exercised by the independent auditor. ¢. the scope of the work. 4. technical training and proficiency of the internal auditor. In accepting an engagement, an auditor takes on professional responsibilities to: a, the public. b. the client, c. the client and the public. 4. the public, the client, and other members of the profession. Inassessing independence, a firm may do which of the following? a. decline the engagement due to a lack of independence. b. circulate the name of a prospective client to staff to identify any relationships inconsistent with independence. €. complete a professional independence questionnaire. 4. all of the above. Which of the following is NOT an ethical consideration for the auditor in deciding to accept an audit engagement? a. ensure their scheduling process allows completion on time. 'b. evaluate circumstances that would compromise independence. c. assessing competence to perform the audit. 4. determine their ability to use due care in performing the audit. For a particular assertion, control risk is the risk that: a, a material misstatement will occur in the accounting process. b. audit procedures will fail to detect a weak control system. . control procedures will not detect a material misstatement that occurs. 4. the prescribed control procedures will not be applied uniformly. Tn 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. bare 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, 4. may be immaterial individually, but may aggregate with misstatements in other accounts to material level. Page 2 of 1112 14. 15. 16. 7 Auditing 300 Mock Examination Paper Essential to both management and auditors is a chain of evidence in the accounting system provided by coding, cross references, and documentation connecting account balances and other summary results with original data, This chain of evidence is referred to as the: a, control trail, ‘b. audit trail. c. tracing trail. d. accounting trail. Which of the following is not an inherent limitation of an internal control structure? a. mistakes in judgement. b. collusion. c. management override. 4. accounting override, Which of the following would NOT be considered to be a risk factor for potential misstatements? a. there is intense price competition in the industry of operation, '. promotions are made on the basis of meeting reasonable targets. c. an employee in the cash office was passed over for a promotion. 4. the internal control of segregation of duties was not practiced, The main control objective of the recording of sales function is: a. that only actual deliveries are invoiced. that sales are recorded accurately and in the proper period. c. that cash will be received for the sale 4. to produce a monthly customer statement. Prior to recording purchases transactions, supplier's invoices are checked and approved in the aecounts department. Controls over this function include all of the following E: a. marking all supporting documentation as “paid” b. approving the supplier's invoice for payment by having an authorised person sign the invoice. ©. agreeing the details of the supplier’s invoice with the related receiving report and purchase order. . determining the mathematical accuracy of the supplier's invoice. An important control over inventory is that maintaining the records is segregated from physical custody of the asset. Which of the following is NOT a function of maintaining inventory records? physically comparing inventory with inventory records, b. recording the movement of goods into inventory. c. physically checking inventory on purchase. d. recording the movement of goods from inventory. Page 3 of 1118. 19. 20. 2. 22, Auditing 300 Mock Examination Paper If preliminary assessment of control risk supports management's intended reliance on inventory records, the auditor would most likely: a. design an audit program to exclude testing the operating effectiveness of those controls. design an audit program to include testing the operating effectiveness of those controls. ¢. design an audit program only testing inventory transactions and tests of details of the inventory balance. 4. design an audit program only testing inventory transactions and excluding tests of details of the inventory balance. ‘The auditor identifies the specific audit objective: “determine that property, plant and equipment (PPE) assets represent productive assets that are in use at balance date”, This objective is derived from the: a. existence or occurrence assertion b. completeness assertion. ¢. presentation or disclosure assertion. 4. rights and obligations assertion. Which of the following combinations is a correct representation of the usual assessed levels of inherent risk in the cash area? High Low a. accuracy or valuation completeness b. existence or occurrence completeness ¢. accuracy or valuation rights and obligations 4. existence or occurrence accuracy or valuation The starting point for verifying cash balances is to: ‘a. review the current period’s activity in the general ledger cash accounts for any significant entries that are unusual. b. determine the mathematical accuracy of cash balances in the general ledger. ©. trace the current period’s opening balances to the closing audited balances in the previous year’s working papers. 4. obtain any schedules that might have been prepared by the entity showing undeposited cash receipt summaries. Ordinarily, an event indicating a condition arising after the reporting date requires: adjustment. b. adjustment and disclosure. c. disclosure. dd. inclusion as an ‘except for’. Page 4 of 1123, 24, 25. Auditing 300 Mock Examination Paper ‘The auditor has decided that the financial statements are affected by an uncertainty that is not susceptible to reasonable estimation at the balance sheet date. If this uncertainty is adequately disclosed in the financial statements, the auditor’s report should contain a(n): standard unqualified opinion. b. ‘except for’ opinion. c. disclaimer of opinion. d, unqualified opinion with an ‘emphasis of matter’ paragraph. ‘The auditor's opinion is expressed in reference to the financial statements as @ whole. This means that the auditor must consider whether the statements: a. show individual accounts on the financial statements, such as cash on the balance sheet. b. show major components included in the financial statements such as current assets on the balance sheet. ¢. create an impression that is consistent with the auditor's intimate knowledge of the entity and its financial condition. d. are a complete set of financial statements required by Accounting Standards. An auditor should request that an audit client send a letter of inquiry to those solicitors who have been consulted concerning litigation, claims or assessments. ‘The primary reason for this request isto provide: a. a description of litigation, claims and assessments that have a reasonable possibility of unfavourable outcome. b. corroboration of the information furnished by management concerning litigation, claims and assessments. ©. An objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. d. The opinion of a specialist as to whether loss contingencies are possible, probable or remote. END OF PART A Page 5 of 11Auditing 300 Mock Examination Paper PART B - SHORT ESSAY QUESTIONS. (45 MARKS) ANSWER ALL THREE (3) QUESTIONS. QUESTION 1 (10 MARKS) (a) How are tests of controls related to the evaluation of control risk? (5 marks) (©) What is the purpose of an audit program? (S marks) Page 6 of 11Auditing 300 Mock Examination Paper QUESTION 2 (15 MARKS) ‘You are the auditor for Jonas & Jonas Pty Ltd (J&J), which has large number of suppliers of various DIY tools. Your audit assistant has selected a number of suppliers from the list. of accounts payable at year end and traced balances to suppliers’ invoices and good received notes to ensure that goods were received prior to year end. Twenty of the creditors were tested and four of the balances were marginally overstated. It was the audit assistant's opinion that as no material errors were located, the accounts payable balance should be accepted. Required (@) Indicate whether your audit assistant’s conclusion is appropriate or inappropriate. Give justification for your answer. (8 marks) (b) Provide two additional audit procedures if you think more test is required. (7 marks) Page 7 of 12Auditing 300 Mock Examination Paper QUESTION 3 (20 MARKS) 1 You have been assigned to the audit of Faraway Limited, a large listed company with diverse operations. During the audit you become aware of the followi a i) Gi) @) Required For each independent item (i) to (iv) above: i Faraway Limited has a $6 million investment in Siberia Pty Limited, a controlled entity based in Russia, This company imports and sells Australian wool and cotton to Russian manufacturers. With the devaluation of the rouble (Russian currency), sales have plummeted and many customers are unable to settle their accounts. By year end, Siberia Pty Limited expects to have incurred losses of over $5 million. Faraway Limited’s account payable are recorded in a ledger that is produced weekly. Lately accounting staff have been having difficulties with the ledger as it has reached the maximum permissible number of creditors’ accounts. Management have approved an upgrade of the system, but in the meantime staffs are having to keep extensive manual records in order to derive accurate payable figures. One of the Faraway Limited’s divisions, IC, manufactures soft drinks. Part of IC’s agreement with its distributors is that IC will supply a fridge complete with advertising signs for the distributor's use, providing IC’s products are stocked exclusively. These fridges are rented out to the distributors at a nominal rent and recorded as fixed assets in the books of IC (and therefore Faraway Limited). Most distributors are either service stations or corner shops. Tn line with many other businesses, Faraway Limited is finding it extremely difficult to recruit and retain skilled factory staff. Accordingly, it has been decided that staff in the most difficult to retain award categories will be rewarded with annual bonuses. These are calculated using a relatively complex formula that takes into account employees’ length of service, award rate, seniority and estimated contribution to profit. (a) Identify two key audit assertions and link these to the relevant balance sheet/income statement account. (8 marks) (b) Recommend the audit procedures (two for each assertion) you would perform to gather sufficient, appropriate audit evidence on each assertion. (12 marks) END OF PART B Page 8 of 11Accounting (Auditing) 300 Mock Examination Paper eK ANG CUT PARTC (30 MARKS) ANSWER ONE (1) OF TWO (2) QUESTIONS. QUESTION 1 Collin White is the engagement partner for the financial report audit of Sunrise Ltd for the year ended 30 June 2012. The following material events or transactions have come to Collin’s attention before she is scheduled to issue her report on 31 August 2012. (@) On 15 July 2012, the company settled and paid a personal injury claim of a former employee as a result of an accident that occurred in March 2009. The company has not previously recorded a liability for the claim (b) On 16 July 2012, the directors became aware of broken glass found in their pre- packaged sandpits. This product had only been on sale for one week and had been purchased directly from the manufacturer, Hamelton Co. an unrelated company in Thailand, one week prior to being introduced to the public. (©) On 25 July 2012, the company agreed to purchase for cash the outstanding share of Zumbo Ltd. This acquisition is likely to double the sales volume of Sunrise Ltd, (d) On 1 August 2012, a plant owned by Sunrise Ltd was damaged in a flood, resulting in an uninsured loss of inventory. Required For each of the above events or transactions, identify audit procedure that should have brought the item to the auditor’s attention, and determine the treatment required in the financial report. (7.5*4= 30 marks)Accounting (Auditing) 300 Mock Examination Paper QUESTION 2 You are the audit partner at Short & Associates, a mid-tier accounting firm. You are responsible for the audits of the flowing four independent entities: (a) Median Constructions Ltd (Median) is a building contractor with a varying workload. In order to compensate for the irregularity of its contracted building projects, Median also purchases large vacant blocks of land that it later subdivides for the construction of houses and units; Median then sells these for its own account. The manner in which Median has allocated costs to these blocks of land is in question. Your analysis strongly suggests that the apportionment of costs to house and units sold has been kept low in order to boost profits. In your opinion, this has resulted in the overvaluation of the unsold blocks of land. The directors of the company do not agree and hold to their view that the stock of land is correctly valued. (b) Clear way Ltd (Clear Way) is a non-profit organization, you have discovered that it has not kept substantiating vouchers of receipts for more than 65 per cent of its expenses, excluding salaries and allowances; Uncertainty exists over the non-deduction of pay-as-you-go withholding (PAYGW) tax from certain significant allowance paid to Clear Way’s directors, You believe that this issue cannot be resolved without a ruling from the Australian Tax Office. However, the directors are unwilling to obtain a ruling, as they believe that the tax is not applicable to these ‘honoraria’, You have discussed the matter with two knowledgeable fellow auditors and it is your opinion that PAYGW tax is applicable. (© Alltime Entertainment Ltd (Alltime) arrange for popular overseas artists 10 perform in Australia, The bank Ping Ltd (PL) was booked by Alltime to play major cities across the country. Alltime’s written contract required the company to pay the band in US dollars but, in order to reduce costs. It did not hedge the amounts. Subsequent to year end, the Australian dollar fell against the US dollar and a substantial loss relative to the band’s tour was predicted. The management of Alltime has tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain finance to cover the expected shortfall, Alltime has now cancelled the tour and expects a substantial claim from PL, which it believes is likely to exceed the tour losses. It is clear to you, as the auditor, that Alltime does not have the income, cash or other assets to sustain such as loss. (d) Medical Products Ltd (MPL) is a medical appliance manufacturer that conducts research and develops new appliances, and has recently successfully produced an appliance for reducing blood pressure. Patents have been filed worldwide and they are considered to be extremely valuable. In order to recognise this asset in the books, MPL has debited the asset and credited an ‘asset revaluation surplus” account with the ‘fair value’ of its patents. This amount is significantly more than the amount that was expended in the research and development of the product. Despite your having drawn their attention to the conflict of their treatment withAccounting (Auditing) 300 Mock Examination Paper the requirements of Austranan accounting standard AASB 138, the directors of MPL believe that proper disclosure requires them to show the asset at its market, value. Required ‘Assuming that all amounts involved are material and that each client has prepared a ‘general purpose financial report for the year ending 30 June 2012, identify and discuss the most likely audit opinion that you would issue on each general-purpose financis report. (7.5*4= 30 marks) END OF PART C END OF EXAM.