Question

1. You have performed a review engagement for XYZ Limited. The level of assurance to be expressed in your report is: a) Reasonable b) Low c) Limited d) None

2. Consider the following characteristics of business: i. Inadequate segregation of duties ii. General lack of mitigating (compensating) controls iii. More reliance on test of controls iv. More reliance on substantive procedures From an audit perspective, a small business would generally exhibit: a) I and iv only b) i and ii only c) ii, iii, and iv only d) i, ii, and iii only

3. The amount of substantive evidence is likely to increase when: a) The level of audit materiality increases. b) Legal and regulatory environment remain unchanged. c) Significance of risk assessment increases. d) Tests of controls are used extensively.

4. The auditor performs a review of client’s internal controls: a) When business risk is high b) When no mitigating (compensating) controls are likely c) Only on large clients d) On every audit engagement

5. An IT system updates a debtor’s account balance immediately when there is a sale invoice processed. This is an example of: a) Online real time processing system b) Online batch processing system c) Online inquiry system d) Online downloading/uploading system Page 3 of 19

6. Which of the following is an example of an “application control”? a) A written manual of system documentation that should be maintained. b) Control totals that should be produced and reconciled with input control totals. c) All program changes that should be approved prior to implementation. d) Access to computer hardware that should be restricted to authorised personnel.

7. You are currently performing the audit of XYZ Limited (XYZ). You audit firm has been in dispute with management over the carrying value of intangible assets (purchased licence agreement. Due to the materiality of the amounts involved, you decided to engage an expert to perform an independent valuation. The result from the expert was close to your original estimate and still materially different to that of management. The directors refuse to amend the financial report. The appropriate audit opinion is: a) Unqualified with an emphasis on matter b) Qualified c) Adverse d) Disclaimer

8. XYZ Limited (XYZ) is an audit client with potentially going concern problems. Your investigation of mitigating circumstances indicate a reasonable expectation that XYZ will continue as a going concern and adequate disclosure has been made in the financial reports. the most appropriate type of audit opinion to be issued is: a) Adverse b) Unmodified c) Qualified d) Unqualified with Emphasis of Matter

9. You have completed your audit and ready to sign the auditor’s report when you receive a copy of the annual report. This report contains supplementary information that is materially inconsistent with your audit findings. The management refuses to make any amendments claiming that it is too late to change the supplementary information as it has gone to the printers. The most appropriate type of audit opinion to be issued is: a) Qualified b) Unmodified c) Unqualified audit opinion with Emphasis of Matter d) Adverse

10. Assuming expert advice has been obtained, the auditor, when issuing an unmodified audit report, should: a) Describe the work of an expert and the expert’s identity. b) Obtain permission of the expert before making reference to them. c) Refer to the work of an expert. d) No refer to the work of an expert.

Answer 1

Solution 1) c Limited Assurance

A review engagement is performed after the audit of the entity's financial statements is completed. The auditor performs audit procedures such as inquiry and analytical reviews while conducting a review engagement and provides a limited assurance on the accuracy of the entity's financial statements. A review engagement provides lesser assurance when compared to an audit engagement.

Solution 2) a

From an audit perspective, a small business would generally exhibit inadequate segregation of duties thereby reducing the reliability on the existing controls. Therefore, more reliance would be placed on the substantive procedures.

Solution 3) c When significance of risk assessment increases

Higher the significance of risk assessment, higher would be the substantive procedures performed. This increases the amount of substantive evidence.

Solution 4) d On every audit engagement

Review of internal controls is considered to be significant in deciding upon the nature,timing and extent of audit procedures to be performed. The auditors may be required to enhance their audit procedures performed if the entity's internal controls is weak or deficient. Hence review of internal controls should form part of every audit engagement.

Solution 5) a Online real time processing system

This is real time processing system as there is no time lag between the processing of sales invoice and updation of the debtor's accounts balance.

Solution 6) b Control totals that should be produced and reconciled with input control totals.

Solution 7) c

The amount involved is material and is considered to significantly affect the user's decision.

Solution 8) d

In this case there is a reasonable expectation that the entity will continue as a going concern. But the fact is to be known to the users as this would have a considerable impact on the decisions taken by them. Thus, it would be appropriate to highlight the matter in the emphasis of matters paragragh.

Solution 9) a

It is noted that the report contains a supplementary information which is materially inconsistent with the audit findings. This is likely to affect the user's decisions. Hence the auditor should issue a qualified report.

Solution10) b

It is considered to be appropriate to make a reference to the auditor's expert in the audit report after obtaining their permission.