T8 Multiple choice questions

With regard to which of the following financial statement assertions may an auditor encounter particular
difficulties in obtaining sufficient evidence where internal controls are weak?
A Ownership
B Existence
C Valuation
D Completeness
D

Confirmation of completeness of recording in the companys accounting records is a particular problem for an auditor,
where the internal controls are weak. This is because lack of adequate controls leads to systems objectives not being met
and there is often a lack of an audit trail to evidence the inception of transactions through to completion.

The auditors of Three Co recently completed their interim audit for the year ending 31 July 2009. They confined their
work only to tests of control on accounting records to 31 March 2009 and concluded that controls were totally unreliable.

What will be the nature of the work carried out when conducting the final audit of the companys financial statements for
the year ending 31 July 2009?
A Tests of control on the system and substantive procedures on transactions for the period from 1 April 2009 to
31 July 2009, plus a review of the financial statements.
B Tests of control on the system for the period from 1 April 2009 to 31 July 2009, substantive procedures on the
statement of financial position as at 31 July 2009, plus a review of the financial statements.
C Substantive procedures on transactions for the whole accounting period and on the statement of financial position
as at 31 July 2009, plus a review of the financial statements.
D Substantive procedures on the statement of financial position as at 31 July 2009, plus a review of the financial
statements.
C

As the auditors of Three Co have concluded that the internal controls of the company are unreliable they cannot rely on
them and will have to adopt a substantive procedures approach when conducting the final audit of the companys
financial statements. This will involve extensive testing of transactions for the whole accounting period in addition to the
verification of the items in the statement of financial position and a review of the financial statements. Options (A) (B)
and (D) do not allow the necessary substantive testing to be carried out

Which of the following would normally be retained on the current file maintained for a limited liability company
audit client?

A Narrative notes describing the companys accounting systems.

B A copy of the companys constitution.
C A management representation letter.
D A description of the companys business and its operations.
C

A management representation letter contains confirmations from management on matters relevant only to the audit of the
financial statements subject to audit. It should therefore be retained on the current file.

4
Which of the following describes the auditors role when attending a clients inventory count?
A To count all of the inventory.
B To observe the conduct of the inventory count.
C To identify damaged and obsolete inventory.
D To supervise the inventory counting teams.
B

The auditor is not an employee of the client company and should therefore take no active part in the inventory count.
Having observed the inventory count the auditor can judge the extent to which (s)he will rely on the inventory count
records as a basis for verifying the inventory as reported in the companys financial statements.

The auditor of Four Co, a manufacturing company, has noted an increase in total sales value but a decrease in the
companys gross profit percentage for 2009 as compared to the previous year.
Which of the following is consistent with, and adequately explains, the decrease?

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A Sales commission payable to the companys sales force increased in relation to sales values as compared to 2008.
B Sales volumes have decreased as compared to 2008.
C During 2009, due to a scarcity of supply the company had to pay higher prices when purchasing components.
D During 2009 a major component supplier withdrew the settlement discounts previously granted.
C

Sales commissions should not be accounted for in the trading account and thus should not affect reported gross profit.
Sales volumes combined with other factors could also be accompanied by an increased gross profit percentage. Any
settlement discounts received should not be accounted for in the trading account and thus should not affect reported gross
profit. An increase in the cost of sales as explained in option (C) would be consistent with the noted decrease in gross
profit.

Which of the following should be included in an auditors report, when there has been a limitation on the
auditors work in connection with a matter they consider material but not pervasive to the financial statements of
a company?

A An except for opinion.

B A disclaimer of opinion.
C An adverse opinion.
D None of the above.
A

The limitation on the scope of the auditors work has created material uncertainty with regard to one particular aspect of
the companys financial statements. However, whilst the matter is considered to be material (if it was immaterial then it
would be ignored by the auditors), it is not considered to be pervasive to the financial statements. Consequently the
auditors should express an except for opinion in the financial statements. If the auditors did consider the matter under
review to be pervasive to the financial statements then they should express a disclaimer of opinion.

Which of the following would provide the most persuasive evidence of a companys ownership of a freehold office
building?

A Inspection of the purchase documentation.

B Inspection of recent expense invoices for extensive repairs to the building, paid for by the company.
C Inspection of the title deeds to the building.
D Inspection of a directors board minute confirming ownership of the building.
C

Whilst options (A), (B) and (D) may provide corroborative evidence as to the ownership of the freehold office building,
the evidence they provide is insufficient and not as reliable as that provided by inspecting the title deeds to the building.
The deeds provide independent reliable confirmation of ownership.

Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially
misstated.
Which of the following categories of risk can be controlled by the auditor?

Category of risk:
(1) Inherent risk
(2) Control risk
(3) Detection risk
(4) Sampling risk
A 1 and 2 only
B 1, 3 and 4
C 2, 3 and 4
D 3 and 4 only

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Control risk and inherent risk are components of fi nancial statement risk, which is governed by the circumstances of the
audit client and therefore is outside the control of the auditor. Sampling risk is a component of detection risk, which is
controlled by the auditor.

Which audit working paper should provide satisfactory evidence that audit resources have been directed towards
high risk areas of an audit?

A Systems narrative notes.

B Systems flowcharts.
C Audit attention points brought forward from the previous period.
D The overall audit strategy documentation.
D

The correct answer is option D. The overall audit strategy documentation should identify the areas of the fi nancial
statements deemed to be of high risk and outline the strategy for the audit of those areas. Systems narrative notes and
system flowcharts serve a similar purpose in that they provide an overview of systems for review and evaluation
purposes, whilst audit attention points brought forward simply highlight areas and points to be reviewed as a
consequence of relevant findings in the previous years audit.

10

Which of the following should be facilitated by the standardisation of substantive procedure working papers?

(1) Meeting of specified audit objectives.

(2) Communicating with the staff of the audit client.
(3) Delegation of audit work.
(4) Review of audit work.
A 1 and 4 only
B 1, 3 and 4
C 2 and 3 only
D 1, 2, 3 and 4
B

With the exception of the area identified in (2) communications with the staff of the audit client, the standardisation of
the working papers should facilitate in all of the areas identified. The extent and quality of the communication with the
staff of the audit client, will depend on the personal attributes of audit staff and their individual ability to communicate
effectively.

11

Which of the following strategies should give an auditor the STRONGEST assurance as to the existence of trade
receivables year-end balances in a company with weak internal controls over the sales and trade receivables
function?

A Carrying out a positive circularisation of receivable balances in respect of the year-end balances.
B Carrying out a negative circularisation of receivables balances in respect of year-end balances.
C Confirming receivables balances by agreeing to sales invoices, authorised delivery notes and valid order.
D Confirming receivables balances by verifying subsequent payments after the year end.
A

Whilst a circularisation of trade receivable balances is intended to provide assurance with regard to several audit
objectives, the principal objective is to provide assurance with regard to existence. As the results from a positive
circularisation are generally recognised to be more reliable than those from a negative circularisation, the correct answer
is option A. The verification of subsequent payments is primarily a test for valuation and testing for balances by agreeing
to sales documentation does not take account of payments that may have been received.

12

Which of the following financial indicators ratios on its own, provides the WEAKEST evidence of possible
working capital problems in a limited liability company?

A Trade receivables collection period.

B Quick (acid test) ratio.
C Gross profit margin.
D Trade payables payment period.

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The correct answer is option C. The gross profi t margin is an income statement ratio and therefore does not give any
indication of the working capital position of a company. In isolation both the trade receivables collection period and the
trade payables payment period can provide an indication of a companys working capital position albeit a weak
indication.

13

The auditors responsibility paragraph in an auditors report should describe an audit as including which of the
following:

(1) Reporting on whether the financial statements give a true and fair view.
(2) Reading other information contained in the annual report and considering whether it is consistent with the audited
financial statements.
(3) Evaluating the overall presentation of the financial statements.
(4) Evaluating the reasonableness of accounting estimates made by management.
A 1, 2 and 3
B 1 and 3 only
C 2, 3 and 4
D 3 and 4 only
D

The correct answer is option D. The descriptors given at (1) and (2) should not be included.

14

Which of the following statements is TRUE with regard to an emphasis of matter paragraph included in a
modified auditors report?

A The paragraph should be included before the Opinion paragraph.

B The paragraph may refer to a matter other than those presented or disclosed in the financial statements that, in
the auditors opinion is relevant to users understanding of the audit.
C The paragraph should ordinarily refer to the fact that the auditors opinion is modified in respect of the subject
matter.
D The inclusion of the paragraph should not affect the auditors opinion on the financial statements.
D

An emphasis of matter paragraph should be included after the Opinion paragraph, must not be used to report matters
other than those affecting information presented or disclosed in the financial statements and should indicate that the
auditors opinion is not modified in respect of the matter emphasised. The correct answer is option D the inclusion of
the paragraph should not affect the auditors opinion on the financial statements subject to audit.

15. D
16. B
17.A

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