1.

Inherent risk could best be described as:

A. A function of the effectiveness of the internal control structure.
B. The risk that the auditor’s substantive procedures will not detect any misstatements
that occur and that are not prevented or detected by the internal control structure.
C. The possibility that a material misstatement could occur.
D. The risk that a material misstatement could occur and not be prevented or detected
on a timely basis by the entity’s internal control function.

2. Which of the following would generally be considered the least appropriate form of
evidence?
A. The auditor’s calculation of earnings per share.
B. Pre-numbered sales invoices prepared by the accounts receivable clerk.
C. The auditor’s inspection of new machine acquisitions for the current year where the
client is a computer manufacturer.
D. Correspondence from the client’s solicitor concerning litigation.

3. Which of the following best describes the reasons why an independent auditor reports on
financial statements?
A. A misappropriation of assets may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the statements and
the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditors work.
D. Poorly designed internal controls may be in existence.

4. Some account balances, such as those for foreign currency translation or leases, are the
results of complex calculations. How is the susceptibility to material misstatements in these
types of accounts defined?
A. Audit risk.
B. Detection risk.
C. Sampling risk.
D. Inherent risk.
5. An audit program should be designed for each individual audit and should include steps and
procedures to:
A. Detect and eliminate all fraud.
B. Increase the amount of management information available.
C. Provide assurances that the objectives of the audit are met.
D. Ensure that only material items are audited.

6. In determining the assessed level of control risk for a client, an auditor must assess control
risk as high when he or she has:
A. Decided not to test the internal control system.
B. Assessed inherent risk to be high.
C. Found no significant deficiencies in the internal control system.
D. Decided on a high level of detection risk.

7. The auditor generally tests the segregation of duties related to inventory by:
A. Personal inquiry and observation.
B. Test counts and cut-off procedures.
C. Analytical procedures and invoice recomputation.
D. Document inspection and reconciliation.

8. The main objective of procedures performed to obtain an understanding of internal control

is to provide an auditor with:
A. Audit evidence to use in forming an overall opinion of the company.
B. Enough understanding to design procedures to gather sufficient audit evidence.
C. Enough evidence to express an audit opinion.
D. Enough understanding to express an opinion on the adequacy of the company’s
internal controls.

9. When an auditor becomes aware of a reportable condition they are required to report this
to:
A. The managing director.
B. The board of directors and internal auditors.
C. Internal auditors and senior management.
D. The appropriate level of management.

10. Which of the following is the single most effective control procedure established to avoid
allowing any person to be in a position to perpetrate and the conceal errors or fraud?
A. To separate the functional responsibilities of custodianship, record keeping,
operations and authorisation.
B. To require each employee to take leave once per year.
C. To establish an internal auditing department.
D. To require fidelity insurance for personnel in positions that necessitate the handling
of cash.
11. Which of the following methods of sample selection is the least desirable in terms of
extrapolating results to the population?
A. Random selection.
B. Haphazard selection.
C. Block selection.
D. Systematic selection.

12. Which of the following is an element of sampling risk?

A. Choosing an audit procedure that is inconsistent with the audit objective.
B. Failing to perform audit procedures.
C. The auditor failing to detect an error on a document in the sample.
D. Choosing a sample size that is too small to achieve the sampling objective.

13. Which of the following would result in an increase in client business risk?
A. Increase in economic growth
B. Decrease in sample size.
C. Increase in interest rates.
D. Decrease in inflation rate.

14. Cookie Monster Ltd’s labour distribution report requires extensive corrections each month
because of labour hours charged to inactive jobs. Which of the following data processing
input controls appears to be missing?
A. Completeness test.
B. Validity test.
C. Limit text.
D. Control total.

15. What level of assurance does a review report provide?

A. High.
B. Reasonable.
C. Moderate.
D. None.

16. The first thing an auditor should do when conducting a performance audit is to:
A. Evaluate the financial report.
B. Determine pertinent facts and conditions.
C. Define problem areas.
D. Identify objectives of the entity and the function being audited.

17. An auditor has been hired to perform review services for a client. Which of the following is a
correct statement?
A. The financial statements are primarily assertions made by the auditor.
B. The auditor must perform the basis audit procedures necessary to determine that
the statements are in conformity with the Australian Accounting Standards.
C. The auditor is performing an accounting service rather than an audit of the financial
statements.
D. The auditor may prepare the statements from the books by may not assist in
adjusting and closing the books.

18. Which of the following is an example of greater audit effectiveness?

A. Decreasing the level of substantive testing within the audit plan.
B. Revision of the audit fee for a client.
C. Greater outputs from the same inputs.
D. Increasing the number of confirmation letters to client customers.

19. A letter addressed by auditors to management and which communicates to management

matters identified during the course of an audit of commonly referred to as:
A. An audit representation letter.
B. A management letter.
C. An engagement letter.
D. A management representation letter.

20. Confirming accounts receivable is required whenever:

A. They are material and it is reasonable to presume the debtors will respond.
B. It is reasonable to presume the debtors will respond.
C. A large number of small balances are involved.
D. They are material in amount.

21. Which of the following material events occurring subsequent to the 30 June 20X0 balance
date would not ordinarily result in an adjustment of the amounts in the financial report before
they are issued on 2 September 20X0?
A: Write-off a receivable from a debtor who filed for bankruptcy on 2 July 20X0.
B: Acquisition of a subsidiary on 23 July 20X0. Negotiations had begun in June of 20X0.
C: Settlement of extended litigation on 28 July 20X0 in excess of the recorded liability.
D: The finalisation of a loss of profits insurance claim on 28 August 20X0 in relation to a fire
that destroyed the factory on 15 June 20X0.

22. The principal benefit to management of there being an internal audit function is that:
A: Management needs assurance that the organisation is complying with legal requirements.
B: It aids management in the areas of risk management, control and governance processes.
C: External audit costs are reduced.
D: Management needs assurance that fraudulent activities will be detected.

23. In assessing control risk, the auditor is basically concerned that the system provides reasonable
assurance that:
A: Controls have not been circumvented by collusion.
B: Misstatements have been prevented or detected.
C: Operational efficiency has been achieved in accordance with management plans.
D: Management cannot override the system.
 24. After obtaining an understanding of the internal control structure and assessing control risk
of an entity, an auditor decided not to perform tests of controls. The auditor most likely
decided that:
A: The available evidential matter obtained through tests of controls would not support an
increased level of control risk.
B: A reduction in the assessed level of control risk is justified for certain financial statement
assertions.
C: It would be inefficient to perform tests of controls given they would not result in reduced
substantive tests.
D: The assessed level of inherent risk exceeded the assessed level of control risk.

25. The use of analytical review as a substantive test will be limited if:
A: Detection risk is assessed as high.
B: Inherent risk is assessed as low.
C: Control risk is assessed as high.
D: Audit risk is assessed as low.

Solutions.

1. C
2. B
3. B
4. D
5. C
6. A
7. A
8. B
9. D
10. A
11. C
12. D
13. C
14. B
15. C
16. D
17. A
18. D
19. B
20. A
21. B
22. B
23. B
24. C
25. C