ACC300 REVISION PRACTICE SAMPLE QUESTIONS SECTION A 10 Multiple Choice Questions (All Topics) 1 The audit expectation gap occurs when: a. b. c. d. Auditors perform their duties appropriately and satisfy users' demands User beliefs do not align with what an auditor has actually done Peer reviews of audits ensure that auditing standards have been applied correctly and the standards are at a level that satisfy users' demands The public is well educated about auditing 2. The independent audit is important to users of financial statements because it: a. Determines the future stewardship of the management of the company whose financial statements are audited b. Measures ad communicates financial and business data included in financial statements c. Involves the objective examination of and reporting on management-prepared statements d. Reports on the accuracy of all information in the financial statements 3. If an audit firm was being sued by a third party based on materially false financial statements on which the third party claims to have relied, which of the following is the best defence for the auditors: a. Lack of privity of contract b. Lack of foreseeability c. A disclaimer contained in the engagement letter d. Contributory negligence on the part of the client 4 . A self-interest threat arises when: a. the client threatens to use a different auditor next year. b. the auditor encourages others to buy shares in a client. c. the assurance team member has recently been a director of the client. d. the auditor owns shares in a business that is a major supplier of the client. 5. The main reason an independent auditor gathers audit evidence is to: a. Form an opinion on the financial statements b. Detect fraud c. Evaluate Management d. Assess control risk 6. In comparison to the external auditor, an internal auditor is more likely to be concerned with: a. Internal administrative control b. Cost accounting procedures c. Performance auditing d. Internal control 7 .The Pacific Acceptance case was significant because it: a. allowed contributory negligence as a defence for audit failure b. dealt with auditor's liability to shareholders c. established that liability might exist to third parties d. dealt with aspects related to auditors' duties. 8. ASA 570 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern. One of the most important types of evidence to assess the going concern question is: a.analytical procedures b.enquiries of its legal counsel c. physical stocktake count d. statistical sampling procedures 9. Sampling risk (sampling error) is an inherent part of sampling which results from: a. testing less than the entire population. b. weaknesses in client's internal control system. c. inappropriate audit procedures. d. failure to recognise exceptions. 10. What condition requires departure from an unmodified report? a materially misstated financial report b. inability to obtain sufficient appropriate audit evidence c. both A and B d.none of the above Answer Multiple Choice Answer Question 1 b 2 c 3 a 4 d 5 a 6 c 7 d 8 a 9 a 10 c SECTION B QUESTION 1: SUBSEQUENT EVENTS The Auditor , Jeff Tripodi , carried out the audit of Welken Ltd for the year ended 30 June 2019. Tripodi signed the Audit report on 8th September 2019. Welken issued the financial statements on 10th September 2019. The following events occurred after balance date (assume all are material): 1) 12th July 2019 A large debtor, Torro Ltd ,went into liquidation. Nothing had been heard from the debtor since it purchased the items on 28th April,2019 2) 28th July 2019 A legal issue was settled requiring a large payout by Welken. At balance date the company solicitor had stated that he expected a favourable outcome from the case. 3) 10th August 2019, Welken made a takeover offer for Bilby Ltd another firm in the same industry Required: (a) What audit procedures that should have brought the item to the auditor's attention in each situation? (b) Determine the appropriate action/disclosure that the auditor would require from the company. A. B. C. D. Answer: 1) 12th July 2019 Adjust the 30 June 2019 financial statements Disclose the information in a note to the 30 June 2019 financial report Request that the client recall the 30 June 2019 financial report for revision No action is required a) Discuss matter with management b) A: Adjust the 30 June 2019 financial statements to write off the bad debt 2) 28th July 2019 a) Discuss with company solicitor b) B :Disclose the information in a note to the 30 June 2019 financial report regarding the legal issue 3) 10th August 2019 a) Review Board meeting Minutes b) Disclose the information in a note to the 30 June 2019 financial report regarding the about the takeover offer for Bibly . QUESTION 2 : AUDIT OPINIONS The external auditor is facing the following separate situations, the effects of all items below are material: 1. The Jurassic client was unable to state it had recorded all sales due to its poor internal control over sales 2. The Wayne company had used LIFO instead of FIFO in recording inventory. The amount of the misstatement was misstated but it was limited to inventory. 3. The Packabell company had incorrectly included two amounts, $8,700 and $200 .While the $8,700 was material, the $200 was not material. The Packabell company corrected its error in relation to the $8,700 Required: For each of the separate situations above: (a) Identify the type of Audit Opinion required. (b) Briefly explain the basis of your answer. ANSWER Q2. (5 x 4 = 20 marks) 2 marks for each part Situation 1 (a) Disclaimer Opinion (b) as material insufficient appropriate evidence and pervasive Situation 2 (a) Qualified audit opinion (b) as disagreement with management but material not pervasive and limited effect to inventory Situation 3 (a) Unmodified Opinion (b) as not materially misstatement