Each multiple choice is worth two (2) marks with one mark for the correct answer and one mark for the explanation for your answer. Explanations must include Auditing standard references to get full marks.

Multiple Choice Question Three (2 Marks)

1. You are completing the audit for ABC Ltd which has a year end of 30 June 2020. You are due to sign the audit report on the 21st August 2020 and the company will release the accounts on the 28th August 2020. On the 25th August 2020, you hear on the news that the companys largest customer, which represents 80% of its income has gone into liquidation. There was no provision for doubtful debts recognised in the financial statements. What is your responsibility as the auditor?

a) Discuss the matter with management and determine if the accounts need to be amended. Perform additional testing if they are.

b) No responsibility. You have completed all your audit procedures and signed the report. Your job is done.

c) Notify ASIC of a potential going concern risk.

d) Perform additional audit testing to determine if the accounts need to be adjusted or not as a type one subsequent event.

2.

You are auditing a company which makes a large amount of purchases of stock from a related party overseas in Italy which generally takes several weeks to arrive in Australia by ship. Ownership of the stock for the company occurs when the goods have left Italy as they insure for the shipping period. You are currently auditing the purchases and closing stock account. Which assertions would be most at risk?

a) Accuracy for purchases and valuation for closing stock

b) Completeness for purchases and cut-off for closing stock

c) Cut-off for purchases and completeness for closing stock

d) Cut-off for purchases and accuracy for closing stock

3.

Which of the following would be an example of a detective control and a suitable test of this control?

a) Having a lock on a door where valuable closing stock is stored. A suitable test of the control would be to check if the lock works.

b) Running an exception report for any negative numbers of specific stock items. A test of this control would include reviewing the printed reports and the adjusting journals in the stock system which rectify any errors.

c) Not allowing negative amounts of stock to be entered into the inventory system. A test of this control would be to try to enter in a negative amount.

d) Performing a stocktake to compare the actual stock items with the amount recorded in the accounts for stock. A test of this control would include reviewing any items of stock in particular that look damaged.