At the planning stage of the audit, the auditor calculates the debtors’ turnover, the gross profit ratio and the inventory turnover. In comparison with the prior year, results indicate that
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s debtors turnover has incread;
s gross profit ratio has decread; and
s inventory turnover has not changed significantly.
What is the most likely risk of misstatement identified?
a.Understatement of accounts receivables.
b.Overstatement of sales.
c.Understatement of cost of goods sol
d.
d.Understatement of sales.
Question 6
Wine Ltd, a large listed winery, purchad 100 per cent of the shares of a small competitor company operating five wineries in Western Australia for an amount considerably above the market value of the parately identifiable net asts. The purcha was completed on 1 January 2010. In planning the audit of Wine Ltd
for the year ended 30 June 2010, which accounts are most likely to be misstated becau of this new venture?
a.Sales and accounts receivable.
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c.Plant and equipment, and intangible asts.
d.Purchas and accounts payabl
e.
Question 7
Which of the following evidence-collecting procedures is likely to be the most effective in testing the existence of an inventory of wine which includes both current and non-current asts?
a.Tasting some bottles of wine from both the current and non-current stocks.
b.Test counting some inventory items, agreeing the test count to the client count and tracing the count to
the inventory listing.
c.Using analytical procedures to compare the inventory account balance and the inventory turnover with
tho calculated in the prior year.
d.Examining production records of the wineries to ensure that the quantities produced agree with the
inventory listing.
Which of the following evidence-collecting procedures is likely to be the most effective in testing the completeness of accounts receivable?
a.Select a sample of customers and verify that the year-end balance does not exceed the customer’s
credit limit.
b.Recalculate the client’s aging of accounts receivable and trace a sample of the outstanding invoices to
the aging.
c.Select a sample of subquent cash receipts and verify that related sales were cut off properly.
d.Select a sample of shipping documents around the year-end and ensure that all shipments prior to the
year-end were invoiced and recorded in the accounts receivable sub-ledger.
Question 9
Wine Ltd, a large listed winery, purchad 100 per cent of the shares of a small competitor company
operating five wineries in Western Australia. The auditor of Wine Ltd is planning the audit of the non-current asts. Which of the following procedures is least relevant to the audit of the accounts?
a.Requesting a solicitor’s reprentation letter from Wine Ltd’s solicitor.
b.Obtaining valuations from a registered valuer for the new wineries purchad in Western Australia
this year.
c.Reading the minutes of the board of directors’ meetings for the year.
d.Reading the contract for the purcha of the West Australian competitor.
Question 10
The auditor has satisfied themlves that the client’s financial statements are not materially misstated. However, the company is the defendant in a major lawsuit involving the safety of their most important product. At prent, management and the firm’s solicitors are unable to estimate the liability that may eventuate. The lawsuit is properly disclod in the notes to the financial statements.
What type of opinion should be issued?
a.The uncertainty is extreme and the auditor should issue a disclaimer of opinion.
b.The uncertainty reprents a scope limitation and the auditor should issue a qualified opinion explaining
this limitation.
c.The auditor should issue an unmodified opinion.
d.The auditor should issue an unmodified opinion with an Emphasis of Matter paragraph regarding the
uncertainty in the auditor’s report.
Solutions
Question 1
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Correct Answer: c
The client providing audited financial statements to financiers is normal business practice.
Answer A: Indications of an inappropriate limitation in the scope of work (ISQC 1, para. A19).
Answer B: Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible (ISQC 1, para. A19).
Answer D: ISQC 1, para. A18, says the firm must consider whether it has the competence to complete the audit. It is not clear here whether or not this is the ca.
Source: Topic heading—‘Client continuance’.
阳江海陵岛Question 2
Correct Answer: b
The price discount is a personal advantage to members of the audit team. This results in a lf-interest threat.
The question clearly implies a lf-interest threat. Self-review and intimidation are not relevant here. The last distracter, a financial threat, is not one that is identified in the Code of Ethics for Professional Accountants, ction 290.230.
Source: Topic heading—‘Ethical considerations’.
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Question 3
Correct Answer: c
C is one of the procedures recommended in ISA 315, para. A.12, to assist the auditor in gaining an understanding of the entity.
Answer A: This procedure does not address the nature of the entity but rather the nature of its management systems.
Answer B: This procedure is normally carried out at the conclusion of the audit process.
Answer D: This procedure is completed as part of the initial asssment of the client and is carried out before accepting the audit engagement.
Source: Topic heading—‘Identifying and asssing the risks of material misstatement through understanding the entity and its environment’.
Question 4
Correct Answer: a
A is identified as one procedure the auditor should carry out in order to asss the risk of material misstatement in ISA 315, para. 26(c).
Answer B: Risks have no direct bearing on the auditor’s report.
Answer C: This is a procedure ud to provide corroboration of evidence obtained through oral enquiries of management and other substantive procedures. It is not a risk asssment procedure.
Answer D: This is a risk identification procedure rather than a risk asssment procedure.
Source: Topic heading—‘Identifying and asssing the risks of material misstatement through understanding the entity and its environment’.
Question 5
Correct Answer: b
An increa in sales would result in changes to the debtors’ turnover and gross profit ratio. The formulas for the ratios are as follows.
s Debtors’ turnover: Sales to accounts receivables.
s Gross profit ratio: Gross margin to sales.
s Inventory turnover: Cost of goods sold to average inventory.
Answer A: This would cau an increa in the debtors’ turnover, but no other changes.
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Answer C: This would cau a change in the inventory turnover.
Answer D: This would cau opposite changes to tho identified.
Source: Topic heading—‘Asssing the risk of material misstatement in the sales, accounts receivable and cash receipts system’.
Question 6
Correct Answer: c
The only unusual transaction is the purcha of the small competitor which will become a subsidiary of
Wine Ltd. Tho accounts most likely to be misstated are the non-current asts, and the amount of the intangible ast goodwill.
While all of the accounts listed in distracters A, B and D may be affected by the consolidation of the subsidiary, the nature of the accounts is unlikely to be different from tho of the parent company and are comprid of numerous repetitive and common transactions. No significant additional risks are apparent from the information provided in the question for the accounts.
Source: Topic heading—‘Asssing the risk of material misstatement in the sales, accounts receivable and cash receipts system’.
Question 7
Correct Answer: b
Test counts are the standard procedure ud to prove the existence of inventory. The auditor must be sure to count the bottles and check that the bottles are full of wine rather than just count the cartons. The cartons may be empty.
Answer A: This procedure might be effective in testing the valuation and allocation asrtion of the inventory. It gives no evidence about quantities on hand.
Answer C: This procedure is a test for the valuation and allocation asrtion. It gives no evidence about quantities on hand.
Answer D: This procedure fails to take into account bottles of wine that were sold.
Source: Topic heading—‘Responding to assd risk of material misstatement in the sales, account
s receivable and cash receipts system’.
Question 8
Correct Answer: d
This procedure is a test that all sales as evidenced by shipments have been recorded and so, it is a completeness test.
Answer A: This is primarily a test of the valuation and allocation asrtion; it determines the collectability of the account.
Answer B: This is part of the testing for the valuation and allocation asrtion for the account. The cond part of this test is to estimate the allowance for doubtful debts, determined on the basis of the aging.
Answer C: This test is related to the cut-off asrtion for sales, and will therefore only test for missing sales around year end.
Source: Topic heading—‘Responding to assd risk of material misstatement in the sales, accounts receivable and cash receipts system’.
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Question 9
Correct Answer: a
The solicitor’s reprentation letter is normally ud to confirm litigation or claims against the company. Communication with the solicitor is unlikely to provide evidence about the non-current asts.
Each of the distracters is an important evidence-gathering procedure regarding the asts acquired in the purcha of the West Australian competitor, and so, important to the audit of the non-current asts of
Wine Ltd. Answer B pertains to the valuation and allocation asrtion for the purchad wineries, Answer C provides general information about the purcha, including estimates of values, and Answer D provides evidence as to the purcha price which is important in valuing goodwill, the rights of Wine Ltd regarding the asts, and in determining any other obligations which might exist in connection with the purcha (e.g. a requirement to pay a percentage of post-sale revenue or profit, which will impact on the carrying value of
the asts).
