Class Assignment

Question 1 – MCQs

1. In an assurance engagement, who is responsible for preparing the subject matter?

A) Practitioner

B) Intended users

C) Responsible party

D) Regulators

2. Which of the following is considered as appropriate subject matter in an assurance engagement?

A) Economic decisions

B) Sufficient evidence

C) The information subject to examination

D) Assurance report

3. What are the criteria against which the subject matter is evaluated in an assurance engagement?

A) Economic decisions

B) Suitable criteria

C) Sufficient evidence

D) Responsible party

4. What is needed to provide a basis for the opinion or conclusion in an assurance engagement?

A) Intended users

B) Suitable criteria

C) Sufficient appropriate evidence

D) Written assurance report

5. What is the output of an assurance engagement expressing a conclusion or opinion about the
subject matter?

A) Responsible party

B) Suitable criteria

C) Sufficient appropriate evidence

D) Written assurance report

6. What is the primary difference between reasonable assurance engagements and limited assurance
engagements?

A) The practitioner performs significantly fewer procedures in reasonable assurance engagements.

B) Limited assurance engagements require less thorough procedures to gather evidence.

C) Reasonable assurance engagements conclude that the subject matter is plausible.

D) Limited assurance engagements give a positively worded assurance opinion.

7. In a reasonable assurance engagement, the practitioner concludes that the subject matter:

A) Conforms in all material respects with identified suitable criteria.

B) Is plausible in the circumstances with respect to identified suitable criteria.

C) Gives a negatively worded assurance conclusion.

D) Is prepared in accordance with an applicable financial reporting framework.

8. What level of assurance does a reasonable assurance engagement provide compared to a limited
assurance engagement?

A) Moderate level of assurance

B) High level of assurance

C) Lower level of assurance than an audit

D) Negatively worded assurance conclusion

9. What is the "expectation gap" in auditing?

A) The difference between the actual and expected audit fees

B) The difference between the actual and expected audit quality

C) The misconceptions about the role of an auditor and the level of assurance provided

D) The difference between the actual and expected financial statement accuracy

10. Which of the following is an example of the "expectation gap"?

A) Auditors are responsible for preparing the financial statements

B) Auditors test all transactions and balances

C) Auditors provide absolute assurance that the financial statements are correct

D) Auditors are required to provide reasonable assurance that the financial statements are free from
material misstatement

11. What is the primary purpose of an external audit engagement?

A) To provide management with recommendations for improving financial performance.

B) To ensure compliance with internal control procedures.

C) To enhance the degree of confidence of intended users in the financial statements.

D) To prepare financial statements in accordance with International Financial Reporting Standards.

12. According to ISA 200, what is the objective of the auditor in an external audit engagement?

A) To express an opinion on whether the financial statements are prepared in accordance with an
applicable financial reporting framework.

B) To maximize shareholder wealth by manipulating financial statements.

C) To identify all instances of fraud within the organization.

D) To provide assurance about the accuracy of individual transactions.

13. What is meant by the term "true and fair" regarding financial statements?

A) It indicates that the financial statements are based solely on factual information.

B) It implies that the financial statements are biased to favor shareholders.

C) It refers to information that conforms with accounting standards and relevant legislation.

D) It suggests that the financial statements may contain errors but are still acceptable.
14. What incentive do directors have to manipulate financial statements, according to the provided
information?

A) To ensure compliance with external audit requirements.

B) To accurately reflect the company's financial position.

C) To achieve the objectives of the company and maximize shareholder wealth.

D) To minimize the need for external audit services.

15. Why do some companies choose to have an external audit even if not required by law?

A) To increase the cost of financial reporting.

B) To decrease shareholder confidence in the financial statements.

C) Because shareholders or influential stakeholders demand it.

D) To avoid scrutiny from regulatory authorities.

16. What level of assurance will be provided by the independent

auditor's report?

A Absolute

B Reasonable

C Moderate

D Limited

17. Which of the following is NOT one of the five elements of an

assurance engagement?

A Subject matter

B Suitable criteria

C Assurance file

D Written report

18. Which of the following is NOT a benefit of an audit?

A Increased credibility of the financial statements

B Deficiencies in controls may be identified during testing

C Fraud may be detected during the audit

D Sampling is used

19. Which of the following statements is false?

A The auditor will express an opinion as to whether the

financial statements give a true and fair view

B The auditor must obtain sufficient appropriate evidence to be

able to form an audit opinion

C If the financial statements are found to contain material

misstatements a negative audit opinion will be given

D An audit may not detect all fraud and error in the financial

Statements

20. Which of the following are examples of the expectation gap?

(i) The independent auditor's report confirms the financial

statements are accurate.

(ii) An unmodified opinion means the company is a going

concern.

(iii) The auditor tests all transactions.

(iv) The auditor can be sued for negligence if they issue an

inappropriate opinion.

A (i), (ii) and (iii)

B (i), (ii) and (iv)

C (i) and (ii) only

D (ii) and (iii) only

21. Which fundamental principle requires a professional accountant to be straightforward and honest in
all professional and business relationships?
A) Objectivity

B) Professional behaviour

C) Professional competence and due care

D) Integrity

22. What is required of a professional accountant in terms of professional knowledge and skill?

A) To attain and maintain a basic level of knowledge and skill

B) To attain and maintain a level of knowledge and skill required to ensure competent professional
services

C) To attain and maintain a level of knowledge and skill that is higher than required

D) To attain and maintain a level of knowledge and skill that is relevant to their personal interests

23. Which fundamental principle requires a professional accountant to respect the confidentiality of
information acquired as a result of professional and business relationships?

A) Objectivity

B) Professional behaviour

C) Professional competence and due care

D) Confidentiality

24. What should a professional accountant do if they have a conflict of interest or are subject to undue
influence of others?

A) Compromise their professional or business judgments

B) Allow their judgments to be compromised

C) Not allow bias, conflicts of interest or undue influence of others to compromise professional or
business judgments

D) Disclose the conflict of interest but still make a judgment

25. Which fundamental principle requires a professional accountant to comply with relevant laws and
regulations and avoid any conduct that might discredit the profession?

A) Objectivity
B) Professional behaviour

C) Professional competence and due care

D) Integrity

26. Why is it important for professional accountants to behave in an ethical, professional manner?

A) To increase their own confidence in their work

B) To act in the best interests of their clients

C) To act in the public interest and increase the confidence of intended users

D) To follow the rules and regulations of their profession

27. What is essential for an assurance provider to be trusted by the intended users?

A) To have a close relationship with their client

B) To have a financial interest in the client's business

C) To be independent of their client

D) To have a reputation for being aggressive in their auditing approach

28. What is a conflict of interest in the context of auditing?

A) When the same audit firm is appointed for two companies that interact with each other

B) When the same audit firm is appointed for two companies that do not interact with each other

C) When a different audit firm is appointed for two companies that interact with each other

D) When a different audit firm is appointed for two companies that do not interact with each other

29. What is a safeguard against conflicts of interest?

A) Disclosing the nature of the conflict to the relevant parties and obtaining consent to act

B) Implementing separate engagement teams with the same engagement partner and team members

C) Reviewing key judgments and conclusions by a member of the engagement team

D) Allowing access to client files to all team members

30. What should the audit engagement letter include?

A) Only the objective and scope of the audit

B) Only the responsibilities of the auditor

C) The objective and scope of the audit, the responsibilities of the auditor, the responsibilities of
management, and other terms as specified in ISA 210

D) None of the above

31. What is the purpose of the engagement letter?

A) To agree the terms of the audit engagement with management or those charged with governance

B) To outline the responsibilities of the auditor only

C) To provide a detailed audit plan

D) To issue the auditor's report

32. What should be done before any engagement-related work commences?

A) The content of the engagement letter should be agreed with the client

B) The auditor should start the audit work immediately

C) The client's acknowledgement of the terms of the letter should be verbally confirmed

D) The engagement letter should be signed by the auditor only

33. Which of these is NOT a fundamental ethical principle?

A Integrity

B Independence

C Objectivity

D Professional competence and due care

34. Which of these statements provides the best explanation of

integrity?

A Members should act diligently and in accordance with

applicable technical and professional standards

B Members should not bring the profession into disrepute

C Members should not use client information for personal

advantage

D Members should be straightforward and honest in all

professional and business relationships

35. A member was found guilty of ethical misconduct by failing

to respond to the professional clearance requests from

another audit firm. This is a breach of which fundamental

principle?

A Integrity

B Independence

C Professional behaviour

D Professional competence and due care

36. Which of the following statements best describes the

conceptual framework approach to ethics?

A A set of rules which must be followed in all circumstances

B A set of principles which the auditor applies based on

professional judgment

C The conceptual framework is set out in company law

D A set of principles which the auditor applies at their

discretion

37. Why do auditors need to be independent?

A To ensure users of the auditor's report can place reliance on

it and have faith it is not biased

B To ensure the financial statements give a true and fair view

C To provide more regulation for auditors to increase the

perception of quality

D The law requires it

38. What is audit risk?

A) The risk that the auditor expresses an appropriate opinion when the financial statements are
materially misstated

B) The risk that the auditor expresses an inappropriate opinion when the financial statements are
materially misstated

C) The risk that the auditor detects all material misstatements in the financial statements

D) The risk that the auditor fails to detect any material misstatements in the financial statements

39. What comprises audit risk?

A) Only the risk of material misstatement

B) Only detection risk

C) The risk of material misstatement and detection risk

D) Neither the risk of material misstatement nor detection risk

40. What is the risk of material misstatement?

A) The risk that the financial statements are materially accurate

B) The risk that the financial statements are materially misstated prior to the audit

C) The risk that the auditor detects all material misstatements in the financial statements

D) The risk that the auditor fails to detect any material misstatements in the financial statements

41. Which of the following is a benefit of identifying areas of the financial statements where
misstatements are likely to occur early in the audit?

A) Reducing the risk of issuing an inappropriate audit opinion to an unacceptable level

B) Increasing the risk of reputational and punitive damage

C) Planning procedures that address the significant risk areas identified

D) Ignoring the risk of material misstatement

42. Which type of misstatement would an auditor classify a difference in an accounting estimate that
they consider unreasonable as?

A) Factual misstatement

B) Judgmental misstatement
C) Projected misstatement

D) None of the above

43. What is the primary purpose of evaluating misstatements identified during the audit?

A) To determine the cause of the misstatement

B) To assess the materiality of the misstatement

C) To determine the appropriate audit opinion

D) To ignore the misstatement

44. Which type of risk is more likely to arise when an accounting standard provides guidance on a
specific accounting treatment that may not be understood by the client?

A) Control risk

B) Inherent risk

C) Detection risk

D) Sampling risk

45. Which risk may be high due to the design of the internal control system being insufficient or the
controls not being applied effectively?

A) Inherent risk

B) Control risk

C) Detection risk

D) Sampling risk

46. Which risk comprises sampling risk and non-sampling risk?

A) Control risk

B) Inherent risk

C) Detection risk

D) Audit risk
47. Which risk is the risk that the auditor's conclusion based on a sample is different from the conclusion
that would be reached if the whole population was tested?

A) Sampling risk

B) Non-sampling risk

C) Control risk

D) Inherent risk

48. Which risk is the risk that the auditor's conclusion is inappropriate for any other reason?

A) Sampling risk

B) Non-sampling risk

C) Control risk

D) Inherent risk

1. How can the auditor amend the audit approach in response to risk assessment?

A) By placing more reliance on internal controls

B) By performing fewer substantive procedures

C) By incorporating additional elements of unpredictability in the selection of further audit procedures

D) By assigning less experienced staff to complex or risky areas of the engagement

49. Which of the following is a change the auditor can make to the nature, timing, or extent of audit
procedures?

A) Placing more reliance on internal controls

B) Performing fewer substantive procedures

C) Changing the timing and frequency of review procedures

D) Assigning less experienced staff to complex or risky areas of the engagement

50. Why is it important for the auditor to emphasise professional scepticism?

A) To reduce detection risk

B) To increase control risk

C) To decrease inherent risk

D) To ensure the auditor's conclusion is appropriate

51. Which of the following is a way to respond to assessed risks?

A) Assigning more experienced staff to non-complex areas of the engagement

B) Providing less supervision

C) Incorporating additional elements of unpredictability in the selection of further audit procedures

D) Performing fewer substantive procedures

52. Which of the following is a way to address complex or risky areas of the engagement?

A) Assigning less experienced staff

B) Providing less supervision

C) Incorporating additional elements of unpredictability in the selection of further audit procedures

D) Assigning more experienced staff

53. What is professional scepticism in auditing?

A) An attitude that includes a questioning mind and a critical assessment of audit evidence

B) A mindset that assumes the client's financial statements are accurate

C) A approach that relies heavily on internal controls

D) A technique that focuses on detecting material misstatements only

54. What should the auditor be alert to when applying professional scepticism?

A) Audit evidence that contradicts other audit evidence and information that confirms the reliability of
documents

B) Audit evidence that contradicts other audit evidence and information that brings into question the
reliability of documents
C) Conditions that may indicate possible error and circumstances that suggest the need for fewer audit
procedures

D) Conditions that may indicate possible fraud and circumstances that suggest the need for fewer audit
procedures

Here are five multiple-choice questions based on the information:

55. According to ISA 320, what is the definition of materiality?

A) Misstatements that are significant but not material

B) Misstatements that could reasonably be expected to influence the economic decisions of users

C) Misstatements that are material but not significant

D) Misstatements that are both material and significant

56. What is the significance of materiality in auditing?

A) It determines the scope of the audit

B) It determines whether the financial statements show a true and fair view

C) It determines the audit procedures to be performed

D) It determines the audit report to be issued

57. How is materiality determined in auditing?

A) By using a quantitative approach only

B) By using a qualitative approach only

C) By using a combination of quantitative and qualitative approaches

D) By using professional judgment

58. What factors should the auditor consider when determining materiality?

A) The size of the misstatement only

B) The nature of the misstatement only

C) Both the size and nature of the misstatement

D) The information needs of individual users only

59. What is the focus of an audit in relation to materiality?

A) Identifying insignificant risks of material misstatement

B) Identifying significant risks of material misstatement

C) Identifying material weaknesses in internal control

D) Identifying material errors in financial statements

Here are two multiple-choice questions based on the information:

60. What is performance materiality according to ISA 320?

A) The amount set by the auditor equal to materiality for the financial statements as a whole

B) The amount set by the auditor at less than materiality for the financial statements as a whole

C) The amount set by the auditor at more than materiality for the financial statements as a whole

D) The amount set by the auditor to identify individual material misstatements

61. Why does the auditor set performance materiality at a value lower than overall materiality?

A) To increase the risk of failing to identify misstatements

B) To reduce the risk that the auditor will fail to identify misstatements that are material when added
together

C) To identify individual material misstatements

D) To ignore misstatements that are material in aggregate

62. Which of the following is an example of an audit risk for

Esperence Co?

A The client is being sued by a customer for a defective

product and if the claim is successful, the compensation

awarded is likely to be significant

B The client is being sued by a customer for a defective

product. The publicity of the case could damage the

company’s reputation

C The client will have to spend a significant amount of money

on improving its quality control procedures to avoid the same

defects occurring again

D Provisions may be understated if the probable payment

resulting from the court case is not recognised as a liability in

the financial statements

63. Which of the following is not an analytical procedure?

A Calculation of gross profit margin and comparison with prior

year

B Recalculation of a depreciation charge

C Comparison of revenue month by month

D Comparison of expenditure for current year with prior year

64. Which of the following is not a ratio?

A Gross profit margin

B Acid test

C Inventory turnover

D Revenue growth

65. You have used the management accounts to calculate the

gross profit margin and found it to be higher than the prior

year figure. Which of the following would provide a possible

explanation?

A Sales prices have been reduced to increase sales volumes

B Prices charged by suppliers have increased but the

company has not increased sales prices to customers to

cover the increased costs

C Closing inventory has been overvalued

D Administration expenses have decreased

66. What is the purpose of analytical procedures in auditing?

A) To identify material weaknesses in internal control

B) To evaluate financial information and identify unusual transactions or events

C) To assess the operating effectiveness of internal control

D) To identify material errors in financial statements

67. What types of comparisons are included in analytical procedures?

A) Only comparisons with prior periods

B) Only comparisons with industry averages

C) Comparisons with prior periods, anticipated results, and industry information

D) Comparisons with budgeted amounts only

68. What types of relationships are considered in analytical procedures?

A) Only relationships among financial information

B) Only relationships between financial and non-financial information

C) Relationships among financial information and between financial and non-financial information

D) No relationships are considered in analytical procedures

Question 2

Analytically evaluate each illustration presented below and identify the audit risk component that is
most pertinent.

1. The company relies heavily on a single supplier for its raw materials, and there is no contingency plan
in place for alternative suppliers:
2. The company's management overrides internal controls to manipulate financial results:
3. The market for the company's product is highly competitive, and there is a history of aggressive pricing
strategies:
4. The company's information systems lack sufficient cybersecurity measures, increasing the risk of data
breaches:
5. The company recently underwent a significant restructuring, resulting in a high turnover of key
financial personnel:
6. The company operates in a highly regulated industry, and there is a history of non-compliance with
regulatory requirements:
7. The company has a complex corporate structure with numerous subsidiaries in different countries,
making it challenging to consolidate financial statements accurately:
8. The company recently implemented a new accounting system, and there have been reports of system
glitches affecting the accuracy of financial data:
9. The company's pension plan is significantly underfunded, and there is uncertainty about the ability to
meet future pension obligations:
10. The company relies heavily on estimates and assumptions in valuing intangible assets, and there is a
lack of transparent documentation supporting these valuations:

Question 3

Analyze the potential threats that may arise in the given situation and provide a comprehensive
recommendation for the most effective course of action or mitigation strategy to protect against those
threats.

1. Fizza was planned to be the engagement supervisor for the audit of Synergy Limited, she has
recently received an employment offer from Synergy Limited. However, she is considering not
accepting the Synergy’s employment offer.

2. Hussain Tarar is the audit partner responsible for the audit of Petra Travels (Private) Limited (PTL).
The CEO of the company has informed Hussain that due to liquidity issues amid COVID, several
employees including some staff members of the finance department have left the company. CEO has
therefore requested Hussain to provide two staff of the audit firm for some time to run the finance
department.

3. You are an audit partner of an audit firm; a client has offered your firm that the fee for taxation
services of this year may be based on a percentage of tax saved by the firm.
4. Attitude of client’s Chief Finance Officer has been very aggressive towards audit team members
particularly at times when questioned on any of his judgements in relation to accounting matters.

Question 4

For each error and fraud listed below, identify one internal control procedure which, if properly
designed and implemented most likely could assist in preventing or detecting the error and fraud

1. Invoices for goods sold are posted to incorrect customers’ accounts

2. Goods ordered by customers are shipped, but are not billed to anyone
3. Invoices are sent for shipped goods but are not recorded in the sales journal
4. Invoices are sent for shipped goods and are recorded in the sales journal but are not posted to
customer account
5. Credit sales are made to individuals with unsatisfactory ratings.
6. Customer’s checks are misappropriated before being forwarded to the cashier for deposit.
7. Payments are duplicated, resulting in excess payments to vendors.
8. Employees steal inventory without recording the reduction, leading to discrepancies in inventory
levels.
9. Unauthorized discounts are applied to customer invoices, leading to revenue leakage.
10. Non-existent employees are added to the payroll, and salaries are fraudulently paid to these ghost
employees