Questions and Answers of Auditing A Practical Approach

What is an accountability relationship?
Who are the main users of company financial statements?
Why might financial statement users demand an audit?
What are the three most common theories used to explain the origins of the demand for audit and assurance services?
What are the three elements of an operational audit?
What is the objective of a financial statement audit?
What are the most common tasks of the internal audit function?
What are the main differences between reasonable and moderate assurance engagements?
What is the level of assurance required for an annual financial statement for a reporting issuer?
What does negative assurance mean?
What are the different types of unmodified audit opinions?
What are the different types of modified audit opinions?
What type of audit opinion is unmodified and modified?
A financial statement must be relevant and reliable. What do these terms mean in this context?
What three characteristics should an auditor have when conducting an audit?
What are non-audit services?
Name the three professional accounting bodies that joined CPA Canada.
What is the AASB and what is its role?
What are the main functions of the CSA?
Define the audit expectation gap.
What has caused the audit expectation gap?
What can be done to reduce the audit expectation gap?
What does it mean to act in the public interest?
List and explain the five fundamental ethical principles in the code of professional conduct for professional accounting bodies.
What are the rules with respect to fees?
What are the three ways an auditor can become associated with financial information?
Why is auditor independence so important?
What are some examples of circumstances that may cause a familiarity threat?
What is the difference between a non-executive and an independent director?
Why is it important that an audit committee be independent?
Why might an external auditor want to use the work of the internal audit function?
What are the two ways a client can establish the duty of care?
What is contributory negligence?
What must be established under tort law to prove that an auditor has been negligent?
What will an auditor consider in assessing the integrity of a client’s management, board, and other personnel?
What are the key components of an engagement letter?
Why must an auditor seek a client’s permission before communicating with its prior auditor or any other relevant third party?
What are the three main stages of the audit?
List three factors that affect an auditor's preliminary risk identification.
What are related parties?
What is the purpose of gaining an understanding of a client?
What will an auditor consider if their client is an importer or exporter?
What does a client risk if it operates in an industry subject to changing trends?
Define related parties.
How do related parties impact risk? Why?
What are three procedures the auditor should perform regarding related parties?
What are the responsibilities of the client and the auditor when it comes to fraud?
List four incentives and pressures that increase the risk of fraud.
What is management override and what procedures should the auditor perform to address it?
List three factors that indicate that the going concern assumption may be at risk.
List three factors that mitigate the risk that the going concern assumption may be in doubt.
What is corporate governance?
Why is the auditor concerned with an entity’s corporate governance?
List three guidelines that should be included in a board of directors’ mandate.
What are some of the risks associated with the purchase of a new IT system?
What are two common sources of new computer programs?
What are application controls?
Explain how an auditor can assess the risk associated with their client’s closing procedures.
Outline how an auditor can assess the adequacy of their client’s closing procedures.
What is the particular risk when an auditor believes that their client is under pressure to report strong results?
What are the three components of audit risk?
What is the relationship between audit risk and detection risk?
What are four factors that affect inherent risk?
What is qualitative materiality?
What is quantitative materiality?
What is the most appropriate materiality base for a for-profit entity? Why?
What is the purpose of developing an overall audit strategy?
What is a substantive audit Strategy and when might an auditor adopt this approach?
To whom will an auditor report uncovered deficiencies in a client’s system of internal controls?
What is a PE ratio?
Explain how internal performance reports may be used.
What is a debt covenant?
Why are liquidity ratios calculated?
Define the gross profit ratio and explain what it indicates.
What is a trend analysis and why might an auditor use this form of analysis?
Find a copy of a recent audit report and a review report for an Australian company listed on the ASX.Required(a) Explain the relevance of the paragraphs ‘Directors’ responsibility for the
Morne Enterprises Ltd has experienced sustained growth in recent years under the leadership of the last two CEOs, both of whom were promoted from within the business. The company began by making
The Duke Plaza Hotel is located close to the main railway station in a large regional city. Its main client base is business people visiting the city for work-related purposes. Other important groups
Shane is getting to know his new client Clarrie Potters, a large discount electrical retailer. Ben was the engagement partner on the Clarrie Potters audit for the past five years, but had to rotate
Pinetree Holdings Ltd (Pinetree) is an importer of kitchen appliances and distributes the goods to retailers around the country. Pinetree has benefited from rising house prices in most capital cities
What financial information could Clarke Partners use to understand its new client, Dolphin? Explain how it would be useful.Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based
(a) Identify and explain any significant fraud risk factors for Dolphin.(b) For each fraud risk factor you identify in (a), explain how the risk will affect the approach to the audit of
Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year Chan and Partners gained a new client, Medical
W&S Partners commenced planning the Cloud 9 audit by gaining an understanding of the client’s structure and its business environment. A major task is to consider the concept of materiality as
Adopting an audit strategy that relies heavily on substantive testing:(a) Is appropriate when internal controls are very strong.(b) Requires the auditor to conduct extensive control testing.(c) Means
Listed companies are required to make certain disclosures in their annual reports about the compensation paid to their top executives. One reason for this is to help interested stakeholders assess
Adopting an audit strategy that does not rely heavily on substantive testing:(a) Is appropriate when internal controls are minimal.(b) Requires the auditor to conduct extensive control testing.(c)
Which of the following is a true statement about profitability ratios?(a) All companies have a high inventories turnover ratio.(b) Auditors will be interested in trends in profitability ratios.(c)
Common uses of analytical procedures include:(a) Risk identification during the risk assessment stage.(b) Estimating account balances during the risk response stage.(c) Overall assessment of the
Analytical procedures:(a) Can only be performed on annual data.(b) Are only useful if the client’s variation from budget is low.(c) Are not affected if the client changes its accounting methods.(d)
The relationship between risk and the materiality level set in the risk assessment phase:(a) Is positive.(b) Is inverse.(c) Is irrelevant.(d) Depends on the size of the client.
What is audit risk? What are the components of audit risk?
A client has physical controls over inventories, including a locked warehouse with access restricted to authorised personnel. Testing of these physical controls over inventories shows that they are
Consider the following statement: ‘If inherent and control risk are high, the auditor will set detection risk as low to maintain a low audit risk’. Explain what it means to set detection risk as
Ajax Finance Ltd (Ajax) provides small and medium sized personal, car and business loans to clients.It has been operating for more than 10 years and run throughout this time by Bill Short. Bill has
Biggest Bargains stocks thousands of items that range in value from $1 to $100. The inventories on hand represent a material portion of current assets. The merchandise items change according to the
One of the clients of MMM Chartered Accountants operates a restaurant. From January of the current year, the business has consistently paid its suppliers late, well in excess of the suppliers’
Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to the credit of sales
Clarence is a new audit junior and is attending training sessions at the audit firm. Clarence is trying to focus on the main points in the training because there will be a test at the end of the
Red Ltd is a media services company. It has radio, television and magazine divisions and operates in all states. Each division manager has a remuneration package that includes a base salary and

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