AA-Ch-10 (Procedures)

Based on your understanding of the nature of EuKaRe you have identified that income is primarily in the form of cash.
Which element of audit risk is increased by this fact?

• Detection risk

• Inherent risk

• Control risk

• Business risk

Your audit partner has highlighted to you that it is imperative that TEY & Co acts in line with ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment. This means it must identify and assess the risks of material misstatement at both the financial statements level and at the assertion level, for classes of transactions, events and their related disclosures, and account balances and their related disclosures.
Which of the following statements is NOT an explanation of why ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment requires a risk assessment to be carried out at the planning stage?

• The risk assessment will help the audit team gain an understanding of the entity for audit purposes

• The risk assessment will enable the audit senior to produce an accurate budget for the audit assignment

• The risk assessment will form the basis of the audit strategy and the detailed audit plan

• Once the risks have been assessed, TEY & Co can select audit team members with sufficient skill and experience to maximise the chance of those risks being addressed

You have identified several audit risks which you feel your team will need to address. One such audit risk relates to the risk that income may be understated in the financial statements. You are concerned that not all income may be recorded. Which of the following statements is NOT a valid response to this audit risk?

• Obtain a breakdown of the income recorded from the cash that was collected in buckets, and vouch a sample of entries back to the volunteer in order to determine which volunteer collected the relevant donations

• Perform analytical procedures on the level of donations in shopping areas per volunteer

• Review the internal controls relating to cash collected in buckets to determine whether buckets are sealed, sequentially numbered and signed in and out by EuKaRe's volunteers

• Observe the counting and recording of proceeds from collections, to determine whether appropriate segregation of duties is in place

Another identified audit risk is the susceptibility of EuKaRe's business to fraud due to the high levels of cash involved.
Which of the following statements correctly describes the auditor's responsibilities in accordance with ISA 240 The auditor's responsibilities relating to fraud in an audit of financial statements?

• The auditor is responsible for the prevention and detection of fraud and error

• The auditor is not responsible for the prevention of fraud and error but is responsible for detection

• The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or error

• The auditor is responsible for detecting all errors and should attempt to detect fraud where information comes to light as a result of standard audit procedures

5 The audit manager has noted in the detailed audit plan that EuKaRe's control environment may be weak. Which TWO of the following statements are valid reasons as to why EuKaRe may have a weak control environment?

• EuKaRe has a detailed constitution which explains how the charity's income can be spent

• EuKaRe's finance department relies on volunteers who may not have accounts experience

• A high proportion of the income of EuKaRe is cash

• Understaffing in the finance department at certain times is due to the ad hoc nature of volunteer working hours

Which of the following are potential indicators that Strawberry is not a going concern?
(1) The breach of the loan covenants
(2) The departure of the sales director
(3) The fall in inventory turnover days
(4) The negative cash flow figures

• 1, 2 and 3

• 2, 3 and 4

• 1, 3 and 4

• 1, 2 and 4

You are reviewing the management's assessment of Strawberry's ability to continue as a going concern. What period must management's assessment cover?

• At least 12 months from the date of the auditor's report

• At least 12 months from the date of the financial statements

• A maximum of 12 months from the date of the auditor's report

• A maximum of 12 months from the date of the financial statements

You are concerned that the debt due from Grape Co may not be recoverable and believe that this would have a significant effect on the viability of Strawberry. Which of the following would provide you with the most reliable evidence regarding the recoverability of this debt?

• A management representation confirming its recoverability

• The response from the customer to your circularisation performed earlier in the audit confirming the amount owed

• Identification during your subsequent events review of a cash receipt for the full amount

• Correspondence between Strawberry's lawyer and Grape Co's lawyers confirming that the amount will be paid

You have raised your concerns with management regarding the ability of Strawberry to repay the $0.6m loan in six months. The directors have assured you that this will be possible as they have a contingency plan. Which of the following courses of action by the directors would provide you with the most assurance that Strawberry will be able to meet this commitment?

• Plans to dispose of a property valued at $5.2m in August 20X2

• The reopening of negotiations regarding the terms of the loan with the current provider

• Plans to substantially cut production costs by moving production to Asia

• Agreement by an alternative financial institution to lend Strawberry $4.8m in September 20X2

You have concluded that Strawberry is not a going concern. If the directors refuse to amend the financial statements which of the following correctly describes the impact on the auditor's report?
Audit opinion Explanation of circumstances
A Adverse opinion (A) Basis for adverse opinion
B Qualified opinion (B) Basis for qualified opinion
C Adverse opinion (c) Material Uncertainty Related to Going Concern section
D Qualified opinion (D) Material Uncertainty Related to Going Concern section

• A

• B

• C

• D