Chapter 4 and Chapter 5 Worksheet Questions

You are senior auditor of Smartwear Ltd. The director of Smartwear have requested you to assist them with the preparation of the statutory financial statements. Which of the following threats does this situation create?

• Self-interest

• Self-review

• Familiarity

• Intimidation

During the external audit of Yummee Ltd you discover that the director has accounted for research costs inappropriately resulting in a material misstatement in Yummee’s financial statements. Your firm plans to issue a modified audit opinion if the misstatement is not corrected. During a conversation with your firm’s audit partner, Yummee’s managing director, Java Peraya, indicated that it is the directors’ intention to seek the removal of your firm as external auditors if your firm issues a modified audit opinion in respect of this matter. Which of the following is an appropriate action that your firm should consider taking in response to the conversation between Java Peraya and your firm’s audit partner?

• Discuss the issue with the director but don’t request them to correct the accounting treatment.

• Provide an unmodified audit opinion to retain the audit contract.

• Provide unmodified audit opinion with an Emphasis of matters paragraph describing the material misstatement.

• Consider resignation as the director’s action represents an intimidating threat and breakdown of trust as well as raising doubts about management’s integrity.

As part of your planning work you have identified a few potential risks to independence, which is “Your audit firm has been asked to prepare the financial statements of a client as their finance director has been taken ill”. Which ethical threats does the case relate to?

• Self-interest

• Self-review

• Advocacy

• Intimidation

There are a lot of reasons which affect the assurance engagement quality. Which TWO of the following reasons affect to assurance engagement quality? Select two.

• The supervisor of assurance engagement may fail to communicate the issues arising to the engagement partner.

• The auditor may perform the right work to an adequate standard.

• The client could be negligent.

• The chief accountant of a company which is a supplier of audited entity could be incompetent.

According to ISA 220 “Quality control for an audit of financial statements” gives the definition of quality control as follow: “Quality controls are…adopted by Certified Public Accountants to provide reasonable assurance of conforming to professional standards in performing audit and related services”. Which TWO of the following options should be filled in the blank to make a full definition? Select two.

• Procedures

• Policies

• Regulations

• Principles

According to ISQC1 relating to ethics, the firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements as following statements: (1) All auditors should maintain independence. (2) The engagement partner should remain alert, through observation and making enquiry for evidence of NCW (non-comply with) relevant ethical required. Which option is correct?

• Both statements are true.

• Both statements are false.

• Statement (1) is false, and statement (2) is true.

• Statement (1) is true, and statement (2) is false.

At the AT audit company, the review of working papers (WPs) is performed by team leader, manager, and engagement partner. Which ONE of the following statements is false relating to review actions in the audit firm?

• The review will help to assess the sufficiency and appropriateness of obtained audit evidence.

• The review is an obligatory procedure according to law and regulations.

• Engagement quality control review (EQCR) is performed by engagement partner.

• A ‘hot review’ is a review carried out by a partner not otherwise involved in the engagement or an external consultant.

At the AT audit company, the review of working papers (WPs) is performed through 3 levels of review. Which TWO of the following statements are true relating to review actions in the audit firm? Select two.

• A ‘hot review’ is a review carried out by an independent partner after the auditor’s report is signed.

• Engagement quality control review (EQCR) is performed by a suitably qualified partner who is NOT involved in the engagement.

• The review is NOT an obligatory procedure according to law and regulations.

• The review will help to assess the sufficiency and appropriateness of obtained audit evidence.

Which THREE of the following procedures should be carried out after the audit firm has decided to accept nomination as auditor? Select three.

• Ensure that the new auditors’ appointment is valid.

• Communicate with the outgoing auditors to discover any reasons they should not accept appointments.

• Set up and submit a letter of engagement to the directors of the company.

• Ensure that the outgoing auditors’ removal/resignation has been properly conducted.

Auditors often use some main signals to define the level of risk. Which TWO of the following might indicate that an assurance client could have lower than normal inherent or control risk?

• Lots of unusual transactions

• The existence of an internal audit department

• Conservative, prudent accounting policies

• Evidence of questionable integrity, doubtful accounting policies