A1. Fundamental Concepts and Scope
Problem Statement: The essence of a financial report audit is to:
a) Examine individual transactions so that the auditor may certify as to their validity.
b) detect fraud.
c) Assure the consistent application of correct accounting procedures.
d) Determine whether the client's financial reports are fairly stated.
Solution:
The correct answer is (d) Determine whether the client's financial reports are fairly stated. The primary objective of an audit is to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
Problem Statement: "Statutory audit is essential for the sole trader-ship and register partnership financial accounts and statement".
Solution:
The correct answer is False. Statutory audit is mandatory for public limited companies and certain private companies as per the Companies Act, but not for a sole proprietorship or a registered partnership. They may opt for a voluntary audit, but it is not a statutory requirement.
Problem Statement: A "going concern" assumption implies that:
a) The company has plans to expand its operations.
b) The financial statements are prepared using a liquidation basis
c) The company is expected to continue operating in the foreseeable future
d) The company is facing significant financial distress
e) All above
Solution:
The correct answer is (c) The company is expected to continue operating in the foreseeable future. The going concern assumption is a fundamental principle of accounting which assumes that a business will continue to operate for an indefinite period.
Problem Statement: At what levels can assurance be provided under the assurance services framework?
a) Reasonable assurance and limited assurance.
b) High assurance and reasonable assurance.
c) Assurance can be provided on a continuum from 0% to 100%.
d) Assurance can be provided on a continuum from absolute to limited.
Solution:
The correct answer is (a) Reasonable assurance and limited assurance. The International Framework for Assurance Engagements (IFAE) identifies two levels: a high, but not absolute, level (reasonable) and a moderate level (limited).
Problem Statement: The responsibility for ensuring that financial statements are free from material misstatements rests with:
a) The auditor
b) The company's management
c) The internal audit team
d) The shareholders
e) None of the above
Solution:
The correct answer is (b) The company's management. The primary responsibility for the preparation of financial statements and ensuring that they are free from material misstatements rests with the company's management and those charged with governance.
A2. Responsibilities and Professional Liabilities
Problem Statement: Retiring auditors does not have the right to
a) Make written representations
b) Get his representation circulated
c) Be heard at the meeting
d) Speak as a member of company
e) All above
Solution:
The correct answer is (d) Speak as a member of company. A retiring auditor has specific rights, but they do not include the right to speak as a member of the company, as they are not a shareholder.
Problem Statement: The client has demonstrated a lack of professional skepticism.
Solution:
The correct answer is False. Professional skepticism is a mindset and attitude of the auditor, not the client. It involves a questioning mind and a critical assessment of audit evidence.
Problem Statement: You have recently come across the following professional issues: 1) During the audit of a listed company on which you were involved, you overheard the finance director on the telephone to a family friend requesting him to buy shares on his behalf, prior to an announcement about a new product which you know is likely to increase the share price significantly. The finance director is a chartered accountant. 2) During a night out at the pub following your exams one of your fellow students told you in strictest confidence that he had tampered with his degree certificate on his computer to improve the classification. He explained that he had done this to satisfy the minimum requirements to secure a job at his firm, one of your main rivals. He boasted about how easy it was with new computer technology currently available. 3) One of the audit clients you recently worked on was so impressed with your courtesy towards his staff members that he wanted to make you a gift of tickets to the World Cup football final, along with an overnight stay in a hotel.
Solution:
1) Insider Trading: Report this to the senior audit partner immediately. The firm must then take appropriate action, which may include reporting the finance director to the relevant regulatory bodies.
2) Misrepresentation and Fraud: You have a professional duty to report this. You should inform your firm's ethics partner, who should then consider the obligation to report the matter to the student's employer.
3) Gift and Hospitality: Politely decline the gift and explain the firm's policy on gifts and hospitality. Inform the senior audit partner about the offer as it may be a key matter for the audit file.
Problem Statement: It is mandatory for an auditor to be independent of the organization before accepting an audit engagement.
Solution:
The correct answer is True. Auditor independence is a fundamental principle of auditing and is mandatory before accepting an audit engagement. The auditor must be independent in mind and appearance to be able to form an objective opinion on the financial statements.
Problem Statement: Auditors should avoid situations that create conflicts of interest, such as having financial interests in the company being audited.
Solution:
The correct answer is True. Auditors have a professional and ethical obligation to maintain their independence and objectivity. Having a financial interest in an audit client creates a self-interest threat, which can compromise the auditor's independence.
Problem Statement: Explain the five threats to ethics with appropriate examples.
Solution:
- Self-Interest Threat: Arises from a financial or other interest that could improperly influence judgment. E.g., an auditor owning shares in the client company.
- Self-Review Threat: Occurs when an auditor audits their own work. E.g., a member of the audit team also preparing the client's financial statements.
- Advocacy Threat: Occurs when an auditor promotes a client's position to the point of compromising objectivity. E.g., an auditor representing a client in a legal dispute.
- Familiarity Threat: Arises from a long or close relationship with a client, leading to a lack of professional skepticism. E.g., an audit partner auditing the same client for 10 years.
- Intimidation Threat: Occurs when an auditor is intimidated or threatened by a client. E.g., a client threatening to fire the auditor for issuing a qualified opinion.