Combined MCQ Mark Schemes PDF

Combined MCQ Mark Schemes ========================= MCQ Mock Test Answers --------------------- **Question 1** Aaron Patel, a qualified auditor, accepted the audit engagement of Kelly Company. During the audit Patel became aware of his lack of competence required for the engagement. What should h...

Combined MCQ Mark Schemes ========================= MCQ Mock Test Answers --------------------- **Question 1** Aaron Patel, a qualified auditor, accepted the audit engagement of Kelly Company. During the audit Patel became aware of his lack of competence required for the engagement. What should he do? a. Suggest that Kelly Company engage another auditor to perform the audit b. Rely on the competence of client's personnel c. Disclaim an opinion d. Self-Review **Question 2** The UK Corporate Governance Code requires listed companies to set up an audit committee. In large companies, the audit committee should comprise: a. At least 50% of non-executive directors, including the chairman b. The chairman plus one other non-executive director c. At least three independent, non-executive directors d. At least one non-executive director, which could be the chairman **Question 3** Which of the following statements best describes the Agency Theory? a\. A theory that holds that the value of the audit report derives from the nature of the auditor as an independent competent professional b. A theory that holds that audit has a social benefit and is not a technical exercise for regulation c. A theory that recognises that auditing is based on scientific logic with a rational process of observation and evaluation of evidence d. A theory that recognises the inclination of agents to act in their own interests rather than that of the principals (such as their employers) **Question 4** Which one of the following qualifications is required for individuals working on audits in the UK? a. University degree b. Be a member of the ICAEW or ACCA, having passed all professional exams c. 2 or more A levels d. Employment by a firm controlled by qualified persons **Question 5** What best describes the purpose of statutory auditor's consideration of internal control in financial statements audit for a non-public company? a. To make recommendations to the client regarding improvements in internal controls b. To identify opportunities for fraud within the client's operation c. To determine the nature, timing, scope and extent of their statutory audit d. To train new auditors on accounting Control systems **Question 6** An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as:Reasonable assurance a. Audit neutralism b. Professional skepticism c. Auditing mindset d. Reasonable assurance **Question 7** Which of the following has primary responsibility for preparation of financial statements? a. Management b. Internal Auditor c. Independent Auditor d. Audit Committee **Question 8** In which of the following situations would an audit firm have violated the code of professional conduct in determining its statutory audit fees: a. A fee is to be established at a later date by the bankruptcy court b. A fee is based on whether or not the audit firms audit report leads to the approval of the client's application for bank financing c. A fee is based upon the nature of the engagement rather than the actual time spent on the engagement d. A fee is based on the fee charged by the client's former auditors **Question 9** Which of the following situations is likely to represent a threat to objectivity for the external auditor? a. The audit team eats in the clients subsidised canteen during the audit b. A member of the audit team accepts the gift of a tin of biscuits when he attends the inventory count of a biscuit manufacturer client c. The engagement partner of a hotel company audit, accepts the use of hotel rooms free of charge on a regular basis for weekend trips with her spouse d. The engagement partner accepts a bottle of whiskey as a Christmas present each year from an audit client **Question 10** Which one of the following threats to independence would not arise on the current audit as a result of an audit team member applying for a full time position with the client? a. Self-Review b. Self-Interest c. Intimidation d. Advocacy **Question 11** The risk that the auditors will conclude, based on audit procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as: a. Business Risk b. Detection Risk c. Engagement Risk d. Control Risk **Question 12** Which of the following statements best describes the responsibility of the IAASB: a. Investigating and disciplining auditors who fail to comply with auditing standards b. Setting auditing and assurance standards and other pronouncements for use around the world c. Setting auditing standards which are compulsory throughout the world d. Monitoring auditors to ensure that they comply with auditing standards **Question 13**  'To behave with courtesy and consideration to all they come in contact during the course of performing their work' is the definition of which of the following fundamental principles of professional ethics: a. Confidentiality b. Professional behaviour c. Objectivity d. Integrity **Question 14** Which of the following best describes why auditors evaluate and test internal controls? a. To obtain evidence of the completeness and accuracy of the amounts in the financial statements b. To help in determining the level of compliance testing that should be done c. To identify the weaknesses that should be reported to management d. To determine the amount of reliance that may be placed on the information contained in the accounting records **Question 15** Which one of the following best describes professional scepticism? An auditor should: a. Apply a questioning mind to the information and evidence he/she obtains b. Always consider the worst outcome c.  Always confirm material balances with a professional expert d. Not believe anything that management tells him/her, without corroboration from another member of the client's finance team **Question 16** Qualitative factors can affect an auditor\'s assessment of materiality. Is either of the following statements true? 1- Misstatements that are otherwise immaterial may be material when aggregated with other immaterial misstatements. 2-  Misstatements that are financially immaterial may be material by virtue of their nature. a. 1 only b. 1 and 2 c. Neither 1 or 2 d. 2 only **Question 17** The most important benefit of having an annual statutory audit by an independent audit firm is to: a. Provide assurance that illegal acts, if any exist, will be brought to light b. Enable directors to avoid personal responsibility for any misstatements in the financial statements  c. Provide assurance to investors and other stakeholders that financial statements are reliable d. Meet the requirements of government agencies **Question 18** Which of the following attributes is more essential for statutory auditors than of management? a. Integrity b. Independence c. Competence d. Keeping informed on current professional developments **Question 19** Which of the following statements is not correct? a. Auditors can be required by law to disclose confidential information about their clients b. Auditors are always bound by the principle of confidentiality c. Integrity denotes an attitude of personal and professional honesty and consistency in the way in which auditors act d. Auditors are required to be independent both of mind and in appearance **Question 20** Which of the following approaches does NOT apply to the UK Corporate Governance Code? a. Comply or Explain b. Legal approach c. Framework approach d. Principles based approach MCQ Practice 02 Solutions ------------------------- +-----------------------------------------------------------------------+ | 1. Which of the following statements best describes the | | responsibility of the IAASB: | | | | | | | | A. Setting auditing standards which are compulsory throughout the | | world | | | | B. Monitoring auditors to ensure that they comply with auditing | | standards | | | | C. Investigating and disciplining auditors who fail to comply with | | auditing standards | | | | D. **Setting auditing standards which facilitate the convergence of | | national and international auditing standards** | | | | | | | | 2. Which of these [is not] the function of a Recognised | | Supervisory Body? | | | | | | | | A. Disciplining members | | | | B. Setting ethical standards | | | | C. Investigating complaints | | | | D. **Reviewing audits of public limited companies to maintain | | auditing standards** | | | | | | | | 3. Which of the following are true in relation to the auditor and | | fraud? | | | | | | | | I. Management can rely on auditors to detect fraud as this is one of | | the auditor's duties under ISA 240 'The auditor's | | responsibilities relating to fraud in an audit of financial | | statements' | | | | II. Auditor's must consider the effect any fraud which has been | | uncovered might have on their audit opinion | | | | | | | | A. I only | | | | B. **II only** | | | | C. I and II | | | | D. Neither I or II | | | | | | | | 4. Which of the following statements relating to internal or | | external auditors is [true]? | | | | | | | | A. Internal auditors must be members of a professional body. | | | | B. **Internal auditors' scope of work should be determined by those | | charged with governance.** | | | | C. External auditors report to those charged with governance. | | | | D. Internal auditors are independent of the company. | | | | | | | | 5. Which of the following types of audit [cannot] be | | performed by internal auditors? | | | | | | | | A. Value for money audit | | | | B. Environmental audit | | | | C. **Statutory audit** | | | | D. Inventory audit | | | | | | | | 6. The UK Corporate Governance Code requires listed companies to set | | up an audit committee. In large companies, the audit committee | | should comprise: | | | | | | | | 7. You are a newly appointed audit firm and your client has asked | | you undertake some lucrative management consultancy work in | | addition to the annual audit. This is situation is known as: | | | | | | | | A. An intimidation threat | | | | B. A self-review threat | | | | C. An advocacy threat | | | | D. **A self-interest threat** | | | | | | | | 8. Which of the following is responsible for establishing a private | | company\'s internal control? | | | | | | | | A. **Senior management** | | | | B. Internal auditors | | | | C. Financial Reporting Council | | | | D. Audit committee | | | | | | | | 9. | | | | | | | | I. International Standards on Auditing (ISAs) are issued by the | | International Accounting Standards Board (IASB) and provide | | guidance on the performance and conduct of an audit | | | | II. In the event that ISAs differ from local legislation in a | | specific country, auditors must comply with the requirements of | | the ISAs | | | | | | | | A. I only | | | | B. II only | | | | C. Both I and II | | | | D. **Neither I nor II** | | | | | | | | 10. Which of the following statements best defines fraud in a | | financial statement auditing context? | | | | | | | | A. Fraud is an unintentional misstatement in the financial | | statements. | | | | B. **Fraud is an intentional misstatement of the financial | | statements.** | | | | C. Fraud is either an intentional or unintentional misstatement of | | the financial statements, depending on materiality. | | | | D. Fraud is either an intentional or unintentional misstatement of | | the financial statements, depending on consistency. | | | | | | | | 11. Which of the following statements are [true] in | | respect of external auditors' responsibilities | | | | | | | | I. Auditors are responsible for the financial content of the annual | | accounts | | | | II. Auditors have to have absolute assurance that the figures they | | audit are correct | | | | | | | | A. B. C. D. | | | | | | | | 12. Which of the following is NOT an inherent limitation of internal | | control systems? | | | | | | | | A. **Insufficient segregation of duties** | | | | B. Possibility that employees may collude together fraudulently | | | | C. Possibility of human error in undertaking tasks | | | | | | | | 13. Which of the following equations represents the relationship | | between the different components of audit risk (AR)? | | | | | | | | A. **AR = IR x CR x DR** | | | | B. AR = IR + CR + DR | | | | C. AR = IR - CR - DR | | | | D. AR = IR ÷ CR ÷ DR | | | | | | | | 14. Which of the following is NOT a responsibility of the auditor? | | | | | | | | A. To provide an opinion on the truth and fairness of the financial | | statements | | | | B. To conduct an audit in accordance with International Standards on | | Auditing | | | | C. **To express an opinion on the company's going concern status** | | | | | | | | 15. Which of the following bodies issue International Auditing | | Standards? | | | | | | | | A. ICAEW | | | | B. **IAASB** | | | | C. IFAC | | | | D. IASB | | | | | | | | 16. 'The threat that a professional accountant will be deterred from | | acting objectively because of actual or perceived pressures, | | including attempts to exercise undue influence over the | | professional accountant' is the definition of which of the | | following threats to compliance with the fundamental principles | | of professional ethics: | | | | | | | | A. Self- interest threat | | | | B. Self-review threat | | | | C. **Intimidation threat** | | | | D. Familiarity threat | | | | | | | | 17. Access to a data-processing centre is restricted to authorised | | personnel. A security guard checks staff-passes. This is an | | example of a: | | | | | | | | A. **General control** | | | | B. Manual application control | | | | C. Computer -- dependent application control | | | | D. Management control | | | | | | | | 18. Which of the following are **[true]** in relation to | | Corporate Governance? | | | | | | | | I. An audit committee should consist of executive directors | | | | II. The Chief Executive, or Chairman, should be on the audit | | committee | | | | | | | | A. I only | | | | B. II only | | | | C. Both of them | | | | D. **Neither of them** | | | | | | | | 19. Which component of audit risk is defined as 'the susceptibility | | of an assertion about a class of transaction, account balance or | | disclosure to misstatement that could be material'? | | | | | | | | A. **Inherent risk** | | | | B. Control Risk | | | | C. Detection Risk | | | | D. Audit risk | | | | | | | | 20. The auditor should not assume that management is dishonest, but | | the possibility of dishonesty must be considered. This statement | | is an example of: | | | | | | | | A. unprofessional behaviour | | | | B. **an attitude of professional skepticism** | | | | C. due diligence | | | | D. ethical behaviour | +=======================================================================+ | **END** | +-----------------------------------------------------------------------+ MCQ Practice 01 Solutions ------------------------- Question 1 Which of the following has primary responsibility for preparation of financial statements? Management Independent auditors Audit committee Internal auditors Question 2 The most important benefit of having an annual audit by an independent audit firm is to: Provide assurance to investors and other stakeholders that financial statements are reliable Enable directors to avoid personal responsibility for any misstatements in the financial statements  Meet the requirements of government agencies Provide assurance that illegal acts, if any exist, will be brought to light Question 3 What best describes the purpose of auditor's consideration of internal control in financial statements audit for a non-public company? To determine the nature, timing, scope and extent of audit To make recommendations to the client regarding improvements in internal controls  To train new auditors on accounting Control systems To identify opportunities for fraud within the client's operation Question 4 The audit committee of a company must be made up of: Representatives from their client's management, investors, suppliers and customers The audit partner, the CFO, the legal counsel, and at least one outsider Representatives of major equity holders Non-executive and independent members and directors Question 5 Which of the following should not normally be included in the audit engagement letter? An indication of the amount of audit fee Indicative timing of the audit A list of the client's offices selected for testing Description of management responsibilities Question 6 The risk that the auditors will conclude, based on audit procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as: Business risk Engagement risk Control risk Detection risk Question 7 In which of the following situations would an audit firm have violated the code of professional conduct in determining its audit fees: A fee is based on whether or not the audit firms audit report leads to the approval of the client's application for bank financing A fee is to be established at a later date by the bankruptcy court A fee is based upon the nature of the engagement rather than the actual time spent on the engagement A fee is based on the fee charged by the client's former auditors Question 8 An auditor may compensate for a weakness in internal control by increasing the extent of: Test of controls Detection risk Substantive tests Inherent risk Question 9 Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? Checklist Flowchart Questionnaire Narrative notes Question 10 Which of the following is not a control procedure Segregation of duties  physical controls Management controls Execution Question 11 Aaron Patel, a qualified auditor, accepted the audit engagement of Kelly Company. During the audit Patel became aware of his lack of competence required for the engagement. What should he do? Issue an adverse opinion Suggest that Kelly Company engage another auditor to perform the audit Rely on the competence of client's personnel Disclaim an opinion Question 12 Which of the following would be least likely to be considered an objective of internal control? Checking the accuracy and reliability of accounting data Detecting management fraud Encouraging Adherence to managerial policies Safeguarding assets Question 13 And entities ongoing monitoring activities often include: Periodic audits by internal auditors The audit of annual financial statements Approval of cash disbursements Management review of weekly performance reports Question 14 In the United States and United Kingdom, a primary objective of corporate governance is to ensure that the interests of senior managers are aligned with the interests of shareholders. True False Question 15 Which of the following statements is not correct? Auditors are always bound by the principle of confidentiality Integrity denotes an attitude of personal and professional honesty and consistency in the way in which auditors act Auditors can be required by law to disclose confidential information about their clients Auditors are required to be independent both of mind and in appearance Question 16 Qualitative factors can affect an auditor\'s assessment of materiality. Is either of the following statements true? Misstatements that are otherwise immaterial may be material when aggregated with other immaterial misstatements. Misstatements that are financially immaterial may be material by virtue of their nature. 1 only 2 only 1 and 2 Neither 1 nor 2 Question 17 Which of the following are true in relation to Corporate Governance? The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The UK Corporate Governance Code provides best practice for all FTSE 350 companies, who are required to adopt the provisions of the Code on a 'comply or explain' basis. 1 only 2 only Both of them Neither of them **Read the paragraph below and answer Questions 18, 19 and 20** The audit firm of Vital & West, has two offices, one in Worcester and one in Cheltenham. The firm has audited the Cameron Corporation out of its Worcester office for the past five years. For each of the following cases, which occurred during the year under audit, indicate whether the independence of either the auditor involved or the audit firm would be impaired: Question 18 Maryam Vital, a partner in the Cheltenham office, fell widely in love with Bill Smith, the treasurer of Cameron Corporation. They were married in London. During the week, Maryam still lives in Cheltenham and works in that office, while Bill Smith lives in Worcester, working for Cameron. On weekends they commute to their flat in London. Maryam does not participate in the audit engagement. Impaired Not impaired Independence is impaired because the Independence Rule requires that an employee not be an officer in an audit client and because immediate family members (in this case her husband) ordinarily have the same requirements as the auditor. Question 19 Jim West is the father of Will West, a Worcester partner. Jim West has a material investment in Cameron. Will West is unaware of his father's investment but does participate in the audit engagement. Impaired Not impaired Independence is not impaired. Neither West\'s nor the firm\'s independence is impaired because West is unaware of the investment. Note, however, that if West becomes aware of his father\'s investment, he should not participate in the engagement. Question 20 Rishi Sunak, an audit senior in the Cheltenham office, has a **material** investment in equity share of Cameron. He does not participate in the audit engagement. Impaired Not impaired Independence of Rishi is impaired because of the investment. The firm's independence is impaired if that investment is more than five percent of the client's ownership interests. End of Paper.