Internal Control System Accounting Questions MCQs

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EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
Choose the correct response to the following multiple-choice questions on the
examination paper.
QUESTION 1
Which of the following is unlikely to contribute to the client’s control environment?
(a)
(b)
(c)
(d)
Code of conduct
Job delineations within the organisation
Processing of accounting transactions
Management’s philosophy and operating style
QUESTION 2
The sales manager reviews the actual sales of each salesperson on a monthly basis against
predetermined sales targets. This is an example of which type of control activity?
(a)
(b)
(c)
(d)
Physical controls
Information processing controls
Performance reviews
Segregation of duties
QUESTION 3
The auditor has calculated bad debts expense as a percentage of the debtors balance and
compared it to the previous year. This is an example of which type of audit procedure:
(a)
(b)
(c)
(d)
Debtor confirmation
Analytical procedure
Re-performance
Inquiry of the client
QUESTION 4
External documents are a more highly regarded type of audit evidence than internal documents
because:
(a)
(b)
(c)
(d)
They provide assurance over all audit assertions
External documents are prepared and used within the client’s organisation
External documents have originated from an independent source/third party
The reliability of external documents depends on the quality of the client’s internal
controls
QUESTION 5
Which of the following factors will not affect the auditor’s assessment of the ‘sufficiency’ of
the audit evidence?
(a)
(b)
(c)
(d)
The auditor’s risk assessment & materiality threshold
Economic factors
The sampling technique to be applied
The size and characteristics of the population
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
QUESTION 6
Which of the following controls would prevent IT personnel initiating and processing
unauthorised transactions?
(a)
(b)
(c)
(d)
A contingency plan which includes arrangements for use of off-premises back-up
facilities
Segregation of duties between user departments and IT for initiating and processing
transactions
Physical security of IT facilities
Internal verification of program changes before implementation
QUESTION 7
The name given to the test of control where the auditor reprocesses actual entity data using
auditor-controlled software is:
(a)
(b)
(c)
(d)
Integrated test facility
Test data approach
Parallel simulation
Dual-purpose testing
QUESTION 8
Which of the following would be a test of control the auditor could perform to verify
segregation of duties between authorising sales, shipping goods and recording sales?
(a)
(b)
(c)
(d)
Review notes made by management on weekly sales reports
Examine shipping documents for evidence of approval
Observe segregation of duties
Submit test data for recorded sales that are not supported by shipments
QUESTION 9
Tests of controls are auditing procedures performed to determine:
(a)
(b)
(c)
(d)
Whether there are material misstatements in the account balances
The efficiency of the information flow
The effectiveness of the design and operation of internal controls
Both (b) and (c)
QUESTION 10
If the auditor’s assessment of both control risk and inherent risk is high, then the acceptable
level of planned detection risk will be:
(a)
(b)
(c)
(d)
Very low
Medium
High
Very high
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
QUESTION 11
(a)
You are auditing a client company whose business focuses on digital telecommunications.
The organisation operates in a volatile industry that deals with regular disruptive change.
You test the internal controls of the organisation and find that they are very weak in the
areas of segregation of duties and information processing controls.
REQUIRED: Using the following detection risk matrix- circle on the matrix what you
consider the acceptable detection risk to be for this audit and then provide justification
for your detection risk assessment and how this would impact on substantive testing for
this client.
(5 marks)
Justify your detection risk assessment and discuss the impact on substantive testing
Inherent risk is high due to the industry in which the client operates (1).
As the control testing indicates that controls are very weak, the assessment of control risk
would be high (1). This would mean that detection risk would need to be assessed at low (1)
and this result in a high level of substantive testing being undertaken as a result of this
detection risk assessment. (1)
(1 mark for circle and 4 marks for explanation – Marker: if circle not included no mark)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
(b)
Identify three key controls relating to the following assertions in the sales and
receivables cycle. Identify an appropriate test of controls you would employ in the
audit for each control.
(6 marks)
Assertions
Key Controls (1 mark each)
Test of Controls (1 mark each)
Occurrence
Sales recorded in the sales
account are based on shipping
documents to customers
Check recorded sales to customer
shipping documents
Completeness
All goods shipped to customers
were recorded in the sales and
accounts receivable accounts
Cut-off
All sales prior to the year-end
were recorded in the sales and
accounts receivable accounts
(a) Check shipping documents to the
sales account and customer
accounts receivable account
(b) Check all shipping documents were
recorded in sales and accounts
receivable accounts by a shipping
document sequence check
Check all sales shipped on last day of
the year are recorded in the sales and
accounts receivable accounts.
(c)
Discuss two strategies an auditor might consider before determining how audit testing
will be structured for an audit client. When and how might the auditor revise this strategy
during the audit?
(8 marks)
Strategy 1: Predominantly substantive approach. Control risk is high as no significant
controls exist. Relevant internal controls are likely to be ineffective. It would not be
efficient to obtain evidence to evaluate the effectiveness of relevant internal controlstherefore no tests of controls required. Must still have sufficient knowledge of IC system to
understand the potential causes of misstatements. (3 marks)
Strategy 2: Reliance on controls approach. Control risk assessed as medium/low. Used
when client has effective internal controls and auditor plans to test controls. Auditor gains
some evidence from testing controls to support a reduced level of substantive procedures.
(3 marks)
Revision of Strategy: The auditor would revise the strategy when reliance on IC is
planned but based on the testing of controls, the auditor may revise their preliminary
assessment of control risk, if controls are not found to be operating effectively. The
auditor then would choose to increase the level of substantive testing. (2 marks)
(d)
How might an auditor assess IT related controls in an online purchasing and payables
system? How are Computer Assisted Audit Techniques (CAATS) used to assist the audit
testing processes?
(6 marks)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
The auditor would need to consider the nature, timing and extent of tests of controls
around the IT related controls in the online purchasing and payables system. Would
consider occurrence, completeness and accuracy via testing of IT related controls. Auditor
would determine if planning to rely on user controls, on reliance on application controls
(with Low CR) or reliance on general controls and manual follow up – High CR. (3
marks)
CAATS are used to assist the testing processes via test data being sent by the auditor
through the control processes, an integrated test facility where a dummy division or entity
is used to facilitate test data being implemented to test controls on a more regular basis.
Parallel simulation – auditor processing of actual data in a copy of the entity programs
and continuous monitoring of processing by auditors can also be used. (3 marks)
(Total Marks for Question 11 = 25 Marks)
QUESTION 12
(a) Your audit firm is undertaking a financial statement audit of Secure Shopping Ltd, a listed
entity that specialises in the purchase and online sale of women’s clothing. You have been
assigned the audit of Inventory for the period ended 30th June 2022. Inventory is shown
on the balance sheet at a value of $524,450.
REQUIRED:
For each of the four management assertions listed in the table below:
i. Provide a description of the management assertion being tested below its name.
ii. Provide one substantive audit procedure specifically in relation to testing the truth
and fairness of the Inventory Balance shown on the balance sheet.
iii. Describe the type of audit evidence gathered from this audit procedure.
(12 marks)
Management Assertion
(i) (1 mark each)
Existence:
Inventories recorded
represent items on hand
at the end of the
reporting period
Completeness:
Inventories included all
materials, products and
supplies on hand at the
end of the reporting
period.
Valuation &
Allocation:
Inventories are properly
stated at the lower of
cost and net realisable
Substantive Audit Procedure
(ii) (1 mark each – ONE ONLY
required)
1.Observe & attend the entity’s
physical stock count
OR
2. Compare stock count
quantities to items on hand in
inventory records.
1. Vouch items on Inventory
listings to count sheets and
inventory tags
OR
2. Compare physical counts with
perpetual inventory records and
test for cut-off data
Type of Audit Evidence
Gathered (iii) (1 mark
each)
Physical evidence
Documentary evidence
1. Examine suppliers’ invoices
and check to perpetual
inventory records
OR
Documentary evidence
Mathematical evidence
Documentary evidence
Documentary evidence
Mathematical evidence
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
value, determined in
accordance with
applicable accounting
standards.
Rights & Obligations:
The entity has rights to
the inventories included
in the Balance Sheet.
2. Perform lower of cost and net
realisable test and write down if
necessary
OR
3. Look for obsolete or damaged
stock and identify adjustment
OR
4. Discuss the potential of
obsolescence with management
Check supplier invoices and
ensure rights to inventory
received.
OR
Confirm inventories at locations
outside the entity
Physical evidence
Oral evidence
Documentary evidence
External confirmation
(b) What are the key issues an auditor must consider in assessing materiality for the financial
report as a whole?
(3 marks)
Often a percentage is applied to the determine materiality for the financial report as a
whole. Will depend on the element of the financial report, whether attention of the users
tend to be focused on these items, the nature of the entity, ownership structure, how the
entity is financed and the volatility of the benchmark. Materiality depends on the size and
nature of the omission and the surrounding circumstances. (3)
(c) What is the relationship between the materiality level determined for an organisation and
the level of audit evidence required to be gathered during the audit?
(2 marks)
There is an inverse relationship between materiality and audit evidence. The lower the
materiality level, the greater the audit evidence required. Where misstatements exceed
materiality, auditor can ask management to change entries or do more testing. (2)
(Total Marks for Question 12 = 17 Marks)
QUESTION 13
(a) An auditor has many responsibilities during the completion stage of the audit with respect
to finalisation of the audit fieldwork.
Some of the final procedures that an auditor must carry out are:
(1) Review of subsequent events
(2) Consider the appropriateness of the going concern assumption
(3) Review of contingencies
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
REQUIRED:
In the table below, list one audit procedure that should be included in the audit programme of
any client, to detect a subsequent event, to assess going concern and to ascertain the existence
of contingent liabilities.
(3 marks)
Completion of Audit
Subsequent event:
Going Concern:
Audit Procedure (1 mark each for any one of the following in
each completion procedure to a maximum of 3 marks)
• Read minutes of Board of Directors held after reporting
date
• Read latest available interim financial statements
• Enquiry of entity’s lawyers
• Enquiry of management
•
•
•
•
•
•
•
•
Contingencies:
•
•
•
•
•
Review events occurring after balance date
Analyse latest interim financial report
Read minutes of BOD/shareholders meetings
Examine compliance with terms of loan/debenture
agreements
Consider information from entity’s solicitors
Analyse and discuss cash flows/profits with management
Review of minutes of meetings of BOD/shareholders
Review of contracts, loan agreements, leases and
correspondence with government agencies
Enquiry of management
Review bank confirmations
Analyse legal expenses
Communicate with legal representative
Obtain a management representation letter
(b)
For the following independent scenarios, detail the impact these would have, if any, on
the auditor’s report.
i.
Blue Ltd have prepared their financial statements on a going concern basis. You, as the
auditor, have assessed the appropriateness of the going concern assumption and have
identified that a material uncertainty exists. You discuss this with the client and they
agree to make adequate disclosure of this material uncertainty in the financial report.
(2 marks)
Unmodified audit opinion however the auditor’s report shall include a separate section
“Material Uncertainty Related to Going Concern”(1 mark for type and one mark for
section)
ii.
Maroon Ltd has a 30 June 2022 year end. On 10th July 2022, Maroon Ltd’s production
facility was severely affected by an electrical fire. Adequate disclosure of this fire was
included in the company’s “Events After Reporting Date” note in the financial
statements.
(2 marks)
Unmodified audit opinion with Emphasis of Matter paragraph”(1 mark for type and one
mark for paragraph)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
(Total Marks for Question 13 = 7 Marks)
QUESTION 14 – Internal Controls and Internal Control Testing
The following describes procedures over sales recording and billing at Rainbow Paints Ltd.
Mail is opened by the receptionist, who hands the 15-20 (daily average) sales orders to Jim, the
Accounts Receivable Clerk. He immediately prepares a five copy sales invoice for each order.
Each copy is distributed as follows:
• Copy 1 (the customer billing copy) is held by Jim until notice of shipment is received
• Copy 2 is sent to the A/R department, who will update the accounting records
• Copies 3 and 4 are sent to the shipping department
• Copy 5 is sent to the storage department to authorise the release of goods to shipping.
After the paint is moved from the storage department to the shipping department, the shipping
department prepares a delivery docket and attaches Copy 4 of the sales invoice to the delivery
docket. After a transport company picks up the goods, the delivery docket and Copy 3 of the
sales invoice (on which any under-shipments are noted) are sent to Jim. Rainbow Paints do not
place goods on ‘back-order’. Customers are to re-order the goods in the event of a shortfall.
When Jim receives the delivery docket and Copy 3 of the sales invoice, he completes Copies 1
and 2 by numbering them and inserting quantities shipped, prices, discounts and totals. Copies
2 and 3 are attached together. Jim then enters the sale into the computer records from Copy 2.
He only enters the quantities, discounts, prices and accounts and the computer computes the
totals. He then compares this to Copy 1, and if details agree he posts Copy 1 with the delivery
docket to the customer. Copy 2 and 3 are then filed in numerical order.
When goods are returned Jim receives the goods, retrieves copies 2 & 3 of the sales invoice
and makes the adjustment for the returned goods on these copies.
Required:
(a) Identify six weaknesses in Rainbow Paints internal control procedures over sales recording
and customer billing.
(b) List a specific control that could have prevented the weaknesses identified.
(c) List a test of control the auditor could perform to check that each control identified is
operative effectively.
(18 marks)
Weakness (1 mark each)
1
2
Specific control (1 mark
each)
Test of control (1 mark each)
No segregation of duties
between authorising sales
transactions and recording
those transactions (Jim).
Separate the two functions;
someone other than Jim
should record the
transaction.
Observe the segregation of
duties between Jim and the other
staff member.
OR
Enquire of both staff what their
duties involve.
No credit check on sales
prior to authorisation.
Credit check approval to be
performed prior to sales
authorisation by other staff
member.
Enquire with staff about the
procedures for credit checks.
OR
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
Examine evidence that credit
limit check approval has been
performed.
3
No pre-numbering of sales
invoices.
Use pre-numbered
documentation only.
Take random sample invoices &
ensure all numbers are
accounted for.
OR
Test ‘dummy’ data to see if
computer accepts same invoice
number twice.
4
No authorisation of
discounts.
Discounts should be
authorised by someone other
than Jim.
Take sample of invoices with
discounts & check for
authorisation.
5
No internal verification of
mechanical accuracy of
calculations.
Independent verification of
the mechanical accuracy of
calculations.
6
No use of proper prenumbered credit notes for
returned goods & no
segregation of duties.
Use pre-numbered credit
Take random sample of credit
notes documentation only,
notes and ensure proper
which should be authorised
authorisation.
by someone other than Jim.
(Total Marks for Question 14 = 18 Marks)
Take random sample of invoices
and re-calculate mathematical
accuracy.
QUESTION 15 – Audit Planning
The Auditing Standard ASA 300 ‘Planning an Audit of a Financial Report’ states that the
auditor needs to plan the audit so it will be performed in an effective way, by establishing the
overall audit strategy for the audit and developing the overall audit plan.
Your client is Comhardware & Co, a company listed on the Australian Securities Exchange
which imports and sells computer hardware products. You are planning the year end audit (30
June) and, from your enquiries of management, have obtained the information below.
1.
In January of this year, Comhardware & Co applied for and was granted a new loan. The
submission made to the bank stated:
 the current ratio was 0.90:1
 gross profit was up by 25% compared with that at the same time last year
 the debt-to-equity ratio was 0.40:1
2.
The bank agreed to the new loan but did enter into a loan covenant with Comhardware
& Co. The covenant required that the company should not breach certain ratios. In
particular the current ratio should be kept above 1.2:1 and the debt to equity ratio should
not fall below 0.50:1.
Required:
List the potential audit risk areas and the impact they will have on your audit plan for the year.
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
(10 marks)
1. ASX listing –
•
•
Comhardware is listed on the ASX, this greatly increases the number of users of the
F/S and increases the reporting requirements  greater risk for the auditor.
Auditor – needs to strictly apply all auditing standards, Corporations Act 2001, and
comply with all facets of ‘in-house’ quality control and ensure enough evidence is
gathered to form an opinion.
2. Industry Risk –
• Potential risk of obsolescence in the inventory because computer hardware becomes
obsolete very quickly. Risk of inventory overvaluation → increase profits.
• Auditor needs to attend stock-take observing if any stock appears obsolete. Then
value stock at LCNRV and write down/off any applicable stock.
3. Loan Risk –
• Current ratio very low when applied for loan → liquidity problems.
• Comhardware needs to improve its liquidity position so debt covenant is not
breached.
• Comhardware may attempt to overstate current assets and understate current
liabilities to comply with the loan agreement.
• Auditor needs to provide evidence for the valuation for inventory, A/R valuation
(provision for doubtful debts) & search for unrecorded accruals etc.
4. Loan Risk –
• Comhardware stated that gross profit increased by 25% in one year – seems a very
large increase. Risk that profit has been manipulated.
• Auditor needs to carefully review cut off for sales & purchases, subsequent sales
returns and subsequent expense payments, revenue recognition policy, and other
revenue increasing techniques and expense decreasing techniques.
5. Loan Risk –
• Debt to equity ratio, Comhardware may try to decrease ‘true level’ of debt.
• Auditor needs to review classification of finance & operating leases & search for
unrecorded accruals.
(1 mark each and up to 10 marks – Marker’s discretion to award a 1 for other potential audit
risks identified).
(Total Marks for Question 15= 10 Marks)
QUESTION 16 – Tests of Controls
Research shows that the acquisitions cycle can be susceptible to fraudulent activity. The
following is a list of audit objectives (assertions) pertaining to the audit of the acquisitions
cycle.
Required:
For each audit objective (assertion) and the corresponding ‘example of a control’ state how
the auditor would test that particular control, using the table below.
(5 marks)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
Audit Objective
(assertion)
Example of a
Control
How would this control be tested
(1 mark each control – use discretion for
other tests)
1. Recorded
acquisition
transactions are
accurate (accuracy)
Acquisitions are
approved for prices
& discounts
Examine sample & look for proper indication
of approval
2. Existing acquisition
transactions are
recorded
(completeness)
Purchase orders are
pre-numbered &
accounted for
Account for a sequence of purchase orders.
3. Acquisition
transactions are
properly included in
the accounts payable
& inventory master
files, and are properly
summarised
Accounts payable
master file or trial
balance totals are
compared with
general ledger
balances
Examine initial on general ledger accounts
indicating comparison
4. Acquisition
transactions are
recorded on the
correct dates
(cut-off)
Dates are internally
verified
Examine indication of internal verification
5. Acquisition
transactions are
properly classified
(classification)
An adequate chart of
accounts is used
Examine procedure manual and observe
whether unrecorded vendors’ invoices exist
(Total Marks for Question 16 = 5 Marks)
QUESTION 17 – Substantive Procedures
You as the auditor, have been provided with the following extract from Emu Ltd’s Statement
of Financial Position. You have been allotted the audit of receivables.
EMU LTD
STATEMENT OF FINANCIAL POSITION (EXTRACT)
AS AT 30 JUNE 2022
Note
Current assets
Cash and cash equivalents
Inventories
Receivables (net)
Other
Non-current assets
5
2022
$,000
5,250
15,687
10,121
5
31,063
2017
$,000
3,161
16,871
9,947
4
29,983
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
Receivables
Property Plant and Equipment
7
5,160
115,879
121,039
5,160
116,545
121,705
Extract from Notes to and forming part of the accounts of Emu Ltd
Note 5 Receivables
Gross receivables
11,121
10,947
Provision for impairment of debtors
1,000
1,000
10,121
9,947
Required:
(a) Design a substantive test for receivables which would cover off on each of the
following audit assertions:
a. Valuation and allocation
b. Cutoff
(2 marks)
Valuation and allocation: Verify a selection of invoices against approved price
lists
Cutoff:
• Subsequent receipts testing
• Debtor confirmation
(1 mark for each assertion – use discretion for other tests)
(b) How would you use Generalised Audit Software to assist you with testing the
Existence assertion?
(1 marks)
From the download of the receivables subsidiary ledger system, using a generalised
audit package, generate a sample of debtors to send out debtors’ confirmations
(c) Specifically from your analysis of the receivables above, what two questions would
you ask the client.
(2 marks)
Any two of •
Why has the provision for impairment of debtors remained at $1M for the
current and prior years?
• What is the nature of the long-term receivable?
• Should there be a provision for impairment for the non-current portion of the
receivables?
• Are they shown at amortised cost?
(for total of 2 marks.)
(Total Marks for Question 17 = 5 Marks)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
QUESTION 18 – Audit Reports
The following are five independent situations for which you are asked to recommend an
appropriate audit report in each case AND justify your answer.
1. Four weeks after the year-end, a customer of Downey Ltd goes into liquidation. Because
the customer confirmed the balance due as at balance date, management refused to writeoff the balance or disclose the information. The balance represents 25% of accounts
receivable and 15% of operating profit.
(2 marks)
2. Upley Ltd’s financial statements disclose a net assets position of $1,250,000 and a profit
of $1,000,000. The notes to the accounts disclose (as a contingent liability) all facts relating
to a legal claim lodged against the firm for $700,000. The directors have not recognised a
liability in the Statement of Financial Position. Legal advice notes the case could go either
way and is due to go to court early next year.
(2 marks)
3. The auditors of Sidely Ltd are refused permission to review the minutes of directors’
meetings due to confidentiality concerns. However the directors are happy to give the
auditors certified copies of all resolutions and actions relating to accounting matters.
(2 marks)
4. The auditors of Backways Ltd were not appointed until after the year-end. Hence they were
not able to verify the existence of physical inventory at the Balance Sheet date, by attending
the year-end stocktake. By using alternative procedures, attending a subsequent stocktake
and checking movements in the “roll-back” period, they are satisfied as to the existence of
stock.
(2 marks)
5. The Directors of Dill Ltd have refused to make any provisions for doubtful debts or stock
obsolescence as they believe it is fallacious to write off any assets until they are actually
proven to be irrecoverable. Audit testing has ascertained that net profit would be reduced
by 25% if these assets were stated at fair value. In addition, the directors have refused to
depreciate buildings or machinery, as in their opinion they assets appreciate rather than
depreciate. The effect on the financial statements is that net profit is currently overstated
by 25%.
(2 marks)
EXCERPTS FROM PRIOR EXAM PAPER FOR YOUR PRACTICE
(Marks: one (1) for each opinion and one (1) for each justification – use discretion if
incorrect opinion but justification is valid)
1. Qualified Audit Opinion – After balance date Type 1 event that requires adjustment to
the final statements. Management refused to adjust, therefore there is a disagreement
with management requiring the auditor to issue a ‘qualified opinion’.
2. Unmodified Audit Opinion with an Emphasis of Matter – the matter is not materially
misleading; however, the auditor considers it fundamental that this item be bought to the
reader’s attention
3. Disclaimer of Opinion – scope limitation which pervades the financial statements. This
is a client-imposed restriction of not allowing auditor access to all records, therefore
cannot express an opinion of any type.
4. Unmodified Audit Opinion – Auditors able to confirm inventory existence by using
alternative means
5. Adverse Audit Opinion – Disagreement with management over the application of
accounting standards. The overall effect is that net profit is overstated by 50%. This is
extremely material & pervades the whole of the financial statements
(Total Marks for Question 18 = 10 Marks)

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