Tag: Ethics

A furniture store and a local high-street bakery have the same markup on cost.

However, the gross profit margin of the furniture store is significantly higher than that of the bakery.

Which ONE of the following is a possible reason for this?

Select ONE answer:

1. The Bakery’s revenue is increasing, while that of the Furniture shop is decreasing
2. The Bakery has a higher level of wastage of inventory than the Furniture store
3. The Furniture shop takes advantage of trade discounts for bulk buying
4. The Bakery has a higher turnover of inventory than the Furniture store

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct => If the Bakery has a higher level of wastage of inventory than the Furniture shop, then the cost of wasted inventory will be treated as an expense in cost of sales. This will reduce the Bakery’s cost of sales independently of the mark-up applied. Cost of sales will therefore be high in relation to revenue, so the Bakery’s gross margin will be lower than the Furniture store’s.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

As part of his overall risk assessment, Alex, the audit partner, has concluded that detection risk must be low.

For the issue of materiality, please select the appropriate consequence of this conclusion………..?

Select ONE answer:

1. Higher
2. Lower
3. Bigger
4. Smaller

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct => If detection risk is low this means that the auditor must have a higher expectation of identifying errors and misstatements. Materiality is lower as the financial statements are more sensitive and sample sizes are increased so that more work is performed.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Which ONE of the following would NOT increase inherent audit risk?

Select ONE answer:

1. A significant number of balances are based on estimates
2. The financial statements include complex transactions
3. The company is seeking to raise finance
4. Audit staff are inexperienced

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. Correct => Incorrect sample sizes and inexperienced audit staff will affect detection risk.

This work is licensed under a Creative Commons Attribution 4.0 International License.

Which ONE of the following would NOT increase inherent audit risk?

Select ONE answer:

1. Sample sizes have been calculated incorrectly by the auditor and are too small
2. A significant number of balances are based on estimates
3. The financial statements include complex transactions
4. The company is seeking to raise finance

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > Incorrect sample sizes and inexperienced audit staff will affect detection risk.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Audit risk can be split into three components: inherent risk, control risk, and detection risk.

For each of the following examples, select the type of risk illustrated.

• Directors’ pay is related to company profitability…..…..?

Select ONE answer:

1. Inherent
2. Control
3. Detection
4. No Risk

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > Profit related pay may motivate the directors to distort the financial information, so constituting an inherent risk.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.