Tag: Ethics

Tick and Co LLP, an audit and assurance firm, has the following factors to evaluate for a prospective client and decide whether it is high or low risk.

For each factor, select whether the inherent audit risk is high or low.

Factor 1 – Company has prudent accounting policies

Factor 2 – Company carries out unusual transactions

Factor 3 – Company currently has no finance director

Are these clients high or low risk?

Select ONE answer:

1. Factor 1 – Low and Factor 2 – Low and Factor 3 – Low
2. Factor 1 – Low and Factor 2 – High and Factor 3 – High
3. Factor 1 – Low and Factor 2 – Low and Factor 3 – High
4. Factor 1 – High and Factor 2 – High and Factor 3 – High

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 == > Prudent accounting policies would constitute a low-risk indicator as directors would appear not to be aggressive in interpreting accounting policies to enhance the performance portrayed by the financial statements. A company carrying out unusual transactions would be high risk, as each transaction would require a separate understanding, leading to a higher risk of error. Having no FD is a high-risk indicator – the staff in the function may not be supervised, and they may not have the skills or the knowledge to apply accounting standards and address the key risks in the systems of the company.
3. Not correct
4. Not correct

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

Which ONE of the following is NOT a benefit of an engagement letter in respect of assurance services?

Select ONE answer:

1. Clearly defines the extent of the assurance provider’s responsibilities
2. Provides written confirmation of the acceptance of the engagement
3. Confirms the scope of the engagement
4. Certifies the assurance provider’s opinion

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 == > The engagement letter does not contain any certification of the assurance provider’s opinion. An engagement letter does serve the other purposes listed.

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

Tick and Co LLP, an audit and assurance firm, has the following two clients among its client portfolio.

For each client, select whether the inherent audit risk is high or low.

Client 1 – Big Brum Ltd is planning to list on the local stock exchange within the next two years.

Client 2 – Little Brum Ltd is currently facing financial difficulties and is seeking alternative forms of finance.

Are these clients high or low risk?

Select ONE answer:

1. Client 1 – High and Client 2 – Low
2. Client 1 – Low and Client 2 – High
3. Client 1 – High and Client 2 – High
4. Client 1 – Low and Client 2 – Low

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 3

1. Not correct
2. Not correct
3. Correct == >    Given its intention to list on the stock exchange, Big Brum Ltd may be motivated to show a better picture of itself than that which exists; hence, it is a high-risk client. Little Brum Ltd is also a high-risk client given that it is seeking alternative forms of finance — > It has the incentive to show itself as a healthier company than it is to attract the finance it requires.
4. Not correct

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

Which ONE of the following might indicate that an assurance client could be higher than normal inherent or control risk?

Select ONE answer:

1. Strong internal controls
2. Experienced and stable senior management
3. The existence of an internal audit department
4. Unusual transactions

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 == > Poor recent performance may indicate a high risk that the company may misstate its financial statements to show improved recent performance. A company carrying out unusual transactions would also be a high risk, as each transaction would require a separate understanding, leading to a higher risk of error. Strong internal controls, experienced and stable senior management, and the existence of an internal audit department would be low-risk indicators.

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

Which ONE of the following might indicate that an assurance client could be higher than normal inherent or control risk?

Select ONE answer:

1. Strong internal controls
2. Experienced and stable senior management
3. Poor recent performance
4. The existence of an internal audit department

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 3

1. Not correct
2. Not correct
3. Correct == >    Poor recent performance may indicate a high risk that the company may misstate its financial statements to show improved recent performance. A company carrying out unusual transactions would also be a high risk, as each transaction would require a separate understanding, leading to a higher risk of error. Strong internal controls, experienced and stable senior management, and the existence of an internal audit department would be low-risk indicators.
4. Not correct

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