Tag: Topic 2

In each of the following cases, select whether inherent risk is higher or lower than normal.

Case 1 – The company has recently listed on the local stock exchange with high profit expectations from analysts.

Case 2 – Inventory is the largest balance on the statement of financial position.

Case 3 – The company operates in a slow-moving, stable industry.

Select ONE answer:

1. Case 1 – Lower and Case 2 – Lower and Case 3 – Lower
2. Case 1 – Higher and Case 2 – Higher and Case 3 – Lower
3. Case 1 – Higher and Case 2 – Higher and Case 3 – Higher
4. Case 1 – Lower and Case 2 – Higher and Case 3 – Higher

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 == > With a recent listing on the stock exchange and high profit expectations, inherent risk is higher than normal as accounts are more susceptible to material fraud and error. Inventory is by its nature more inherently risky as it is susceptible to theft, omission and misstatement. The fact that the company operates in a slow-moving, stable industry, decreases the susceptibility of the financial statements to material fraud and error.
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 a valid comment about the quality of assurance evidence?

Select ONE answer:

1. Evidence from internal sources is more reliable than evidence created by the assurance provider
2. Evidence from internal sources is more reliable when related internal controls operate effectively
3. Evidence from external sources is less reliable than evidence obtained from the entity’s records
4. Photocopies are more reliable than facsimiles

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 internal controls are not operating effectively, then evidence from reliable sources is not to be relied upon.
3. Not correct
4. Not correct

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

As part of Alex’s analytical procedures work on the financial statements of Big Staffie Ltd, he has identified that the gross profit margin has fallen from 27% to 24%.

Which ONE of the following could be a valid explanation for this decrease?

Select ONE answer:

1. Unusually high sales at the end of the year resulted in lower levels of closing inventory as compared to the previous year
2. Increased competition resulted in sales prices being cut
3. A bank overdraft resulted in a higher interest expense than in previous years
4. There was no significant change in the mix of products sold

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 sales prices are cut but costs remain the same gross profit margins will fall. If the company sells a greater proportion of goods with a lower margin than in previous years the overall margin will be reduced. Increased levels of sales (and therefore lower closing inventory) will not affect gross profit margins provided selling prices are maintained. Interest expense is not deducted in arriving at gross profit, therefore it can have no effect on gross profit margins.
3. Not correct
4. Not correct

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

For each of the following situations, select the most appropriate audit approach that should be used by the assurance firm.

The audit of a new client, recently started up, with just a few employees in its accounting department………..?

Select ONE answer:

1. Tests of controls only
2. Substantive procedures only
3. Analytical procedures only
4. A mix of tests of controls and substantive procedures

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 => Substantive procedures only – a new client with few employees implies a lack of segregation of duties and hence high control risk. Therefore, reliance should not be placed on the internal control system. Audit evidence should be gathered using substantive procedures.
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 sample sizes, 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 3

1. Not correct
2. Not correct
3. 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.
4. Not correct

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