Tag: Topic 2

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

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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.

Which ONE of the following are auditors always required to do on being invited to accept an audit engagement?

Select ONE answer:

1. Do a general search on the internet about the prospective client
2. Ensure they have adequate existing resources to carry out the audit
3. Obtain references for key personnel within the entity to be audited
4. Communicate with the existing auditors to discover any reasons they should not accept the appointment

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 == > It will not be necessary to obtain references when the entity is already known to the firm. It will not be necessary to contact previous auditors in the case of a company’s first audit.
3. Not correct
4. Not correct

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

Which ONE of the following are auditors always required to do on being invited to accept an audit engagement?

Select ONE answer:

1. Ensure they are professionally qualified to act
2. Do a general search on the internet about the prospective client
3. Obtain references for key personnel within the entity to be audited
4. Communicate with the existing auditors to discover any reasons they should not accept the appointment

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 == > It will not be necessary to obtain references when the entity is already known to the firm. It will not be necessary to contact previous auditors in the case of a company’s first audit.
2. Not correct
3. Not correct
4. Not correct

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

The level of assurance provided by an assurance engagement will depend on the type of engagement.

For each of the following examples, select the level of assurance which would be given: Report on profit and cash flow forecasts?

Select ONE answer:

1. Absolute
2. Reasonable
3. Limited
4. Unlimited

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 == >    A statutory audit provides reasonable assurance, which reflects the comprehensiveness of the audit procedures carried out. No assurance engagement, not even a statutory audit, can give absolute assurance. A review of financial information gives limited assurance, which is a lower level of assurance than a statutory audit, and thus, its conclusion would be worded negatively. A report on profit and cash flow forecasts gives limited assurance because forecasts are, by nature, about uncertain future events and so cannot be made with enough certainty to give a ‘reasonable’ level of assurance.
4. Not correct

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