FINALTERM EXAMINATION

ACC311- Fundamentals of Auditing

Question No: 1 ( Marks: 1 ) - Please choose one

Which one of the following is an objective of the internal audit?
 
To report on financial statements
To check accounting system and internal control are operating efficiently
To determine the accuracy of financial statement values and disclosures
To establish a control system in the company

Question No: 2 ( Marks: 1 ) - Please choose one

Which one of the following statements is NOT correct in respect of the
internal auditor?

The scope of audit performed by internal auditors is primarily in respect of financial

report audits
An internal auditor does not require a license to practice
Internal auditors are usually employed by companies and government units
Primary responsibility of the internal auditor is to the board of directors
Question No: 3 ( Marks: 1 ) - Please choose one
After how many days the Securities and Exchange Commission may appoint
the auditors, if the Directors of a company could not appoint the auditors to
fill casual vacancy? (Companies Ordinance, 1984)

30 days
60 days
80 days
120 days

Question No: 4 ( Marks: 1 ) - Please choose one

Suppose that during audit of a company, an auditor accepted the schedule
of bad debts furnished by the client, though it was apparent that debts were
not recoverable. The auditor shall be held liable for which one of the
following liabilities?

Liability for negligence

Liability for misfeasance
Criminal liability
Personal liability
 
Ref: Page no.19

Question No: 5 ( Marks: 1 ) - Please choose one

The books of accounts of a company should be kept at which one of the
following offices?(Companies Ordinance, 1984)
Registered office of the company
Accounts office of the company
Record office of the company
Registrar office

Question No: 6 ( Marks: 1 ) - Please choose one

Which of the following is one of the most fundamental and effective internal
controls?

Increased use of computers for recording accounting transactions

Increased reliance on internal auditors to monitor accounting systems
Segregation of incompatible duties across several people
Having internal auditors report only to the Board of Directors

Question No: 7 ( Marks: 1 ) - Please choose one

Which of the following is NOT a major component of an internal control
system?

Risk assessment Staffing

Control procedures/activities
Information and communication system

Question No: 8 ( Marks: 1 ) - Please choose one

An audit firm audited a Leather Manufacturing company and presented its
report addressed to the management. They found significant material
misstatements in the company s internal controls system. They strongly
recommended that there should be sufficient controls in existence to ensure
management can effectively control the business operations. In your
opinion, auditors are emphasizing on which one of the following categories
of SOAP MAPS?
Authorization
Management and Monitoring
Arithmetic and Accounting
Segregation of duties

Question No: 9 ( Marks: 1 ) - Please choose one

Which of the following statements best describes the purpose of an internal
control questionnaire (ICQ)?
An internal control questionnaire is a series of questions regarding accounting and
control policies and procedures that the auditor considers necessary to prevent all
misstatements in the financial report.
An internal control questionnaire is a series of questions regarding accounting and
control policies and procedures that the auditor considers necessary to prevent
material misstatements in the financial report.
An internal control questionnaire is a series of questions regarding accounting and
control policies and procedures that the auditor considers necessary to detect
material misstatements in the financial report.
An internal control questionnaire is a series of questions prepared by the entity about
the entity's accounting and control policies and procedures for which the entity seeks
guidance on from the auditor in order to detect material misstatements in the
financial report.

Question No: 10 ( Marks: 1 ) - Please choose one

A Beverages company is being audited by an audit firm. Audit procedures
are being undertaken in all of its departments. During this, the audit team
has to spend more time on physical examination of the company assets to
get reliable audit evidence. In your opinion, auditors are considering which
type of audit inquiry in this case?
Recalculations Inspection of tangible assets Analytical procedures Confirmations
Existence of any immaterial mistake in the statements
Existence of any fraud or error in the statements
Company s growth trend in the future in figures Market value of the company s stock

Question No: 12 ( Marks: 1 ) - Please choose one

Which one of the following may NOT be a type of control of the purchase
cycle of an entity?

Receipt of goods
Invoicing and returns
Invoicing and credit notes
Purchase ledger and suppliers
 
Ref : Page no.93
Question No: 13 ( Marks: 1 ) - Please choose one
While testing the purchase system of an entity, which one of the following
control tests may be applied to the Credit Notes by the auditors?

Evidence of matching credit notes to goods returned notes

Evidence of approval of credit notes
Evidence of a sequence check
Proof of issuance date

Question No: 14 ( Marks: 1 ) - Please choose one

During the audit work of testing the purchase system of an entity, which
one of the following control tests may be applied to the Payables Ledger by
the auditors?
Evidence of authorization of adjustments to payables ledger
Evidence of review of reconciliation of purchase ledger listing
Evidence of authorization of adjustments to payable ledger control account
Evidence of authorization of adjustments to purchase ledger
 
Ref: Page no.93
Question No: 15 (Marks: 1) - Please choose one
Which one of the following possible misstatements related to payroll does
not involve the audit objective of Validity?

Payments to fictitious employees

Payments to terminated employees
Payments to valid employees who have not worked
Payments to valid employees at a rate in excess of the authorized amount

Question No: 16 ( Marks: 1 ) - Please choose one

In order to ensure effective control, how often a full inventory count should
be held when perpetual inventory records are not kept adequately?

On a daily basis
At least once a year
At least monthly
At least weekly
 
Ref: Page no.101

Question No: 17 (Marks: 1 ) - Please choose one

An oil exploring company employs 1500 personal in its international market.
All of its personnel are paid on monthly basis. The company should
compensate them in which form of payment?

Salary
Cheque
Wages
None of the given option

Question No: 18 ( Marks: 1 ) - Please choose one

For the purpose of keeping effective control in the cash system, who should
have no access to the cash or the preparation of the paying-in slip?

Sales ledger personnel

Teller/cashier
Cash officers
Operations manager
Ref: Page no.99

Question No: 19 ( Marks: 1 ) - Please choose one

When should the petty cash book entries be made?

At the day end

Next day
Promptly
Monthly

Question No: 20 ( Marks: 1 ) - Please choose one

How often the physical inspection of non current assets should be carried
out?

Rarely
Periodically
Never
Daily

Question No: 21 ( Marks: 1 ) - Please choose one

In which one of the following ways auditors can choice the verification
techniques in a given set of circumstances?

It depends upon the available audit evidence to the auditor

It depends upon the nature of business operations of the entity
It depends upon the audit procedures planned by the auditor
It depends upon the judgmental skills of the auditor
Question No: 22 ( Marks: 1 ) - Please choose one
Which one of the following may NOT ensure that the movement in share
capital of a company is properly authorized and correctly shown and
described in accordance with the Companies Ordinance, 1984?
Check that directors were authorized to allot shares
Agree authorized capital with memorandum of association
Consider special rules for allotments of public company shares
Test payments with supporting evidence and trace entries in register

Question No: 23 ( Marks: 1 ) - Please choose one

Which one of the following testing objectives refers to the management
assertion Occurrence in obtaining audit evidence?

Assets shown include all rights under the control of the enterprise
Transactions and events that have been recorded have occurred and pertain
to the entity
The amounts at which assets and liabilities are stated is correct
Assets and liabilities included on the balance sheet actually exist

Question No: 24 ( Marks: 1 ) - Please choose one

Which one of the following certain expense items may be verified in order to
keep control of stock-in-trade and stores & spares?

Interest on short term loan

Accumulated depreciation on assets
Director s fees
Wages and salaries

Question No: 25 ( Marks: 1 ) - Please choose one

Which one of the following is NOT an advantage of using statistical

sampling?

It aids in the design of an efficient sample

It allows the auditor to measure the sufficiency of the evidential matter obtained
It allows the auditor to greatly reduce substantive testing
It provides means for mathematically measuring the degree of sampling
risk

Question No: 26 ( Marks: 1 ) - Please choose one

Which one of the following is an underlying feature of random-based
selection of items?

Each stratum of the accounting population be given equal representation in the

sample
All items in the accounting population be randomly ordered.
Every item in the population should have an opportunity to be selected
Every item must be systematically selected using replacement

Question No: 27 ( Marks: 1 ) - Please choose one

Which one of the following matters is generally included in an auditor's
engagement letter?
Management's responsibility for the entity's compliance with laws and
regulations
The factors to be considered in setting preliminary judgments about materiality
Management's vicarious liability for illegal acts committed by its employees
The auditor's responsibility to search for significant internal control deficiencies

Question No: 28 ( Marks: 1 ) - Please choose one

What should be the next step of an auditor after establishing the overall
audit strategy of an entity?

To develop an audit plan

To define the scope of audit
To determine the focus of engagement team efforts
To determine the objectives of audit

Question No: 29 ( Marks: 1 ) - Please choose one

The establishment of the overall audit strategy involves the following
EXCEPT:

To determine the characteristics of the engagement

To ascertain the reporting objectives of the engagement
To consider the important factors i.e. materiality levels, higher risks of material
misstatement etc.
To guide the development of detailed business activities to occur in future

Question No: 30 ( Marks: 1 ) - Please choose one

Which one of the following mainly affects the auditors opinion?

Agreement on accounting policies

Limitation on the scope of the auditors work
Dispute among the members of the company
Future prospects of the company s growth

Question No: 31 ( Marks: 1 ) - Please choose one

Which one of the following matters does NOT affect Auditor s Opinion?

When there is a limitation on the scope of the auditor s work

When there is a disagreement with management regarding the accounting policies
selected
When there is a disagreement with management regarding the method of
applying accounting policies
When an auditor modify the auditor s report by adding a paragraph to highlight a
material matter

Question No: 32 ( Marks: 1 ) - Please choose one

Tracing selected shipments to the sales journal to be sure that each one is
included is a test of which of the following?

Accuracy
Classification
Completeness
Existence

Question No: 33 ( Marks: 1 ) - Please choose one

Which one of the following best describes the term Input VAT?

Input VAT is charged on a firm when it makes its purchases

Input VAT is charged on a firm when it makes its investments
Input VAT is charged on a firm when it produces highly quality products
Input VAT is charged on a firm when it exports the products

Question No: 34 ( Marks: 1 ) - Please choose one

The duties of the wages staff should preferably be rotated during the year
when the salary payment is made by which of the following systems?

By cheque
In cash
By demand draft
Direct transfer to employees bank account

Question No: 35 ( Marks: 1 ) - Please choose one

Which of the following are the three audit objectives that are most
important for cash, and that receive the greatest attention during the audit?

Existence, accuracy, and completeness

Existence, cutoff, and presentation
Accuracy, cutoff, and presentation & disclosure
Completeness, realizable value, and cutoff

Question No: 36 ( Marks: 1 ) - Please choose one

Which one of the following is most likely to indicate fraud?

Several overpayments are made for goods received from a supplier

The year end cash balance does not include cash in transit to the company at year-
end
A check received after year end was inadvertently recorded as if received
before year-end
A documented loan is sanctioned to an officer of the company

Question No: 37 ( Marks: 1 ) - Please choose one

When an auditor increases the assessed level of control risk because certain
control activities were determined to be ineffective, which of the following
would most likely be increased by the auditor?

Extent of tests of controls

Level of detection risk
Extent of tests of details
Level of inherent risk

Question No: 38 ( Marks: 1 ) - Please choose one

Which one of the following statements is TRUE regarding control
procedures?
They are not required if the control environment is strong
They should generally be all manual
They should generally be all automated
They can be either manual or automated

Question No: 39 ( Marks: 1 ) - Please choose one

Which one of the following statements does not apply to the Institute of
Chartered Accountants of Pakistan (ICAP) in Pakistan?

An autonomous body incorporated under the Chartered Accountants Ordinance 1961

Regulatory body that formulates auditing standards in Pakistan
Its affairs are run by a council which is elected by its member (Chartered
Accountants).
ICAP is a member of the International Federation of Accountants (IFAC)

Question No: 40 ( Marks: 1 ) - Please choose one

Which one of the following statements indicates a primary difference
between an operational audit and a compliance audit?

Operational audit focuses on business efficiencies and effectiveness, while

compliance audit focuses on whether laws and other requirements are being followed
Operational audit focuses on reliability of the financial statements, while compliance
audit focuses on whether laws and other requirements are being followed
Operational audit focuses on business growth prospects, while a compliance audit
focuses on reliability of the financial statements
Operational audit focuses on business size and potential to grow, while compliance
audit focuses on reliability of accounting records

Question No: 41 ( Marks: 1 ) - Please choose one

Which one of the following primary assertions is satisfied when an auditor
ensures that there is no false transaction recorded and all recorded
transactions have actually taken place?

Occurrence
Completeness
Existence
Rights and obligations

Question No: 42 ( Marks: 1 ) - Please choose one

Following are the points considered during the verification of bank balances
EXCEPT:

Obtain direct bank confirmation

Obtain direct bank confirmation
Investigate about outstanding stale cheques
Investigate any significant reconciling items of an unusual nature
Ensure that the creditors have been paid for their loan amount
Question No: 43 ( Marks: 3 )
Enlist the typical control procedures at key stages of the sales cycle.
Solution:

1. Orders
2. Dispatch
3. Invoicing and credit notes
4. Returns inwards
5. Receivables
6. Bad Debts

Question No: 44 ( Marks: 3 )

What steps an auditor should take in order to ensure that the reserves are
properly classified and described in the accounts in accordance with the
Companies Ordinance, 1984?

Question No: 45 ( Marks: 3 )

Throughout the 1960s and 70s, the largest accounting firms devoted
extensive resources to the development and implementation of statistical
sampling procedures. Enlist several sample selection methods now available
to an auditor for selecting items in the populations.

Question No: 46 ( Marks: 5 )

Suppose you have been appointed as an auditor of a manufacturing
company. You are at the stage of testing the purchase system. According to
your knowledge of Auditing Standards, what control objectives would you
develop in respect of the Purchase system of the entity?

Question No: 47 ( Marks: 5 )

Discuss the factors which influence auditor s judgment regarding sample
size for tests of control.

Question No: 48 ( Marks: 10 )

Suppose that your supervisor has asked you to carry out an internal control
review of the inventory system of a manufacturing company. What internal
control procedures would you examine in respect of the following functions
of the inventory system?
1. Arithmetical Accuracy
2. Control Accounts
3. Access to Assets and Records

Question No: 49 ( Marks: 10 )

A company has hired auditors at the year end. Auditors used audit sampling
techniques which made them enable to gather audit evidence efficiently.
State the objectives auditors might have defined first to achieve by using
sampling techniques and also briefly explain further steps the auditors
might undertake to complete the sampling process.