Based on the results of test of control, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve

Question 1 (1 mark)

Based on the results of test of control, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Increase inherent risk.

Increase materiality levels.

Decrease substantive testing.

Decrease detection risk.

Question 2 (1 mark)

If an auditor performs a stocktake of the inventory of Station Ltd and selects items from the factory floor to count and trace to the clients stock sheets, the auditor will be obtaining evidence for which of the following assertions?

Accuracy, valuation and allocation

Existence

Accuracy

Completeness

Question 3 (1 mark)

You have found no mitigating controls in relation to your audit clients purchases of inventory. In this situation an inappropriate test to perform would be:

Selection of a sample of inventory items from records and tracing them to the actual inventory.

Selection of a sample of stock items and then tracing these items back to source documents to verify their unit cost prices.

Selection of a sample of warehouse receiving documents to test that they were properly checked and initialled by the receiving clerk to indicate that the quantities recorded were actually received.

Physical inspection of items shown on the stock obsolescence report to determine if their classification is correct.

Question 4: (1 mark)

Which of the following situations is not a reason to assess control risk as high?

Internal control policies or procedures are unlikely to be effective.

Evaluating the effectiveness of the internal control policies or procedures would be more time consuming than another audit approach.

The auditor has assessed detection risk as high.

Internal control policies or procedures are unlikely to pertain to an assertion.

Question 5 (1 mark)

Which of the following sources of audit evidence is the least persuasive to the auditor:

Written representations received from the clients solicitor.

Client issued invoices.

Suppliers invoices.

Bank statements.

Question 6

While beginning to establish an audit approach / strategy for your clients revenue account, you begin with an evaluation of internal controls.

On closer inspection, you find a significant number of instances where large discounts have been given to certain customers without appropriate authorization. Furthermore, the authorized price list has not been adhered to in many instances.

Required:

Identify and justify the key assertion at risk in relation to revenue. (2 marks)

Identify the most appropriate audit approach and audit strategy for (a) above. Justify your decision.(4 marks)

Question 7

You are an audit senior at Black Bookkeepers and Auditors (BBA) and have noted the following independent issues in relation to the audit of a client, Polyester Ltd (Polyester), a clothing manufacturer, for the financial year ending 30 June 2022:

(i) Polyester introduced a new accounting system in January 2022 following a brief testing phase. Polyester has faced several issues with the new system and the system was not intermittently operational since the implementation. This has resulted in many general ledger accounts at year end having to be based on estimates, with large portions of actual data relating to these balances being lost or distorted.

(ii) As a result of pressures to reduce costs, the directors of Polyester made the decision to retrench its credit department responsible for debt collection in August 2021.

(iii) Due to increased competitive pressures in the industry, Polyester has recently moved the manufacturing of some of its clothing lines out of Melbourne into regional areas. While Polyester saves around 20% in costs, the manufacturing process takes longer and, on several occasions, late deliveries have resulted in lost sales.

Required:

Explain the impact of these issues on:

i) your assessment of Polyesters audit risk (specify the component of audit risk) (4 marks);ii) and the audit strategy that would be adopted for the engagement (2 marks).

Question 8

For each of the following independent exceptions, outline an appropriate, practical audit procedure that would have detected the error.

The balance of sales transactions from point-of-sale receipts in July amount to a higher value than revenue for the month (1 mark).

Key assertion:

Procedure:

An additional item in accounts payable has been paid that is not matched against cost of goods sold or inventory of any kind (1 mark).

Key assertion:

Procedure:

Sales on credit in the third week of the month do not appear to be recorded anywhere in accounts receivable, with no cash being paid (1 mark).

Key assertion:

Procedure:

Prepaid insurance is materially understated due to the expensing of insurance policies when received, regardless of the term of this cover (1 mark).

Key assertion: =

Procedure

Question 9

For the following audit procedures, identify the prime assertion addressed by the test and indicate the type of test being conducted.

Audit Area/Account Detailed Procedure Assertion

) Type of audit test(i.e. test of control or substantive test of detail)

(1 + 1 Mark)

Interest expense For a sample of bank loans, check that the reconciliation of interest expense, from the bank statement to the interest expense account, has been reviewed by the financial controller. Property, plant and equipment For a sample of fixed assets, review the appropriateness of useful lives used for depreciation charges.