Auditing Exam.docx

Fundamentals of Auditing Exam ANSWER ALL QUESTIONS IN SECTION A AND ANY FIVE FROM SECTION B. SECTION A 1. Which of the following best describes the objective of internal auditing? a. To assist members of the organization in the effective discharge of their responsibilities b. To assist management with the design and implementation of accounting and control systems c. To examine and evaluate an organization's accounting system as a service to management d. To monitor the organization's internal control system for the external auditors 2. According the the Statement of Responsibilities of Internal Auditing, which of the following is not included in the scope of the internal audit function? a. Appraising the economy and efficiency with which resources are employed b. Reviewing the strategic management process, assessing the quality of management decision making both quantatively and qualitatively, and reporting the results to the audit committee c. Reviewing the means of safeguarding assets and, as appropriate, verifying the existence of such assets d. Reviewing operations or programs to ascertain whether results are consisten with established objectives and goals and whether the operations or programs are being carried out as planned. 3. Of the following, which is the major objective of The Institue of Internal Auditors? a. Cultivate, promote and disseminate information concerning internal auditing and related subjects b. Oversee the activities of internal auditors c. Promulgate standards that must be followed by all corporations d. Investigate accusations that Certified Internal Auditors have violated The Institute of Internal Auditors Code of Ethics 4. One of the purposes of the Standards for the Professional Practice of Internal Auditing as stated in the Introduction to the Standards is to a. Encourage the professionalization of internal auditing b. Establish the independence of the internal audit department and emphasize the objectivity of internal auditing c. Encourage external auditors to make more extensive use of the work of internal auditors d. Establish the basis for guidance and measurement of internal auditing performance 5. Which of the following statements does not describe one of the purposes of The IIA Code of Ethics? The IIA Code of Ethics a. Sets forth basic principles in the practice of internal auditing b. Charges IIA members to maintain high standards of conduct c. Explains the internal audit profession's responsibility to society at large d. States that a distinguishing mark of a profession is acceptance by its members of responsibility to those it serves 6. Independence permits internal auditors to render impartial and unbiased judgments. The best way to achieve independence is through a. Individual knowledge and skills b. Organizational status and objectivity c. Supervision within the organization d. Organizational knowledge and skills 7. Which of the following is considered a major reason for establishing an internal audit function? a. To relieve overburdened management of the responsibility for establishing an effective control structure b. To safeguard resources entrusted to the organization c. To ensure the accuracy, reliability and timeliness of financial and operating data used in managment's decision making d. To assist members of the organization in the measurement and evaluation of the effectivenss of the established internal control structure 8. The internal auditor's responsibility for the prevention of fraud includes all of the following except a. Determining if the organizational environment fosters control consciousness b. Ensuring that fraud will not occur c. Being aware of activities in which fraud is likely to occur d. Evaluating the effectiveness of actions taken by management to deter fraud 9. The internal auditing profession is believed to have advanced primarily as a consequence of a. Increased interest by graduating students and experienced auditors b. The limitation of external audit scope c. Job qualification specifications that include added emphasis on background knowledge and skills d. Increased complexity and sophistication of business operations 10. The audit committee can serve several important purposes, some of which directly benefit internal auditing. The most significant benefit provided by the audit committee to the internal auditor is a. Protecting the independence of the internal auditor from undue management influence b. Reviewing annual audit plans and monitoring audit results c. Approving audit plans, scheduling, staffing and meeting with the internal auditor as needed d. Reviewing copies of the procedures manuals for selected company operations and meeting with company officials to discuss them 11. Which of the following best describes and internal auditor's purpose in reviewing the adequacy of the system of internal control? a. To help determine the nature, timing and extent of tests necessary to achieve audit objectives b. To ensure that material weaknesses in the internal control system are corrected c. To determine whether the internal control system provides reasonable assurance that the organization's objectives and goals are met efficiently and economically d. To determine whether the internal control system ensures that the accounting records are correct and that financial statements are fairly stated SECTION B Explain the operating elements of an Information System. List the sources of planning data. Explain. Discuss the need of Information Technology. What are the categories of MIS? Explain. Explain the ethical issues of IT. Explain the structure of LAN. Explain the three basic categories of electronic commerce applications. Discuss about ERP Implementations Cycle. Define linear programming. State the procedure for formulating linear programming problems. What are the steps followed in simplex method. Explain different approaches to probability. Write the dual of given LPP Maximise Subject to Solve the transportation problem by using North West Corner Rule. To Q1 Q2 Q3 Supply F1 50 30 200 1 From F2 90 45 170 3 F3 250 200 50 4 Demand 4 2 2 The joint probability mass function of random variables and is given by and . Find out the marginal probability mass function of and , the conditional distribution of and . A decision problem has been expressed in the following pay off table. Find the maximax and maximum pay off action. Strategy 1 2 3 A 1880 1840 1800 States B 1620 1600 1640 C 1400 1420 1720 State with reason, following are true or false or both. Director can appoint auditor. If auditor is not appointed in the General Meeting, he is appointed in the next General Meeting. First auditors must be appointed before first General Meeting. Auditor can not be changed after financial statement has been published. Power and duties of auditor can be limited by the Management. Auditor is liable for negligence if he fails to detect fraud or errors. Appointment of the Auditors of Private Limited Company is not compulsory under provision of the Company Ordinance, 1984 Auditor’s opinion is based on conclusive evidence. (M-1) Question 01: Suppose you have been appointed as an auditor of Banking Company then what steps should be followed in understanding of the entity and its environment. Question 01: Highlight the right option among the given choices. Analytical procedures includes: Preparation of financial statement related to that entity Observation of entity activities and operations Inspection of documents, records and internal control manuals Ratio analysis, trend analysis, and common size analysis of financial as well as non-financial information pertaining to the entity Risk Assessment Procedures DOES NOT include: Monitoring of management activities Inquiries of management and others within the entity Analytical procedures Observation and inspection Nature of the Entity Refers to: Its name and ownership Entity’s operations, its ownership and governance the types of investments it makes or plans to make the way its structured and financed. The type of accounting standard adopted by the organization The nature of companies relationship to its customer An Investment DOES NOT include: Acquisitions, mergers or disposals of business activities. Investments and dispositions of securities and loans. Capital investment activities, including investments in plant and equipment and technology. Leasing of property, plant or equipment for use in the business Internal controls is the process: Designed and affected by those charged with governance, management to provide reasonable assurance that entity will achieve objective. That allows management to achieve control over the employees That includes control over the production cost Used for achieving organization marketing objectives effectively A component of internal control DOES include: Audit control Stake holders The entity’s risk assessment process Companies objectives Objective of an audit is to enable an auditor to express an opinion: Whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework (e.g. International or Local Accounting Standards). Whether reports are accordance with accounting procedures Whether companies is doing well financially Whether auditors report is prepares correctly Reasonable assurance is: A conclusion that the financial statements are materially misstated A conclusion that the financial statements are not materially misstated A statement about the fairness of audit A report about the companies director The concept of reasonable assurance acknowledges that: There is a risk the audit opinion is in appropriate. It is assured that audit is correct Risk is always associated with audit Auditor report is correct Benefit of opinion is: It helps to determine who the auditors of the company are What are the companies strength It improves credibility of financial statements. It improves credibility of owner’s Question 01: What are the different audits approaches that an auditor may follow to obtain sufficient appropriate audit evidence? (6) Question 02: What do you understand by the terms; nature, timing and extent of different audit approaches? Discuss very briefly. (4) Question 01: What are the different testing procedures adopted by the auditor while verifying different assertions at classes of transaction and account balances level? (6) Question 02: What are the control objectives while testing the inventory of an entity? (4) Question 01: Highlight the right option among the given choices. (10) 1). Audit sampling conducted: On selected number of items On Whole population On specific no of items All of the given options 2). Advantages of Audit Sampling: Economical Time Saving More Practical All of the given options 3). Which of the following is the component of audit risk? Inherent risk Control risk Detection risk All of the given options 4). Which of the following is not needed to be verified at the time of verification of Equity? Share capital’s classification Movement in share capital Preliminary expenses are properly write off Movements in reserves 5). Which of the following is needed to be verified at the time of verification of Account Balances? Look over any significant reconciling items of an unusual nature. Inspect about outstanding stale cheques. Acquire direct bank confirmation All of the given options 1. Which of the following is not a likely source of information to assess fraud risks? 2. When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to: 3. With whom should the auditor communicate whenever he or she determines that fraud may be present, even if the matter might be considered inconsequential? 4. Management is responsible for: 5. For inquiry to be effective, auditors need to be skilled at listening and _______ an interviewee’s response to questions. 6. Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following conditions should alert an auditor about the initial assessment? 7. As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures? 8. As part of the brainstorming sessions, auditors are directed to emphasize: 9. This type of inquiry often elicits “yes” or “no” responses to the auditor’s uestions. 10. In the fraud triangle, fraudulent financial reporting and misappropriation of assets: 11. Which of the following is not an application control? 12. It is common in IT systems to have certain types of transactions initiated automatically by the computer. Which of the following activities would not be an appropriate candidate for automatic computer initialization? 13. Application controls vary across the IT system. To gain an understanding of internal control for a private company, the auditor must evaluate the application controls for every: 14. Many clients have outsourced the IT functions. The difficulty the independent auditor faces when a computer service center is used is to: 15. An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as: 16. Which of the following is not a general control? 17. The most important output control is: 18. ______ link equipment in large geographic regions. 19. When using the test data approach: 20. What tools do companies use to limit access to sensitive company data? 21. Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s: 22. Which of the following procedures are frequently performed in response to the auditor’s assessment of the risk of material misstatement? 23. The purpose of tests of controls is to provide reasonable assurance that the: 24. The most important consideration in developing the audit plan and audit program is the: 25. When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to: 26. A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a: 27. The primary emphasis in most tests of details of balances is on the: 28. Which of the following audit tests is usually the least costly to perform? 29. Auditors who test manual controls that rely on IT-generated reports must consider: 30. Which of the following types of evidence is not available when using substantive tests of transactions? 31. Which of the following is not one of the five classes of transactions included in the sales and collection cycle? 32. What event initiates a transaction in the sales and collection cycle? 33. What critical event must take place before goods can be shipped? 34. Which of the following is not a business function within the “Sales” class of transactions? 35. The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as: 36. When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, objective? 37. The most important aspects of the billing function include all but which of the following? 38. In which of the following will sales return and allowances not be recorded? 39. Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? 40. For most firms, the function of indicating credit approval is recorded on the: 41. Describe the sources of information gathered to assess fraud risks. 42. Describe three computer auditing techniques available to the auditor. 43. There are seven types of audit evidence: physical examination, confirmation, documentation, observation, inquiries of the client, reperformance, and analytical procedures. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances. 44. State the five classes of transactions that comprise the sales and collection cycle. 6). Tolerable error and sample size have: a) direct relationship An inverse relationship No relation None of the given options 7). Sample risk and sample size have: A direct relationship An inverse relationship No relation None of the given options 8). Where the auditor relies more on the system of internal control the circumstance warrant: He spends more time on audit Effectiveness of the audit is affected Efficiency of the audit is affected Reliability of the results of the tests is affected 9). The auditor should select sample in such a way that: All important items should be selected All items containing misstatement should be selected All items in the population are selected All items in population have an opportunity of being selected 10). Stratification is a process of dividing a population into sub-populations which have: Heterogeneous characteristics Nothing in common Lot of sampling units Homogeneous characteristics Question no 02: Match each of the description given on the left (List A) with the terms given on the right (List B). Each term is used once only. (5) List A List B Maximum acceptable error in the population. Haphazard selection Selection of random sample without using a Tolerable error statistical technique of sample selection. Amount of error expected in the population. Audit sampling Conclusions reached by examining the sample Expected error might be different from the conclusions reached if the entire population were to be tested. Application of audit procedures to less than 100% Sampling risk of the items.