ADVANCED AUDITING & ASSURANCE

SEMESTER 1 TEST 2 - 2024

This test comprises two parts, with the first part being multiple choice questions and second part being
short answer questions. The test is to be completed within 1 hour and 45 minutes.

Section A: Multiple Choice Questions (10 Marks)

You are required to circle the best option as your answer under each of the questions. Each question is
work 0.5 marks.

1. In which of the following stages of an audit would analytical procedures NOT be used?

A. Planning the audit

B. Substantive procedures
C. Tests of controls
D. Overall review

2. Which of the following statements regarding the appropriateness of audit evidence is/are TRUE?

I. It concerns the quantity of audit evidence needed

II. It concerns the relevance and reliability of audit evidence needed

A. Both I and II
B. I
C. II
D. Neither I nor II

3. Rank the reliability of the following items of audit evidence from best (1) to worst (4) (by numbering
them from 1 to 4)?

A. A customer confirms his balance in response to a telephone enquiry.

B. Bank Statement provided by the bank
C. The Finance Director says an invoice has been paid
D. A list of unpaid invoices extracted from the client’s accounting records
4. Which four of the following are financial statements assertions?

I. Occurrence
II. Cut-off
III. Materiality
IV. Completeness
V. Going Concern
VI. Existence

A. I, II, III and IV

B. I, II, IV and VI
C. II, III, IV and V
D. !!, III, V and VI

5. Which of the following is NOT an audit procedure to obtain audit evidence?

A. Looking at client’s staff performing a control activity

B. Assembling audit documentation in a final audit file
C. Inquiring management about operational and regulatory risks that may affect financial reporting
D. Recalculating deductions and net pay on monthly payrolls

6. Which of the following audit procedures cannot provide audit evidence about the operation of
controls?

A. Observation
B. Inspection
C. Re-calculation
D. Analytical Procedures

7. A company’s gross profit has fallen from 50 percent to 30 percent. Which of the following events
could explain this?

A. An overstatement of closing inventory

B. A fall in customer demand
C. An understatement of revenue
D. An increase in mark-up
8. An auditor has planned to obtain external confirmations from the following customers?

I. All customers with balances greater than K 1 million

II. 25 % of customers with balances between K 250, 000.00 and K 1 million
III. 50 customers with balances less than K 250, 000

A. Significance Testing
B. Layering
C. Monetary Unit Sampling
D. Stratification

9. A receivable balance is recorded in the client’s books as K 2, 885 Dr, but the customer’s reply to the
confirmation request states that only K 2, 635 is owed.

Which of the following could NOT account for this discrepancy?

A. The customer had paid K 250 on the last day of the accounting period
B. An invoice of K 250 had been sent, by post, to the customer on the last day of the accounting
period
C. An invoice of K 250 had been raised the day after the end of the accounting period
D. The client’s records are inaccurate

10. Which of the following about a representation letter are true?

I. It is a written statement, signed by management to confirm certain matters or support other

audit evidence
II. It may be dated at any time before the date of the auditor’s report on the financial
statements

A. Neither I nor II
B. I only
C. Both I and II
D. II only
11. On which two of the following matters may it be appropriate to request written representation as
audit evidence?

I. Management’s assertion that all risks have been accounted for in accordance with the applicable
financial reporting framework
II. Confirmation that company has legal title to a material item of property
III. Confirmation that management is not aware of any contingent liabilities other than those
disclosed in the financial statements
IV. Management’s intention that may affect amounts or disclosures in the financial statements

A. I and II
B. II and III
C. III and IV
D. I and IV

12. Which of the following would NOT be found in a letter of representation?

A. That management has no plan to discontinue any part of the operations

B. That the company is a going concern
C. That management has fulfilled its responsibilities for the preparation of the financial statements
D. That management is not aware of any impending legal actions

13. What is the gist of the audit program?

A. Steps to be applied in audit fieldwork

B. Risks to be assessed by the auditor
C. Samples to be selected by the auditor
D. Evidence to be examined by the auditor

14. Which of the following statements are true?

I. The audit fieldwork is dependent on how well you have planned the audit.
II. The audit fieldwork is just as good as the auditor.

A. I only
B. Both I and II
C. Neither I nor II
D. II only
15. Which of the following actions would not be an appropriate response to management’s refusal to
provide a requested written representation?

A. Discuss the matter with management

B. Reevaluate the integrity of management
C. Determine the possible effect this may have on the auditor’s report
D. Seek legal advice

16. What is the main purpose of audit documentation?

A. To provide evidence that the overall objectives of the audit have been met
B. To help the engagement team to plan and perform the audit
C. To direct, supervise and review audit work
D. To record matters of continuing significance to the audit

17. Who is responsible for the performance of an audit of financial statements?

A. The engagement partner

B. The audit firm
C. The engagement quality control reviewer
D. The relevant professional or regulatory body

18. What is an engagement quality control review?

A. An objective evaluation of the significant judgements made by the engagement team

B. A review of the work of less experienced team members by more experienced team members
C. A review to ensure that the entity is a going concern
D. An evaluation of the operating effectiveness

19. When is an engagement quality control review performed?

A. After the auditor’s report has been issued

B. On or before the date of the auditor’s report
C. At any time, before or after the date of the auditor’s report
D. It is discretionary for the audit partner to decide whether to perform a quality control review or
not
20. What is sampling risk?

A. The risk that controls may be weak

B. The risk that the auditor may issue an inappropriate opinion
C. The risk that the conclusion formed based on a sample is different from the one formed on the
entire population
D. The risk that the conclusion formed based on a sample is the same as the conclusion formed
based on the entire population

Section B: Short Answers (5 Marks)

Write your answers clearly and concisely under each of the questions below.

1. What is the difference between a tolerable misstatement and tolerable rate of deviation? (1 Mark)

Section B: Short Answers (5 Marks)

Write your answers clearly and concisely under each of the questions below.

2. What is the difference between a tolerable misstatement and tolerable rate of deviation? (1 Mark)

Tolerable Misstatement

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance that it is not exceeded by the actual misstatement in the population. The actual
misstatement in the population does not exceed tolerable misstatement

 It relates to tests of details

 Secondly it talks about a sample in a population. That misstatements identified and projected
over a population do not exceed the tolerable misstatement and if they do then there is a
material misstatement in the population.

Whereas Tolerable Rate of Deviation

A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of
deviation in the population.

 It relates to a test of controls

 Secondly it talks about a sample in the population
3. You are trying to sample the accounts receivable balances for a client. Below are the details that are
available for this client. (4 Marks)

I. During your audit planning, you have set gross profit as your benchmark and this client
declared a gross profit of K 40, 000.00. The predecessor auditors have consistently used 5
percent of gross profit as their overall materiality and 70 percent of overall materiality as
their performance materiality.
II. You have done some analytical procedures to see the changes in the accounts receivable
balance from the previous financial year, but the controls over accounts receivable were very
weak hence there was no need for you to do a test of controls. This means you will rely on
substantive tests of details.
III. You have obtained the list of customers that owe the client various amounts for goods and
services provided to them.

(a) Use the above information to fill out the spaces left blank in the table below. Show your calculations
for working out materiality in the space provided at the bottom of the table. (1 Mark)

Question Response
Purpose of test To ensure the existence of receivable by selecting a sample of
receivable balances and sending confirmation letters
RMM in the relevant assertions Moderate
Population to be tested Accounts receivable balance at period end
Monetary value of population 120,000
Specific items subject to separate 37000
evaluation
Risk reduction obtained from None
testing the operational
effectiveness of internal control
Risk reduction from other Moderately effective substantive analytical procedures
procedures such as risk
assessment procedures
Confidence factor to be used In light of other sources of evidence, a confidence factor of 80
(reduced for risk reduction gained percent (1.6) will be used.
from other sources)
Performance Materiality 1400
Expected deviations in sample None

Calculations

5%@K40, 000 = K 2000

70%@K2000 = K 1400
(b) Use the information in the preceding table to work out the sampling interval. (1 Mark)

Sampling Interval = Performance Materiality / Confidence Factor

1400/1.6 = K 875

(c) Now, use the sampling interval to select your sample from the first 15 customers as shown in the
table below. The first item you randomly choose is Customer A with K 1, 000. (2 Marks)

Accounts Receivable Sampling Include in

No Customer
Balance Interval Sample?
1 Customer A 1,000 1,000 Yes
2 Customer B 1,500 1,875 No
3 Customer C 3,000 1,875 Yes
4 Customer D 3,000 2,750 No
5 Customer E 4,500 2,750 Yes
6 Customer F 900 3,625 No
7 Customer G 6,000 3,625 Yes
8 Customer H 2,500 4,500 No
9 Customer I 3,500 4,500 No
10 Customer J 12,000 4,500 Yes
11 Customer K 3,250 5,375 No
12 Customer L 2,700 5,375 No
13 Customer M 1,000 5,375 No
14 Customer N 1,250 5,375 No
15 Customer O 15,000 5,375 Yes