ACY 55 Auditing & Assurance – Specialized Industries

SY 2023-2024, 1st Semester 9. An auditor was unable to obtain audited financial statements or other
Summative Exam No. 1 evidence supporting an entity's investment in a foreign subsidiary. Between
which of the following opinions should the entity's auditor choose?
Instructions: a) Adverse and unqualified with an explanatory paragraph added b)
1. This exam is good for 1 hour only. Disclaimer and unqualified with an explanatory paragraph added
2. Follow the instructions below in answering the exam. c) Qualified and adverse
3. Please bring your belongings when submitting your paper and then d) Qualified and disclaimer Commented [U9]: .
kindly leave the exam room.
4. Write your answers in a ½ sheet yellow paper, crosswise. 10. The risk that an auditor's procedures will lead to the conclusion that a
material misstatement does not exist in an account balance when, in fact
Multiple Choice such misstatement does exist is referred to as
1. Broadly defined, the subject matter of any audit consists of a) Audit risk b) Inherent risk
a) Financial statements b) Economic data c) Control risk d) Detection risk Commented [U10]: .
c) Assertions d) Operating data
11. Which of the following conditions or events most likely would cause an Commented [U1]: .
2. The most difficult type of misstatement to detect is fraud based on auditor to have substantial doubt about an entity's ability to continue as a
a) The over-recording of transactions going concern?
b) The non-recording of transactions a) Significant related-party transactions are pervasive Commented [U2]: .
c) Recorded transactions in subsidiaries b) Usual trade credit from suppliers is denied
d) Related party receivables Commented [U11]: .
c) Arrearages in preferred stock dividends are paid
d) Restrictions on the disposal of principal assets are present
3. For good internal control, the purchasing department should not be
responsible for 12. In considering internal control, the auditor is basically concerned that it
a) Authorizing the acquisition of goods provides reasonable assurance that Commented [U3]: .
b) Finding the lowest cost vendor a) Operational efficiency has been achieved in accordance with
c) Reviewing the vendors catalogue descriptions and prices for management plans.
standardized items b) Material misstatements due to errors and fraud have been prevented or
d) Designing the purchase order form detected. Commented [U12]: .
c) Controls have not been circumvented by collusion.
4. An auditor plans to apply substantive tests to the details of asset and d) Management cannot override the system.
liability accounts as of an interim date rather than as of the balance sheet
date. The auditor should be aware that this practice 13. The objective of an accountant's compilation of the financial statements
a) Eliminates the use of certain statistical sampling methods that would of a non-issuer (non- public company) is to provide what type of
otherwise be available assurance?
b) Presumes that the auditor will re-perform the tests of the balance sheet a. Absolute assurance b. Limited assurance
date c. No assurance d. Reasonable assurance Commented [U13]: .
c) Should be especially considered when there are rapidly changing
economic conditions 14. The primary responsibility for establishing and maintaining an internal
d) Potentially increases the risk that errors that exist at the balance sheet control rests with Commented [U4]: .
date will not be detected a. The external auditors
b. The internal auditors
5. This quality control element requires a CPA firm to establish policies and c. Management and those charged with governance Commented [U14]: .
procedures to provide it with reasonable assurance that engagements are d. The controller or the treasurer
performed in accordance with professional standards and regulatory and
legal requirements, and that the firm or the engagement partner issue 15. Which of the following factors or conditions is an auditor least likely to
reports that are appropriate in the circumstances plan an audit to discover?
a) Ethical requirements b) Engagement performance a. High turnover of senior management. Commented [U5]: .
c) Monitoring d) Human resources b. Financial pressures affecting employees.
Commented [U15]: .
c. Inadequate monitoring of significant controls.
6. Which is least likely to be a response when an auditor has obtained d. Inability to generate positive cash flows from operations.
evidence indicating a risk of material misstatement in the area of inventory?
a) Request inventory counts at the end of each month. 16. At which stage(s) of the audit may fraud risk factors be identified? Commented [U6]: .
b) Discuss questions of inventory valuation with any other auditors involved a. Planning – Yes; Obtaining understanding – Yes; Conducting fieldwork –
with the audit. Yes
c) Make oral inquiries of major suppliers in addition to written confirmations. b. Planning – Yes; Obtaining understanding – Yes; Conducting fieldwork –
d) Perform inventory observations on an unannounced basis. No
c. Planning – Yes; Obtaining understanding – No; Conducting fieldwork –
7. A note to the financial statements of a bank indicates that all of the No
records relating to its business operations are stored on magnetic disks; d. Planning – No; Obtaining understanding – Yes; Conducting fieldwork –
and that there are no emergency back-up systems or duplicate disks stored Yes Commented [U16]: .
since the bank and their auditors consider the occurrence of a catastrophe
to be remote. Based upon this, one would expect the auditor's report to 17. Which of the following is most likely to be an overall response to fraud
express risks identified in an audit?
a) An adverse opinion b) An "except for" opinion a. Supervise members of the audit team less closely and rely more upon
c) An unqualified opinion d) A qualified opinion judgment. Commented [U7]: .
b. Use less predictable audit procedures.
8. The accounts payable department receives the purchase order form to Commented [U17]: .
c. Only use certified public accountants on the engagement.
accomplish all of the following except d. Place increased emphasis on the audit of objective transactions rather
a) Compare invoice price to purchase order price. than subjective transactions.
b) Ensure the goods had been received by the party requesting the goods. Commented [U8]: .
c) Ensure the purchase had been properly authorized.
d) Compare quantity ordered to quantity purchased.
18. Which of the following factors would most likely heighten an auditor's 27. What type of audit evidence can experts provide in a specialized
concern about the risk of fraudulent financial reporting? industry?
a. Large amounts of liquid assets that are easily convertible into cash. A) Supportive evidence without high significance
b. Low growth and profitability as compared to other entities in the same B) Primary or first-hand audit evidence
industry. C) Personal opinions unrelated to specific industry
c. Financial management's participation in the initial selection of accounting D) High quality audit evidence in specialist situations Commented [U27]: .
principles.
d. An overly complex organizational structure involving unusual lines of 28. How can working on an audit engagement in a specialized industry
authority. benefit audit staff? Commented [U18]: .
A) Exposure to sometimes unusual businesses
19. Which of the following statements relating to the appropriateness of B) Higher compensation due to complexity of the audit Commented [U28]: .
audit evidence is always true? C) Chance to acquire industry-specific certification
a. Audit evidence gathered by an auditor from outside an enterprise is D) Opportunity for promotion within the firm
reliable.
b. Accounting data developed under satisfactory conditions of internal 29. What should auditors be cautious about when relying on the work of an
control are more relevant than data developed under unsatisfactory internal auditor's expert in a specialized industry?
control conditions. A) Challenging the expert's findings without significant evidence
c. Oral representations made by management are not valid evidence. B) Over-reliance on the expert's work and failure to investigate any
d. Evidence gathered by auditors must be both valid and relevant to be inconsistencies Commented [U29]: .
considered appropriate. C) Undervaluing the significance of expert's opinion
D) Passing responsibility solely to the expert without auditor's involvement Commented [U19]: .
20. Control testing is performed in order to determine whether or not
a. Necessary controls are absent 30. In a specialized industry, when might an auditor use an auditor's expert
b. The assessed level of control risk can be reduced to obtain audit evidence? Commented [U20]: .
d. Incompatible functions exist A) When regulatory bodies require involvement of external experts
c. Material peso error exist B) When the audit firm lacks specific expertise in certain areas Commented [U30]: .
C) When there is a lack of industry-specific financial reports
21. What does IFRS 7, Financial Instruments: Disclosure, require for D) When clients request assistance in complex financial transactions
specialized industries?
A) Disclosure of airline industry financial instruments 31. Which of the following is a challenge often faced by auditors in the
B) Specific application by companies operating in the banking sector construction industry? Commented [U21]: .
C) Valuation of apple trees in agriculture sector A) Evaluating job site operations
D) Valuation of oil production in the oil extraction industry B) Assessing costs on contracts in progress and recognizing contract
profits Commented [U31]: .
22. According to ISA 220 (Revised), what should audit firms assess before C) Auditing accounts receivable
accepting an audit engagement in a specialized industry? D) Managing raw materials for construction projects
A) Existence of specialized accounting policies
B) Compatibility with industrial regulatory bodies 32. To ensure accurate financial reporting, auditors in the construction
C) Whether there are sufficient and appropriate resources with appropriate industry need expertise in which of the following areas? Commented [U22]: .
competence and capabilities A) Engineering and construction issues
D) Availability of industry-specific financial reporting systems B) Environmental regulations for construction projects Commented [U32]: .
C) Contract negotiation and dispute resolution
23. What is important for both larger and smaller audit firms when D) Financial analysis and cost accounting
assessing competence in a specialized industry?
A) Adequate documentation demonstrating competence and steps taken 33. What should auditors review before starting the audit process in the
for improvement construction industry? Commented [U23]: .
B) Proficiency in specific accounting policies of the industry A) Internal control policies and procedures
C) Previous experience working with the same industry B) General industry standards for financial reporting
D) Expertise in the respective industrial regulatory requirements C) All major contracts and key contract details Commented [U33]: .
D) Recent changes in accounting regulations
24. What should auditors consider when identifying the risk of material
misstatement in a specialized industry? 34. Which auditing challenge often arises from construction companies'
A) Specific balance sheet ratios for the industry accounting for raw materials and supplies inventory?
B) Specialist industry certifications A) Obsolescence and excessive materials on contracts Commented [U34]: .
C) Standards for industry-specific audit procedures B) Excess inventory in job site offices
D) Obtaining appropriate understanding of the business and its C) Misallocation of raw materials and supplies expenses Commented [U24]: .
environment D) Inaccurate accounting for usage accounting

25. Why must auditors not forget to consider 'normal' balances and 35. When auditing contract costs, why is it important to ensure accurate
transactions even when auditing a specialized industry client? reflection of actual costs compared to original estimates?
A) Auditors' focus should solely be on industry-specific transactions A) To identify any variations in the original bid estimate
B) Specialized industries do not have 'normal' balances and transactions B) To calculate the contractor's cash flow
C) Specialized industries overrides the need to review 'normal' balances C) To determine the appropriate amounts to bill clients
D) Such risks can still exist and must be evaluated D) To assess the accuracy of profit recognition Commented [U25]: .

26. What must auditors evaluate when assessing the findings of an 36. What measure can auditors take to assess the accuracy of contract Commented [U35]: .
auditor's expert in specialized industries? costs charged by subcontractors?
A) Comparison against industry-specific benchmarks A) Auditing accounts receivable related to subcontractors
B) Existence of specialized industrial regulations in the findings B) Conducting random site visits to subcontractor offices
C) Consistency with the auditor's understanding and other audit procedures C) Reviewing joint venture agreements Commented [U26]: .
D) Significant deviation from the findings of other experts D) Reviewing billing statements and confirming balances
Commented [U36]: .
37. Why is recognizing profit accurately in the early stages of contracts 45. What does the auditor's report state in relation to a bank's financial
important for auditors? statements?
A) To verify compliance with environmental regulations A) Validation of the accuracy and completeness of the financial statements
B) To assess the contractor's investment in joint ventures B) Comprehensive analysis of the profitability and solvency of the bank
C) To ensure prompt payment to subcontractors C) Adherence to accounting principles Commented [U45]: .
D) To avoid overstatement of financial performance D) Opinions on the bank's future financial performance and stability
Commented [U37]: .
38. What can auditors examine to evaluate the efficiency and effectiveness 46. What are some of the risks faced by banks?
of job site operations? A) Customer dissatisfaction, shareholder unrest, environmental disasters,
A) Purchase orders for construction equipment and geopolitical instability
B) Medical insurance policies for construction workers B) Misappropriation, fraud, failure, liquidity crises, and liabilities for breach
C) Financial statements of subcontractors of trust Commented [U46]: .
D) On-site office records and internal controls C) Compliance breaches, operational inefficiency, reputational damage,
and inherent weaknesses Commented [U38]: .
39. What is one of the common weaknesses in contractor operations? D) Cybersecurity attacks, economic recessions, market fluctuations, and
A) Neglecting to regularly assess contract profitability regulatory violations Commented [U39]: .
B) Having accurate contract cost record-keeping
C) Maintaining strong control over estimating and bidding on new contracts 47. What audit considerations arise in the review of private banking clients'
D) Overestimating contract profitability trust and similar arrangements?
A) Verification of authorized signatories and monitoring of changes in key
40. Why is auditing accounts payable important in the construction client personnel
industry? B) Control over documentation, compliance with legal requirements, and
A) To assess the contractor's investment in joint ventures accurate reporting Commented [U47]: .
B) To verify accuracy and compliance with contract terms C) Review of internal control procedures and testing for segregation of
C) To evaluate billing procedures for construction projects duties in fiduciary administration Commented [U40]: .
D) To identify potential fraud in subcontractor payments D) Analysis of trust income and expenses and valuation of assets held in
trust accounts
41. What is a priority for auditors when assessing the internal control
system of a bank? 48. What controls and procedures are essential for managing credit risk in
A) Evaluating the competency and integrity of the bank's management and private banking?
employees A) Implementing anti-fraud measures and third-party monitoring processes
B) Ensuring proper recording of transactions and accurate financial B) Analyzing client credit information, monitoring repayment compliance,
statement assertions and assessing collateral quality Commented [U41]: .
C) Identifying potential fraud risks and establishing fraud prevention C) Applying risk-based pricing and direct collateralization of credit exposure
controls D) Conducting in-depth financial due diligence on clients and exploring Commented [U48]: .
D) Measuring the operational efficiency and effectiveness of the bank's alternative sources of credit enhancement
processes
49. What are some audit risk factors related to private banking services in
42. How does the auditor assess inherent risk in a bank? banks?
A) Assess the entity's ability to continue as a going concern and the A) Ineffective management oversight of relationship managers, poor
accuracy of management's assumptions record-keeping practices, and unauthorized access to client assets
B) Evaluate management's judgment in determining financial estimates and B) Confidentiality breaches, lack of segregation of duties, and compliance
preparing disclosures with related party lending rules Commented [U49]: .
C) Examine internal control procedures, conduct physical inspections, and C) Weak customer onboarding processes, inadequate client risk
review legal documents assessment, and limited anti-money laundering procedures
D) Consider leverage, earnings importance, regulatory compliance, and D) Inaccurate or misleading disclosure of investment products, potential
reputation conflicts of interest, and violations of market conduct rules Commented [U42]: .

43. What is the auditor's role in evaluating internal controls for asset 50. What is the significance of organizational culture and compliance in
management activities in banks? private banking oversight?
A) Ensure proper documentation, valuation, reconciliation, and custody of A) Developing effective marketing strategies and building long-term client
securities relationships Commented [U43]: .
B) Assess the performance of investment portfolios and the effectiveness of B) Establishing risk management frameworks and technical expertise in
risk management systems asset management and investment services
C) Review investment policies and strategies, including compliance with C) Ensuring profitability through prudent investment decisions and
fiduciary responsibilities proactive client advisory services
D) Evaluate the accuracy and completeness of financial records relating to D) Creating a culture of compliance and setting policies for customer
asset management knowledge and money laundering prevention Commented [U50]: .

44. What are some key audit risk factors related to fiduciary activities in "Auditors are the guardians of integrity in financial reporting, protecting
banks? investors and stakeholders."
A) Managing the liquidity and interest rate risks of loan portfolios, enforcing
credit policies, and controlling collateral valuation "Auditing financial statements is like solving a puzzle, except all the pieces
B) Developing and maintaining robust asset-liability management systems are numbers, and you hope they fit!"
to mitigate interest rate and liquidity risks
C) Ensuring compliance with anti-money laundering and know-your- For which one of you, when he wants to build a tower, does not first sit
customer requirements, and protecting customer information down and calculate the cost to see if he has enough to complete it?
D) Avoiding mismanagement of third-party funds, asset protection, (Luke 14:28)
compliance with mandates, and reporting requirements Commented [U44]: .