ADVANCED EXTERNAL AUDITING [AU2] EXAMINATION
Time: 4 Hours
Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note:
11/2 marks each
Which of the following statements regarding client business risk is correct? 1) The financial statement audit planning process is designed to address client business risk, not engagement risk.
2) The higher the client business risk, the less likely the auditor is to issue an unqualified opinion on the financial statements.
3) At a small organization, client business risk is always high because the owner-manager cannot keep track of all financial and accounting issues.
4) Client business risk is generally not affected by the nature and strength of the client’s internal controls.
b. Which of the following actions is a requirement, in accordance with CAS 250, for auditors when they suspect non-compliance with laws and regulations?
1) Include an emphasis of matter paragraph in the auditor’s report describing suspected non-compliance
2) Modify the audit plan, assuming fraud exists in the financial statements 3) Obtain further information to evaluate the possible effect on the financial statements 4) Document the areas of non-compliance and discuss with the client’s legal counsel immediately c.
The auditor’s report based on the results of the interim review of the financial statements prepared in accordance with Handbook section 7050 should be addressed to which of the following parties? 1)
d. Which of the following is most likely to be a characteristic of an effective audit committee? 1) The audit committee meets once a year in order to approve the financial statements of the company.
2) The audit committee chair and the chief executive officer of the company possess financial expertise.
3) The audit committee is independent from the corporation and any past or current relationship. 4) The audit committee chair is a retired partner of the firm that currently audits the financial statements of the company.
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Which of the following represents a best practice in the governance of the remuneration process? 1) Remuneration policies should be submitted to the annual meeting and, as appropriate, for shareholder approval.
2) Remunerations systems should encourage short-term performance by the management team and emphasize future results.
3) Boards should closely consult with management regarding the level and conditions of performance-based remuneration.
4) Remuneration policies should minimize downside risk to managers so that they can take risks in difficult circumstances.
Which of the following is a brainstorming technique that is likely to lead to generation of better ideas? 1)
Restrict the discussion to the items on the fraud checklist
Discuss all low-risk areas so that the audit team can focus field work on high-risk areas Have the engagement partner or another expert lead the brainstorming session Remind members of the audit team that not all of them have experience to present high-quality ideas
g. What type of application control is described in the following example? “A credit manager reviews the aged receivable trial balance to ensure that new credit sales are not approved for customers with past due accounts.”
Fully automated control
h. Which of the following is not necessarily considered by the...
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