AUDIT 411

1. Which statement is incorrect regarding the auditor's responsibilities and audit procedures
regarding related parties and transactions with such parties?
a. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence
regarding the identification and disclosure by management of related parties and the effect of related party
transactions that are material to the financial statements.
b. An audit cannot be expected to detect all related party transactions.
c. The auditor is responsible for the identification and disclosure of related parties and transactions with such
parties.
d. The auditor needs to have a level of knowledge of the entity's business and industry that will enable
identification of the events, transactions and practices that may have a material effect on the financial
statements.

2. When auditing related-party transactions, an auditor places primary emphasis on

3. After determining that a related-party transaction has, in fact, occurred, and auditor should
a. Add a separate paragraph to the auditor’s standard report to explain the transaction.
b. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.
c. Obtain an understanding of the business purpose of the transaction.
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction.

4. Which of the following least likely indicates the existence of previously unidentified related parties?
a. Transactions which have abnormal terms of trade., such as unusual prices, interest rates, guarantees, and
repayment terms.
b. Transactions which lack an apparent logical business reason for their occurrence.
c. Transactions in which substance does not differ from form.
d. Unrecorded transactions such as the receipt or provision of management services at no charge.

5. Which of the following statements best expresses the auditor’s responsibility with respect to events occurring
in the subsequent events period?
a. The auditor has no responsibility for events occurring in the subsequent period unless these events affect
transactions recorded on or before the balance sheet date.
b. The auditor’s responsibility is to determine that transactions recorded on or before the balance sheet date
actually occurred.
c. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed
procedures through the last day of field work.
d. The auditor is responsible for determining that a proper cutoff has been made and for performing a general
review of events occurring in the subsequent period.

6. Which of the following procedures should an auditor ordinarily perform regarding subsequent events?
a. Compare the latest available interim financial statements with the financial statements being audited.
b. Send second requests to the client’s customer who failed to respond to initial accounts receivable
confirmation requests.
c. Communicate material weaknesses in the internal control to the client’s audit committee.
d. Review the cutoff bank statements for several months after the year-end.

7. Which of the following is least likely a procedure that would be performed by the auditor near the auditor’s
report date?
a. Reading the minutes of the meetings of shareholders, the board of directors and audit executive committees
held throughout the audit year.
b. Reading the entity’s latest available interim financial statements.
c. Inquiring of the client’s legal counsel concerning litigations and claims.
d. Reviewing the procedures that management has established to ensure that subsequent events are identified.

8. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures
concerning audited financial statements, unless
a. Information, which existed at the report date and may affect the report, comes to the auditor’s attention.
b. The control environment changes after issuance of the report.
c. Information about an event that occurred after the end of field work comes to the auditor’s attention.
d. Final determinations or resolutions are made of contingencies that had been disclosed in the financial
statements.

9. Which of the following factors is inappropriately relevant to the management’s assessment of the going
concern assumption?
a. The degree of uncertainty associated with the outcome of an event or condition decreases significantly the
further into the future of judgment being made about the outcome of an event or condition.
b. Any judgment about the future is based on information available at the time at which the judgment is made.
c. The size and complexity of the entity, and the nature and conditions of its business affect the judgment
regarding the outcome of events or conditions.
d. Subsequent events can contradict a judgment which was reasonable at the time it was made.

10. Which of the following may not cast significant doubt about the going concern assumption of an entity.
a. The entity heavily used equity financing for investment in permanent assets.
b. Non-compliance with capital or other statutory requirements.
c. Pending legal or regulatory proceeding against the entity that may, if successful, result in claims that are
unlikely to be satisfied.
d. Changes in legislation or government policy expected to adversely affect the entity.

11. When events or conditions have been identified which may cast significant doubt on the entity’s ability to
continue as a going concern, the auditor should:
a. Review management’s plans for future actions based on its going concern assessment.
b. Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists
through carrying out procedures considered necessary, including considering the effect of any plans of
management and other mitigating factors.
c. Seek written representations from management regarding its plans for future action.
d. All of the above.

12. Which of the following proposed actions may mostly mitigate the going concern problem of an entity?
a. Rescheduling of loan payments.
b. More vigorous business expansion.
c. Acquiring asset replacement using short-term loans.
d. Increasing the amount of cash dividends to be paid.

13. The following are related to the auditor’s responsibility to assess the ability of the company to continue as a
going concern?
I. The auditor should consider the appropriateness of the management’s use of the going concern assumption in
the preparation of the financial statements.
II. The auditor is to consider whether there are material uncertainties about the entity’s ability to continue as a
going concern that needs to be disclosed in the financial statements.
III. The absence of any reference to going concern uncertainty in the auditor’s report is viewed as a guarantee as
to the entity’s ability to continue as a going concern.
Which of the foregoing inappropriately describe(s) the auditor’s responsibility?
a. I only b. I and II only c. II only d. III only

14. The auditor consider events and condition relating to the going concern assumption during the planning
stage in order to:
a. Help management do action that may mitigate its going concern problems.
b. Identifying the areas of accounting and internal control systems that need tests of control.
c. To have a timely discussion with management and a review of management’s plans and resolutions of any
identified going concern issues.
d. In order to shorten assessment period.

15. If adequate disclosure is not made by the entity regarding substantial doubt about its ability to continue as a
going concern, the auditor should include in his report specific reference to the substantial doubt as to ability of
the company to continue as a going concern and should express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an “except for” qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
16. If the auditor believes that the entity will not be able to continue as a going concern and the financial
statements are prepared on a going concern basis, the auditor’s report should include:
a. Unqualified opinion with explanatory paragraph. c. Adverse opinion.
b. Qualified opinion. d. Disclaimer of opinion.

17. If the auditor believes that management should extend its assessment but the latter refuses to do so, the
auditor should:
a. Rectify the lack of analysis by management.
b. Extend his audit procedures to obtain sufficiently appropriate evidence regarding the use of the going concern
assumption.
c. Emphasize this matter in the audit report.
d. Consider a modification of the report as a result of the limitation in the scope of the auditor’s work.

18. The management denied the auditor’s request that the management has to extend its assessment of its going
concern ability. However, the auditor’s other procedures are sufficient to assess the appropriateness of
management use of the going concern assumption in the preparation of the financial statements. he auditor
should issue:
a. Unqualified opinion c. Adverse opinion
b. Unqualified opinion with explanatory paragraph d. Disclaimer of opinion

19. To maximize independence, the director of internal auditing should report to the
a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.

20. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.