Nanyang Technological University ‘Nanyang Business School Assurance and Auditing (AC3101) Semester 2, 2014/15 Mid-term Test (60 minutes) Instructions to students: Please do not tum over the question paper until you are told to do so. This paper contains SEVEN (7) pages and two parts. Part I consists of one case-based question of 20 marks, representing 50% of total marks awarded. Part II consists of 20 multiple choice questions with a total of 20 marks, making 50% of total marks awarded. Answer all questions. This is a elose-book test Please use the answer booklet provided to answer the question in Part I, and the Scantron sheet provided to answer the multiple choice questions in Part Il. Write legibly in black/blue ink in the answer booklet and black 2B peneils on the Scantron sheet. The answer booklet and Scantron sheet must be retumed at the end of the test. Candidates may retain the question paper. Answers will be graded for content and appropriate presentation.jad, oleton 7 Part ? take apt te Se osc ta) AceTraders Pte Ltd (“AceTraders”) is an online broker, specializing in equity, options, futures and forex trading. All trading occurs on the company’s platform which allows online trai aeross all markets 24/7. The only day that no trading occurs is on 1 January. Customers first have to create an online account by registering all their details - name, NRIC, address, etc. They also have to create an unique user name and password. This creates an account with a “pending” status. The customers then have to submit hard copies of supporting documents and pay a deposit to activate their accounts before they are allowed to begin trading. The online trading platform is custom-built and highly specialized. Customers can place either mock trades (je. not real trade involving real money, rather a hypothetical trade under real market conditions to test a theory or practise to gain confidence) or real trades. The company earns a commission on every single real trade transacted and interest on customer's account balances overnight. The more that customers trade and the more money in their accounts overnight, the more revenue the company makes. AceTraders employs 5 of its own traders who are responsible for maintaining the company's own trading positions in the market to balance out the positions opened by customers. (For purposes of this case you do not need to consider any further information on this aspect of the business.) The accounting software is directly connected to the software running the trading platform. The system batch totals all trades made per customer per day, calculates the commission payable and updates that into each customer account where an automatic journal will deduct the amount payable from the individual’s current balance and post it into the company’s relevant income account. Commission fees per trade vary — customers with account balances over a set threshold ($500,000) receive discounts on their commission fees, as well as customers who trade more than a specified amount of trades per month (>1,500 trades a month). AceTraders also runs promotions for new customers signing up for the first time, who will receive discounts on their commission fees for the first few months of trading. All variations in commission fee have to be manually captured in the system. They are proposed by the sales staff responsible for new customers and ongoing customer relations, authorized by an accountant, updated by an IT staff member, and checked by another accountant who signs off the commission variation application form. The entire company employs $6 people in total; 6 work exclusively in IT. The server is located in a special cooled room within the Singapore office, with unlimited power supply and smoke detectors.Required (a) Identify four(4) inherent risks for AceTraders that you should consider in your audit planning and explain why you have identified them as such. (8 marks) () an how AceTraders’ IT environment will impact your audit approach. espn (11 aeblct Au dl folly, omgbahoued) (A marks) uae # yaad b ay veld (©) _ Describe three(3) application controls you would expect to see over the commission fee variations in your audit of AceTraders, other than those mentioned in the case. Vo Sqn paleo D Bleal lay dept B marks) vo babe cealle 4.0m gd Wee dest vb ar let (@) You read from newspaper reports that during the year there was a virus attack encountered in the computer systems of AceTraders. You understand from management that the virus crashed the client’s customer account module where client’s personal details were stored. Management assured you that the virus was identified and removed and the system repaired within 36 hours. Explain the impact the event would have on your audit, including the audit report. 4 (S marks) tl eet if (Total 20 marks) Hier 65 Blod cine MEM =) onesie! 1 ath a 2) gil on cheak ( pre of mee 9 vast) } " “nn cy ark sagt Hy yn Bet = pore tnse ss bese)Part IT \ Answer all the 20 multiple choice questions below by marking the correct options on the Scantron sheet provided, using black 2B pencils. Each question is worth | mark. e 1. An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry should: ey _— A. Make appropriate declaration to those charged with governance. B. Decrease his audit risk. é C. Consult other parties or sources to obtain relevant knowledge. ” D. Issue a disclaimer opinion. The definition of auditing refers to auditing as a "systematic process of objectively obtaining and evaluating evidence regarding assertions...". What is meant by "systematic process"? ‘K._ There should be a well-planned approach for obtaining and evaluating evidence. B. The auditor should systematically perform risk assessment followed by test of controls and then substantive procedures. C. Audit evidence must be obtained to support all assertions. D. There should be a logical connection between the purpose of the audit procedure and the assertion under consideration. =) Wee x 3. Which of the following is true with respect to the auditor's report? yg A. The report indicates that the client's financial statements were audited in accordance with applicable financial reporting framework b B. The report indicates that the client's financial statements were audited in accordance with applicable auditing standards, % C. The report indicates that the client's financial statements were audited in accordance with the auditor's best judgment D. — Allofthe above._/ fear aly io omen Coppa’ 4. An auditor does not need to maintain independence of the audit client when: A. The lack of independence does not influence his or her professional judgment. B. Both parties agree that the independence issue is not a problem C. The lack of independence is insignificant. D. None of the above—the auditor cannot lack independence. eee Which of the following is not an essential component of quality control? * "J A. Policies and procedures to ensure that firm personnel are actively engaged in monitoring the firm’s engagement risk. B. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards C. Policies to ensure that personnel maintain their independence in fact and in appearance. a D. Policies and procedures regarding the acceptance and continuance of client relationships. 4 410, ll. All of the following could require an emphasis of matter paragraph except for: A. The existence of significant related party transactions. y B. The lack of auditor independence. \ b C. Important events occurring subsequent to the balance sheet date. D. Material uncertainties disclosed in the notes to financial statements. x rote de bu YRS the wt ly A disclaimer of opinion may be issued for which of the following. 1. When a limitation on the scope of the audit has occurred II. When the auditor lacks independence ay eal val ILL When there is a departure from Singapore financial reporting standards "a A. Tand IL. B. Tand TI. Cc. and II. D. [land II Te dt Which of the following would professional judgment be/|i xpected from an auditor? A. Assessment of debtors’ impairment. B. Assessment of allocation of overheads to work-in-progress. C. Assessment of valuation of bank balances. < D. Determining materiality when planning the audit. When comparing the auditor's responsibility for considering material misstatements due to employee fraud and errors, the profession has placed the responsibly: Baral vetoed A. More on discovering errors than employee fraud. oe one pie B. More on discovering employee fraud than errors. = ce C. Equally on discovering errors and employee fraud.“ D. Only on discovering errors and not on employee fraud. fatement due to fraud is The auditor's evaluation of the likelihood of material normally done initially as a part of: —— A. Tests of controls. a B. Tests of transactions. aeuiits ; e C. Understanding the entity's internal control. A Heh D. The assessment of whether to accept the audit engagement. ./ Which of the following evidence would belTeast persuasive to support the auditor's opinion about marketable securities and other investments held by the company? A. _ Responses to auditor's questions by the president and controller regarding the investments account. B. Correspondence with a stockbroker regarding the quantity of client's investments held by the broker. « ~ A C. Minutes of the board of directors authorizing the purchase of stock as an investment. D. The auditor's count of marketable securities.just alla jan? 12. 1B. 14, 16. 7. Auditors may perform analytical procedures instead of tests of details in areas where they have identified as low risk because the: A. Analytical procedures are more reliable. B. Analytical procedures are considerably less expensive.“ b C. Analytical procedures are more persuasive.» D. Tests of details are more difficult to interpret. Which of the following statements regarding the appropriateness of evidence is correct? A. The eflectiveness of a clients internal control has no influence on the reliability of most types of evidence. 4 eneywcson hy B. Analytical procedures will be reliable evidence even if the client's internal oO» nt controls are weak. = C. One type of evidence is generally sufficient by itself to provide appropriate evidence. D. The reliability of evidence obtained through inspection is generally high../ é —~, Evidence is usually{more persuasive)for balance sheet accounts when it is obtained: A. Asclose to the balance sheet date as possible. / B. Only from transactions occurring during the financial period. « C. From various times throughout the financial period. D. From the time period when transactions in that account were most numerous during the financial period. Auditing standards specifically require auditors to identify as a presumed fraud risk in most audits. A. overstated assets ott B. understated liabilities RCPERS a G improper revenue recognition ii D. overstated expenses , ‘The preliminary audit strategy: A. Is set before the auditor understands the client's reasons for the audit. B. Guides the development of the audit plan. 4 C. Is determined after the engagement staffing is set. D. _ Is the detailed steps to be followed for the substantive audit tests... The audit team gathers information about a new client's business and industry in order to: A. Obtain an understanding of the clients internal control system for financial reporting. « B. Obtain an understanding of how economic events and transactions have an effect on the company's financial statements. / C. Formulate the audit strategy. D. Obtain information regarding whether the company is engaging in financial statement fraud.Which of the following statement is correct? A. Auditors should evaluate application controls before evaluating general controls. B. Auditors should evaluate application controls and general controls simultaneously. @ C. Auditors should evaluate general controls before evaluating application controls. / D. _ None of these statements is correct. 19. Which of the following statements is not correct? A. Materiality is a relative rather than an absolute concept. * B. The most important base used as the criterion for deciding materiality is net profit}, before tax. C. Qualitative factors as well as quantitative factors affect materiality. x D. Preliminary materiality may change during the engagement. 20. Duringlaudit planning, the auditor uses analytical procedures primarily to: A. Determine if the company's financial statements appear reasonable and are free of material misstatement. B. Determine the nature, extent, and timing of audit procedures. / C. Obtain evidence about particular assertions related to account balances or classes, of transactions. D. _ Assess whether company's financial statements are consistent with the auditor’ understanding of the entity. (Total 20 marks) - END OF PAPER -