M4 Quiz 1

22/04/2021 KnowledgEquity
AAA M4 – MODULE QUIZ 1
Question 1  1 mark
Where there is uncertainty as to whether a company is able to continue as a going concern, the auditor’s concern is 
whether the company can continue for a reasonable period of time.
For this purpose, what does a r

easonable period of time
constitute in terms of ASA 570?
A. One year from the date of the audit report.

B. Six months from the date of the audit report.
C. One year from the date of the financial statements.
D. Six months from the date of the financial statements.
You selected A - This is correct

TOTAL MARKS : 1 MARKS OBTAINED 1
The first option is the correct answer as this is specifically required by ASA 570, para. 13.
Daffodil Limited is a company limited by guarantee. As at 30 June, its annual revenue was $225,000. Daffodil was 
recently awarded deductible gift recipient status.
Which of the following regarding Daffodil’s reporting framework requirements is correct?
A. Exempt from preparing the financial report and directors report.

B. Required to prepare the financial report which is to be audited.
C. Required to prepare the financial report with the option of a review rather than audit.
D. Prepare an audited financial report following the reduced disclosure regime requirements.
You selected C - This is correct

In accordance with ASRE 2415 and the Corporations Amendment (Corporate Reporting Reform) Act 2010, Daffodil would be
required to prepare a financial report but can elect for it to be either reviewed or audited. This is based on the second tier
category for entities that are a deductible gift recipient with revenues below $250,000. Normally, entities in the second tier
have annual revenues between $250,000 and $1 million. However, page 52 of the study guide refers to this exception for
deductible gift recipients, pushing those with revenues below $250,000 into the second tier.
https://knowledgequity.com.au/members/10580138/course/course-results/?action=68472 1/5
You are currently auditing Carp Limited. One of the major contentious issues relates to inventory where the company 
uses last in first out instead of first in first out. You have concluded that this will have a material impact on the current
year financial statements and is a contravention of generally accepted accounting principles.
Based upon the above information, what opinion should be issued?
A. Disclaimer.
B. Adverse opinion.
C. Qualified opinion.
D. Unqualified opinion.

The third option is the correct answer as a qualified opinion is the most appropriate since the matter is material only but not
pervasive. That is the matter can be confined to the inventory balance only and it does not render the entire set of financial
statements meaningless.
The auditor has determined that the Client Co. use of the going concern assumption is not appropriate due to an 
upcoming change in legislation that will significantly impact the business. Management insists that the going concern
basis is appropriate for the preparation of the financial statements because its budget shows the company remaining
profitable and with positive cash flows in the subsequent year. Management plans also indicate that the organisation’s
business model will change to accommodate the expected change in legislation related to the business. The auditor
questions the plans and assumptions used by management but management has refused the auditor’s request to re-
evaluate the assumptions made.
What course of action must the auditor follow?
A. The auditor must provide a qualified opinion and include an Other Matter paragraph in the auditor’s report
B. The auditor must provide an adverse opinion
C. The auditor must provide a qualified opinion but should not include an Other Matter paragraph in the auditor’s
report.
D. The auditor can issue an unqualified auditor’s opinion but must include a Material Uncertainty Related to Going
Concern paragraph explaining the circumstances in the auditor’s report.
You selected B - This is correct

The second option is correct.An adverse opinion should be issued if management has used the going concern assumption
but the auditor believes it is not appropriate. All other options are incorrect as none of them refer to issuing an adverse
opinion which is appropriate in these circumstances.
Question 5  0 marks
Which of the following situations would an auditor modify the audit report without changing the unmodified audit 
opinion? Assume that management has made full disclosure in the financial statements relating to each of the options
below.
A. Management are unable to estimate future events due to unreasonable estimates.

B. Significant doubt has arisen that the company will not be able to continue as a going concern.
C. Certain transactions could not be tested because accounting staff did not retain supporting documentation.
D. The auditor refused to provide an opinion on the balance sheet only and not on the rest of the financial statements.
You selected C - This is incorrect. The correct answer is B

TOTAL MARKS : 1 MARKS OBTAINED 0
The second option is the correct answer as it would result in an issue of an unmodified opinion. The matter will also likely be
discussed under the heading 'Material Uncertainty Related to Going Concern' paragraph. The first option is incorrect
because it would lead to either a qualified or adverse opinion being issued. The third option is incorrect as this is a scope
limitation resulting in a qualified opinion or disclaimer. The fourth option is incorrect because it implies that the auditor has a
"choice" of which elements of the financial statements he/she can provide assurance over. When performing an external
audit, the auditor does not have such a choice. The auditor can and must provide assurance over the financial statements as
a whole. The balance sheet is an integral component of the financial statements. It is not possible for the auditor to not
provide an opinion on the balance sheet component while providing assurance on other components.
Your audit client has not correctly valued investment properties in accordance with IAS 40 . The misstatement has 
resulted in an overstatement of current assets by 75%.
What type of audit opinion should you issue?
A. An unmodified opinion with emphasis of matter

B. An adverse opinion
C. A disclosure as a key audit matter
D. A qualified opinion
You selected D - This is incorrect. The correct answer is B

The second option is correct as the misstatement is both material and pervasive since the investment properties represent a
significant proportion of the assets of the company. Consequently an adverse opinion will be issued. The first option is
incorrect as an unmodified opinion can only be issued if the misstatement is not material. The third option is incorrect as
issues the result in a modification of the audit opinion are not discussed as key audit matters. The fourth option is incorrect
as the misstatement is not only material but also pervasive. A qualified opinion can only be issued if the misstatement is
material but not pervasive.
Which of the following procedures would not normally be carried out by the engagement quality control reviewer? 
A. Review and approval of the audit procedures to be performed
B. Review of selected audit documentation relating to significant judgements made
C. Review of the financial statements and the proposed auditor's report
D. Review of conclusions reached during the audit
You selected A - This is correct

The first option is correct because the second review partner will generally not review audit procedures that should be
performed. All the other options relate to evaluations that should be performed by the partner.
You are the auditor of Bulwinkle Limited. Due to circumstances beyond the client’s control, you are unable to verify 
the opening balances relating to inventory. You are of the opinion that this is material and pervasive to the inventory
amount and cost of sales amount.
What would be the most appropriate audit opinion?
A. Adverse.
B. Qualified.
C. Disclaimer.
D. Unqualified.

The third option is correct because the issue is both material and pervasive and it relates to a limitation of scope. The first
option is not correct since the matter is not a disagreement. The second option is not correct since the matter is both material
and pervasive and not just material. If the matter was material only, then it would be most appropriate to issue a qualified
opinion. The fourth option is incorrect since there is material and pervasive issue which affects fair presentation of the
financial statements.
Which of the following would most likely lead to an adverse opinion? 
A. Tests of controls confirm that the entity has a poor internal control structure which cannot be relied upon.
B. The client refuses to provide copies of board minutes of meetings despite repeated requests from the auditors.
C. The financial statements do not conform with the accounting standards in respect of employee entitlements.
D. Information comes to the auditor's attention that the entity will not be able to continue as a going concern in the
foreseeable future.
You selected D - This is correct

The fourth option is correct because the basis on which the financial statements are prepared is material and pervasive. If
management prepared the financial statements on the going concern basis when it is not a going concern, it would lead to
an adverse opinion. The first option is incorrect as the audit opinion relates to fair presentation of the financial statements
and not on the effectiveness of internal controls. The second option is incorrect as we do not know if this is material and
pervasive and thus it could be a qualified opinion and if it is material and pervasive then it would lead to a disclaimer of
opinion and not an adverse opinion. The third opinion is incorrect as we do not know if the matter is material and pervasive
and so a qualified opinion (if the matter is material only) could also be appropriate in this situation.
Which of the following statements is included in an independent auditor’s report? 
A. The financial statements are consistent with those of the prior period.
B. There have been no contraventions to the auditor independence requirements.
C. The auditor evaluated internal control and limited assurance was placed on it.
D. The disclosures made provide reasonable assurance that the financial statements are free of material
misstatement.
You selected C - This is incorrect. The correct answer is B

The second option is correct because this is specifically required in Australia by Section 307C of the Corporations Act. The
other three options are incorrect because they provide information which is not included in the audit report.
Total Marks 7 / 10

M4 Quiz 1

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M4 Quiz 1

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22/04/2021 KnowledgEquity

AAA M4 – MODULE QUIZ 1

For this purpose, what does a r

A. One year from the date of the audit report.

You selected A - This is correct

Which of the following regarding Daffodil’s reporting framework requirements is correct?

A. Exempt from preparing the financial report and directors report.

You selected C - This is correct

Based upon the above information, what opinion should be issued?

You selected C - This is correct

What course of action must the auditor follow?

You selected B - This is correct

A. Management are unable to estimate future events due to unreasonable estimates.

You selected C - This is incorrect. The correct answer is B

What type of audit opinion should you issue?

A. An unmodified opinion with emphasis of matter

You selected D - This is incorrect. The correct answer is B

You selected A - This is correct

What would be the most appropriate audit opinion?

You selected C - This is correct

You selected D - This is correct

You selected C - This is incorrect. The correct answer is B

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