The internal auditing department has been assigned to perform an audit of a division. Based on background review, the auditor knows the following about management policies:
Company policy is to rapidly promote divisional managers who show significant success. Thus, successful managers rarely stay at a division for more than three years.
A significant portion of division management's compensation comes in the form of bonuses based on the division's profitability.
The division was identified by senior management as a turnaround opportunity. The division is growing, but is not scheduled for a full audit by the external auditors this year. The division has been growing about 7% per year for the past three years and uses a standard cost system.
During the preliminary review, the auditor notes the following changes in financial data compared to the prior year:
Sales have increased by 10%.
Cost of goods sold has increased by 2%.
Inventory has increased by 15%.
Divisional net income has increased by 8%.
Which of the following items might alert the auditor to the possibility of fraud in the division?

• A. Inventory has increased by 15%
• B. The division is not scheduled for an external audit this year
• C. Sales have increased by 10%
• D. A significant portion of management's compensation is directly tied to reported net income of the division

John has been given the following draft figures for Kulran Ltd for the year ended 30 June 2011 to analyse. Materiality has been set at $35,000 and the finance director has told John in a planning meeting that there have been few changes in the year. Budgets were set at 2010 levels and there have been no major movements in non-current assets.
20112010
$$
Revenue3,497,2843,487,286
Cost of sales1,867,2942,008,967
Salaries467,900420,975
Which of the following is normally designed to detect possible material monetary errors in the above figures of financial statements?

• A. Analytical procedure
• B. Observation of a procedure
• C. Walk-through test
• D. Test of control

The auditor of Net plc carried out an external confirmation of receivables at the year end to confirm the accuracy of total trade receivables in the balance sheet at that date. Two of the replies to the confirmations disagreed the balance.
For each of these two disagreements, select whether the disagreement would be considered as a misstatement or would not be considered as a misstatement for the purposes of evaluating the accuracy of total trade receivables in the balance sheet at the year end.
(i)Word Ltd disagreed the balance because they had made a payment two days before the year end. The auditor has confirmed that the cheque cleared the bank two days after the year end.
(ii)Red Ltd disagreed the balance because their records did not contain invoice number SI 00942. This invoice and associated goods were despatched by Net plc on the last day of the year. The auditor has verified that the despatch note and cut-off with inventory are correct.

• A. (i) would be considered as misstatement and (ii) would not be considered as misstatement
• B. (i) would not be considered as misstatement and (ii) would be considered as misstatement
• C. Both (i) and (ii) would not be considered as misstatement
• D. Both (i) and (ii) would be considered as misstatement

As related parties are not independent of each other, many financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements.
Which of the following sources of information may not assist the auditor in identifying related parties?

• A. Enquiry of management
• B. Prior year working papers and disclosures
• C. Work on employee's personal tax
• D. Statutory books and returns

Dan Lawrence is the auditor of Nava Ltd. The directors are Bernard Russell, Pauli Morin and Cyndi Clifford. They are also the only shareholders owning 35% of total shares by Russell and Morin and the rest by Cyndi. Recent dispute between Russell and Morin arises that Dan believesmay be impossible to resolve. However, Morin requested Dan to provide her with details of all last year purchases through company's accounts by Russell and Cyndi. Dan Lawrence has all the company's books and records in his office.
What would be the most appropriate action by Dan Lawrence when Pauli Morin asked him to disclose company's accounts details?

• A. Arrange dispute resolution meeting and find a way to resolve the dispute between Russell and Morin.
• B. Provide with all the relevant information as was requested by Pauli Morin because she has the controlling interest in the company.
• C. Provide the relevant information before taking the consent from other directors.
• D. Decline the request of Pauli Morin even if she has the controlling interest in the company.