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Test Bank for Auditing, 12th Edition John R. Taylor, Alan Millichamp
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Test Bank for Auditing, 12th Edition John R. Taylor, Alan Millichamp
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Multiple-Choice QuestionsPart 1
The Why of Auditing, Corporate Governance, the Statutory
Framework, Accounting Requirements of the Companies Act 2006
and Auditing and Accounting Standards and Guidelines
ANSWERS
1. Below are four statements regarding the appointment and regulation of auditors.
Identify whether each of these statements is true or false
For use with Auditing 12th edn, Alan Millichamp and John Taylor, ISBN 9781473778993
© Cengage Learning EMEA 2022
, True False
The role of a Recognised Supervisory Body in the UK includes √
investigating possible breaches of audit regulations.
The Brydon Report suggested that the purpose of an audit is to √
encourage and maintain confidence in the company and its
directors.
Recognised Qualifying Bodies are responsible for setting auditing √
standards and guidelines.
The Theory of Rational Expectations holds that the shareholders √
can expect the auditors to validate all the transactions by the
directors and uncover fraud in the company.
2. Corporate Governance is defined as ‘the system by which companies are directed and controlled.’ (UK
Corporate Governance Code, 2016). This involves several components all of which have a part to play in
proper governance.
Which of the following are not classed as part of an entity’s corporate governance?
(a) The Audit Committee
(b) The Auditors
(c) The Regulator
(d) The Shareholders
(e) The Public
Answer: (e)
3. Which of the following best describes the audit expectation gap?
(a) Auditors are performing in a manner which is at variance with the beliefs and desires of others
who are party to or interested in the audit.
(b) The expectation that the primary focus of an audit is detecting fraud.
(c) Audits are of a lower quality than shareholders expect given how much they cost.
(d) The level of assurance provided by an audit should be “almost certain”.
Answer: (a)
4. Platypus Ltd is a family company with a turnover this year of £12m, up from last year’s figure of
£9.8m.
For use with Auditing 12th edn, Alan Millichamp and John Taylor, ISBN 9781473778993
© Cengage Learning EMEA 2022
,It is wholly owned and run by two brothers who are the directors and it employs 20 people. The
company’s net assets total £6m consisting mostly of machinery, land, agricultural buildings in which the
equipment is stored and a small office and parts store.
The directors are not sure about their status as regards an audit. Advice they have been given ranges
from:
(a) As a small family company with no outside shareholders they do not need an audit, but they
could choose to have one.
(b) It is a good idea to have an audit in any case as it adds credibility to the figures when they are
being looked at by the bank and the taxman.
(c) They must have an audit by law.
(d) As they are both involved in managing the business and they own all of it, an audit is pointless
and will not benefit anyone.
Which of these statements is true?
Answer: (c)
5. Which of the following is NOT a reason provided as to why the chairman and chief executive of a
company should not be the same person?
(a) Both roles require significant time commitments that would make it difficult for one person to
be effective at both.
(b) The chairman, as a member of the board of directors, is responsible for the appointment,
remuneration and performance of the chief executive.
(c) Combining the chairman and the chief executive gives one person considerable power over
both the strategic direction and the operations of the company.
(d) Because the chief executive and chairman sit on the board of directors this would give one
person two votes at the board.
Answer: (d)
6. Which of the following is NOT a responsibility of the board of directors in accordance with the main
principles of The UK Corporate Governance Code?
(a) The board is responsible for determining the principal risks it is willing to take in achieving its
strategic objectives and enacting appropriate risk management.
(b) The board should seek out the views of major shareholders.
(c) The board should oversee the operational activities of an organization to ensure that they are
undertaken in an efficient and effective manner.
(d) The board’s roles include challenging and contributing to strategy development.
For use with Auditing 12th edn, Alan Millichamp and John Taylor, ISBN 9781473778993
© Cengage Learning EMEA 2022
, Answer: (c)
7. Below are four statements regarding the appointment and regulation of auditors.
Identify whether each of these statements is true or false.
True False
The work of the auditing profession in the UK is governed √
primarily by the Companies Act 2006.
The Financial Reporting Council has the power to discipline √
auditors who perform their work poorly.
Auditors do not have to have absolute assurance that the √
figures they audit are correct.
Only accountants who are qualified with the Institute of √
Chartered Accountants in England & Wales or the Association of
Chartered Certified Accountants can become Registered
Auditors.
8. Auditors have several rights to enable them to carry out their duties. Which of the following is not an
auditor’s right?
(a) Right to all explanations and information they consider necessary
(b) Right to access all books and records of the company
(c) Right to access company information held by third parties
(d) Right to attend any meeting of the company
Answer: (d) The auditors have right to attend any general meeting of the company i.e. any
shareholders meeting.
9. The UK Corporate Governance Code is described as taking a narrow concept of corporate governance.
Which of the following best describes this concept?
(a) Corporate governance focuses on the relationship between directly affected stakeholder
groups.
(b) Assessing corporate governance is the responsibility of the auditor.
(c) Corporate governance focuses on ensuring the corporation acts in the best interests of the
shareholders.
(d) Corporate governance is focussed on ensuring that the corporation follows the appropriate laws
and regulations.
For use with Auditing 12th edn, Alan Millichamp and John Taylor, ISBN 9781473778993
© Cengage Learning EMEA 2022
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