I85PREP
⌘ K
ACCA AA study materials
ACCA AA study resources

ACCA AA practice questions

One question at a time. Build your ACCA AA understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Audit framework and regulation

Which body is responsible for issuing International Standards on Auditing (ISAs)?

  1. The International Accounting Standards Board
  2. The International Federation of Accountants Council
  3. The International Auditing and Assurance Standards Board Correct answer.
  4. The International Ethics Standards Board for Accountants

Explanation

ISAs are developed and issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body supported by IFAC. IFAC itself hosts but does not write the auditing standards.

Question 2Audit framework and regulation

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with:

  1. the entity's own accounting policies
  2. the prior year's audited figures
  3. the applicable financial reporting framework Correct answer.
  4. the auditor's professional judgement

Explanation

An audit opinion addresses whether the financial statements give a true and fair view (or are presented fairly) in accordance with the applicable financial reporting framework. The framework provides the criteria against which the statements are evaluated.

Question 3Audit framework and regulation

Which of the following best describes the concept of 'reasonable assurance' in an audit?

  1. An absolute level of assurance obtained by testing every transaction
  2. A high but not absolute level of assurance that the financial statements are free from material misstatement Correct answer.
  3. A guarantee that the financial statements are free from all error
  4. A moderate level of assurance appropriate for limited assurance engagements

Explanation

Reasonable assurance is a high level of assurance, but it is not a guarantee, because of inherent limitations such as sampling, judgement and the nature of evidence. It relates specifically to freedom from material misstatement.

Question 4Audit framework and regulation

The auditor's responsibility to consider laws and regulations includes which of the following?

  1. Designing procedures to detect all fraud and error in the entity
  2. Obtaining sufficient appropriate evidence of compliance with laws and regulations generally recognised to have a direct effect on the financial statements Correct answer.
  3. Providing assurance on the entity's compliance with all laws and regulations
  4. Reporting every instance of non-compliance to the police

Explanation

ISA 250 requires the auditor to obtain evidence regarding compliance with laws and regulations that have a direct effect on the determination of material amounts and disclosures. For other laws, the auditor's responsibility is limited to inquiry and remaining alert.

Question 5Audit framework and regulation

Which of the following is a fundamental principle of the IESBA Code of Ethics?

  1. Profitability
  2. Confidentiality Correct answer.
  3. Efficiency
  4. Marketing

Explanation

The fundamental principles in the IESBA Code are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Confidentiality is one of these principles.

Question 6Audit framework and regulation

An auditor holds shares in a client company. Which threat to independence does this most directly create?

  1. Self-review threat
  2. Advocacy threat
  3. Self-interest threat Correct answer.
  4. Intimidation threat

Explanation

A financial interest in a client creates a self-interest threat because the auditor's own financial position could be affected by the audit outcome, potentially biasing judgement.

Question 7Audit framework and regulation

Which safeguard is most appropriate where a small audit firm's partner has a long-standing personal relationship with the client's finance director?

  1. Relying on management representations in place of substantive testing
  2. Increasing the audit fee to reflect the risk
  3. Removing the partner from the engagement and having the engagement quality review performed by another partner Correct answer.
  4. Reducing the extent of audit testing to limit interaction

Explanation

Where familiarity or other threats cannot be eliminated, safeguards such as rotating the engagement partner or having an independent partner review the work reduce the threat to an acceptable level. Removing the affected individual addresses the source of the threat directly.

Question 8Audit framework and regulation

Under ISA 200, which of the following is an inherent limitation of an audit?

  1. The use of sampling and the possibility of collusive fraud Correct answer.
  2. The requirement to obtain an engagement letter
  3. The need to comply with ethical requirements
  4. The obligation to document the audit file

Explanation

Inherent limitations include the use of sampling, the subjectivity of judgement, and the possibility that fraud or error may be concealed through collusion or forgery. These mean absolute assurance is unattainable.

Question 9Audit framework and regulation

Which of the following best describes the 'expectation gap' in auditing?

  1. The gap between interim and final audit procedures
  2. The gap between what the public expects auditors to do and what auditors are actually required to do Correct answer.
  3. The difference between the planned and actual audit timetable
  4. The difference between the audit fee charged and the cost incurred

Explanation

The expectation gap is the difference between the public's perception of the auditor's role and responsibilities and the reality of the audit function as defined by standards. It often concerns fraud detection and the meaning of an audit opinion.

Question 10Audit framework and regulation

Which of the following is a key element of corporate governance relevant to the external auditor?

  1. The audit committee providing independent oversight of the financial reporting process Correct answer.
  2. The marketing department setting the audit fee
  3. The board delegating all financial reporting decisions to the external auditor
  4. The internal audit function reporting solely to the finance director

Explanation

An effective audit committee, composed of independent non-executive directors, oversees financial reporting, internal control and the external audit relationship. This strengthens the auditor's independence and the quality of reporting.

Question 11Audit framework and regulation

The auditor is required to communicate significant deficiencies in internal control to:

  1. those charged with governance, in writing and on a timely basis Correct answer.
  2. all shareholders in the annual report
  3. the entity's customers
  4. the external regulator in all cases

Explanation

ISA 265 requires the auditor to communicate in writing significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis.

Question 12Audit framework and regulation

Which of the following is the primary purpose of the engagement letter?

  1. To confirm the auditor's acceptance of the appointment and the agreed terms of the engagement Correct answer.
  2. To serve as the auditor's report on the financial statements
  3. To guarantee that the audit will result in an unmodified opinion
  4. To provide the client with a list of audit tests to be performed

Explanation

An engagement letter documents the agreed terms of the audit engagement, including the respective responsibilities of management and the auditor, and confirms acceptance of the appointment. It helps avoid misunderstandings.

Question 13Audit framework and regulation

A company's audit committee wishes to strengthen auditor independence. Which action best achieves this?

  1. Allowing management to negotiate the audit fee directly
  2. Extending the audit engagement indefinitely without review
  3. Requiring the audit partner to be rotated periodically and reviewing non-audit services provided Correct answer.
  4. Having the finance director approve the audit plan

Explanation

Partner rotation and review of non-audit services reduce familiarity and self-interest threats, supporting independence. These are recognised safeguards under ethical requirements.

Question 14Audit framework and regulation

Which of the following describes the auditor's responsibility regarding 'other information' included in an annual report?

  1. The auditor has no responsibility for any information outside the financial statements
  2. The auditor must express an opinion on the other information
  3. The auditor must rewrite the other information to match the financial statements
  4. The auditor must read the other information and consider whether it is materially inconsistent with the financial statements Correct answer.

Explanation

ISA 720 requires the auditor to read the other information and consider whether there is a material inconsistency with the audited financial statements or a material misstatement of fact. The auditor does not express an opinion on the other information.

Question 15Audit framework and regulation

Which of the following is a self-review threat?

  1. The audit firm prepares the client's financial statements and then audits them Correct answer.
  2. The audit partner has a close family member who is the client's chief executive
  3. The audit firm promotes the client's shares to investors
  4. The audit firm is threatened with losing the engagement if it reports a breach

Explanation

A self-review threat arises when the auditor evaluates the results of previous work performed by the same firm, such as preparing the financial statements and then auditing them. The firm would effectively be reviewing its own output.

Question 16Audit framework and regulation

The audit committee of a listed company is considering whether to appoint the audit firm to provide tax advisory services. Which consideration is most relevant to independence?

  1. Whether the tax advice is delivered by a junior member of staff
  2. Whether the tax advice involves management decision-making or self-review Correct answer.
  3. Whether the tax advice will reduce the audit fee
  4. Whether the tax advice is profitable for the audit firm

Explanation

Non-audit services that involve management responsibilities or create a self-review threat are more likely to impair independence. The nature of the service, not its profitability, is the key consideration.

Question 17Audit framework and regulation

Which of the following best describes the role of internal audit compared with external audit?

  1. Internal audit provides an independent opinion on the financial statements
  2. Internal audit reports primarily to shareholders
  3. Internal audit evaluates and improves risk management, control and governance for the entity Correct answer.
  4. Internal audit is required by statute for all entities

Explanation

Internal audit is an independent, objective assurance and consulting activity that adds value by evaluating and improving risk management, control and governance processes. Its primary focus is on the entity's own needs, unlike the external audit's statutory opinion.

Question 18Audit framework and regulation

An auditor identifies that the client has a policy of recognising revenue before goods are dispatched. Under which category of threat to compliance with the fundamental principle of integrity does this fall?

  1. The auditor must consider whether the policy misstates the financial statements and address it through audit procedures and reporting Correct answer.
  2. The client's policy is a matter for management judgement and requires no auditor action
  3. The auditor should adjust the financial statements personally
  4. The auditor should immediately resign without further action

Explanation

When the auditor becomes aware of information indicating a possible misstatement, they must perform procedures to determine whether it is material and respond appropriately. This may involve discussion with management and, ultimately, modification of the opinion.

Question 19Audit framework and regulation

Which of the following is required for the auditor to accept an audit engagement?

  1. The auditor must obtain a guarantee of payment before commencing work
  2. The auditor must perform the audit without an engagement letter
  3. The auditor must consider whether the financial reporting framework is acceptable and whether the engagement is ethically permissible Correct answer.
  4. The auditor must agree to issue an unmodified opinion

Explanation

ISA 210 requires the auditor to determine whether the financial reporting framework is acceptable and to agree the terms of the engagement. Ethical acceptance considerations, such as competence and independence, must also be satisfied.

Question 20Audit framework and regulation

Which of the following statements about the auditor's report is correct?

  1. The auditor's report is addressed to the board of directors only
  2. The auditor's report replaces the financial statements
  3. The auditor's report is addressed to the shareholders or those charged with governance and contains the opinion Correct answer.
  4. The auditor's report must always contain a disclaimer of opinion

Explanation

The auditor's report is addressed to the shareholders (or equivalent) and includes the audit opinion, the basis for the opinion, and other required elements. It accompanies, but does not replace, the financial statements.

Question 21Audit framework and regulation

Which fundamental principle requires an auditor to avoid conduct that discredits the profession?

  1. Objectivity
  2. Confidentiality
  3. Professional behaviour Correct answer.
  4. Professional competence and due care

Explanation

Professional behaviour requires auditors to comply with relevant laws and avoid any conduct that discredits the profession. It governs how the auditor presents themselves and interacts with clients and the public.

Question 22Audit framework and regulation

An auditor discovers that a client has breached environmental legislation that does not directly affect the financial statements. What is the auditor's primary responsibility?

  1. Design audit procedures to detect all breaches of environmental law
  2. Remain alert during the audit and, if aware of a breach, consider the implications and communicate appropriately Correct answer.
  3. Ignore the matter because it does not affect the financial statements
  4. Report the breach to the environmental regulator immediately in all cases

Explanation

For laws and regulations not directly affecting the financial statements, the auditor's responsibility is limited to performing procedures to identify non-compliance and remaining alert. If a breach is identified, the auditor considers its implications and communicates as required.

Question 23Audit framework and regulation

Which of the following best explains why an auditor should retain documentation of the audit?

  1. To replace the need for an engagement letter
  2. To allow the client to prepare the financial statements
  3. To provide evidence that the audit was planned and performed in accordance with standards Correct answer.
  4. To serve as the auditor's opinion on the financial statements

Explanation

Adequate documentation provides evidence of the basis for the auditor's report and supports the conclusion that the audit was planned and performed in accordance with ISAs and applicable requirements. It is also important for quality control and future reviews.

Question 24Audit framework and regulation

A client asks the auditor to keep certain information confidential but a court order requires its disclosure. What should the auditor do?

  1. Disclose the information to all shareholders
  2. Refuse to disclose the information in all circumstances
  3. Publish the information on the firm's website
  4. Disclose the information as required by law, having considered the legal or professional obligation Correct answer.

Explanation

Confidentiality is not absolute; disclosure is permitted where required by law or where there is a professional duty or right to disclose. The auditor should consider legal advice and the appropriate recipients.

Question 25Audit framework and regulation

Which of the following is a limitation of the audit committee's effectiveness in a small owner-managed entity?

  1. The absence of independent non-executive directors reduces independent oversight Correct answer.
  2. The entity must issue an unmodified opinion
  3. The auditor is required to report to the tax authority
  4. The entity is exempt from audit

Explanation

In owner-managed entities, governance structures such as an independent audit committee are often absent, reducing independent oversight. The external auditor must adapt communications to those charged with governance accordingly.

Question 26Audit framework and regulation

Which of the following is the primary objective of an external audit of financial statements?

  1. To provide absolute assurance that the financial statements are free from material misstatement
  2. To express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Correct answer.
  3. To detect all instances of fraud and error in the financial statements
  4. To prepare the financial statements on behalf of management

Explanation

The primary objective of an external audit is to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. This provides reasonable, not absolute, assurance. The auditor does not guarantee detection of all fraud and error, nor is the auditor responsible for preparing the financial statements.

Question 27Audit framework and regulation

Which of the following is a fundamental principle of professional ethics that requires an auditor to be straightforward and honest in all professional and business relationships?

  1. Objectivity
  2. Confidentiality
  3. Integrity Correct answer.
  4. Professional competence and due care

Explanation

Integrity requires an auditor to be straightforward and honest in all professional and business relationships. Objectivity requires not compromising professional judgment, confidentiality requires respecting the confidentiality of information, and professional competence requires maintaining knowledge and skills.

Question 28Audit framework and regulation

An auditor is offered an expensive gift by a client's finance director during the audit. Which threat to independence does this most directly create?

  1. Intimidation threat
  2. Familiarity threat
  3. Self-interest threat Correct answer.
  4. Self-review threat

Explanation

A self-interest threat arises when an auditor could benefit from a financial or other interest in the client. Accepting an expensive gift creates a financial interest that may improperly influence the auditor's judgment. Self-review, familiarity, and intimidation threats relate to different circumstances.

Question 29Audit framework and regulation

Which of the following is a key component of an effective corporate governance framework for a listed company?

  1. The chief executive officer also serving as chairman of the board
  2. A board of directors dominated by executive directors
  3. An audit committee composed entirely of executive directors
  4. A majority of independent non-executive directors on the board Correct answer.

Explanation

Good corporate governance typically requires a board with a sufficient number of independent non-executive directors to provide effective oversight and challenge management. A board dominated by executives, an audit committee of executives, or a combined CEO/chairman role would weaken governance.

Question 30Audit framework and regulation

Which of the following best describes the role of the audit committee in relation to the external auditor?

  1. To guarantee the accuracy of the financial statements
  2. To perform the audit procedures on behalf of the external auditor
  3. To select and appoint the external auditor and oversee their work Correct answer.
  4. To prepare the financial statements for the external auditor to audit

Explanation

The audit committee is responsible for overseeing the external auditor's work, including recommending the appointment or removal of the auditor and reviewing the audit findings. It does not perform audit procedures, prepare financial statements, or guarantee accuracy.

Question 31Audit framework and regulation

An auditor is assessing whether to accept a new audit engagement. Which of the following factors is most relevant to the auditor's decision?

  1. The number of employees in the client's finance department
  2. The client's market share in its industry
  3. The auditor's competence and ability to perform the engagement Correct answer.
  4. The client's profitability in the previous year

Explanation

Before accepting an engagement, the auditor must consider whether they have the competence, capabilities, and resources to perform the engagement, and whether they can comply with ethical requirements. Client profitability, number of employees, and market share are not primary considerations for acceptance.

Question 32Audit framework and regulation

Which of the following is a self-review threat to an auditor's independence?

  1. An auditor is offered a discount on products by a client
  2. An auditor has a long-standing friendship with the client's CEO
  3. An auditor is threatened with litigation by the client
  4. An auditor prepares the financial statements for a client and then audits them Correct answer.

Explanation

A self-review threat occurs when the auditor evaluates their own previous work or the work of their firm. Preparing the financial statements and then auditing them creates such a threat because the auditor would be reviewing their own work. The other options describe self-interest, familiarity, and intimidation threats.

Question 33Audit framework and regulation

Which of the following best describes the purpose of an engagement letter?

  1. To confirm the auditor's independence from the client
  2. To serve as a substitute for the audit plan
  3. To provide a guarantee that the audit will detect all fraud
  4. To document the terms of the audit engagement and clarify the responsibilities of management and the auditor Correct answer.

Explanation

An engagement letter documents the agreed terms of the engagement, including the objective and scope of the audit, and clarifies the responsibilities of management and the auditor. It does not guarantee fraud detection, replace the audit plan, or confirm independence.

Question 34Audit framework and regulation

An auditor is a member of a team auditing a company where the auditor's spouse is the financial controller. Which threat to independence is most likely to arise?

  1. Self-interest threat
  2. Self-review threat
  3. Familiarity threat Correct answer.
  4. Intimidation threat

Explanation

A familiarity threat arises when the auditor has a close relationship with the client, such as a spouse being in a key financial position. This close relationship may impair the auditor's objectivity. Self-interest, self-review, and intimidation threats are less directly related to family relationships.

Question 35Audit framework and regulation

Which of the following is a safeguard that may reduce a threat to auditor independence created by a close business relationship with a client?

  1. Extending the audit deadline
  2. Reducing the amount of audit testing
  3. Increasing the audit fee
  4. Removing the individual from the audit team Correct answer.

Explanation

A common safeguard is to remove the individual with the close relationship from the audit team, thereby eliminating the threat. Increasing fees, extending deadlines, or reducing testing do not address the threat and may even exacerbate it.

Question 36Audit framework and regulation

Which of the following best describes the auditor's responsibility for detecting fraud in an audit of financial statements?

  1. The auditor has no responsibility for detecting fraud
  2. The auditor is responsible for preventing fraud by implementing internal controls
  3. The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error Correct answer.
  4. The auditor is responsible for detecting all fraud, regardless of materiality

Explanation

The auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor is not responsible for detecting all fraud, nor for preventing fraud, which is management's responsibility.

Question 37Audit framework and regulation

An auditor is auditing a company that has a policy of capitalizing costs that should be expensed. The auditor believes the policy is not in accordance with the financial reporting framework. This is an example of:

  1. A misstatement due to error Correct answer.
  2. A misstatement due to fraud
  3. A fraud risk factor
  4. A limitation of scope

Explanation

Applying an incorrect accounting policy that is not in accordance with the financial reporting framework is a misstatement due to error, as it is unintentional. Fraud involves intentional misstatement, and a limitation of scope occurs when the auditor cannot obtain sufficient appropriate evidence.

Question 38Audit framework and regulation

Which of the following is an inherent limitation of an audit that may prevent the auditor from obtaining absolute assurance?

  1. The auditor's lack of independence
  2. The use of professional judgment and sampling Correct answer.
  3. The auditor's failure to follow auditing standards
  4. The client's refusal to provide an engagement letter

Explanation

Inherent limitations of an audit include the use of professional judgment, the use of sampling, the nature of audit evidence, and the possibility of fraud being concealed. These limitations mean the auditor provides reasonable, not absolute, assurance. Lack of independence, refusal to provide an engagement letter, or failure to follow standards are not inherent limitations but rather ethical or compliance issues.

Question 39Audit framework and regulation

An auditor is evaluating the objectivity of the audit team. Which of the following situations is most likely to impair objectivity?

  1. The auditor's spouse is the client's chief financial officer Correct answer.
  2. A team member has a loan from the client bank on normal commercial terms
  3. The audit partner has been rotated off the engagement after five years
  4. The audit firm provides tax compliance services to the client

Explanation

Objectivity requires the auditor to be free from bias, conflict of interest, or undue influence. A close family relationship, such as a spouse being the CFO, creates a familiarity threat that is likely to impair objectivity. Rotation, a normal commercial loan, and tax compliance services (with safeguards) are less likely to impair objectivity.

Question 40Audit framework and regulation

An audit firm is considering whether to accept appointment as auditor of a new client. Under the firm's quality management procedures, which matter is most relevant when deciding whether the firm's existing fee quotation for the engagement is appropriate?

  1. The fee must be sufficient to allow the audit to be performed in accordance with applicable standards and legal requirements Correct answer.
  2. The fee must be agreed with the audit committee before the engagement letter is signed
  3. The fee must be set below the level charged by the predecessor auditor to secure the appointment
  4. The fee must be fixed as a percentage of the client's reported profit before tax

Explanation

A firm must be able to command the resources needed to perform the engagement to the required quality, so the fee must be sufficient to support an audit conducted in accordance with standards. Fee levels that are too low create a risk that necessary procedures are cut, which is a threat to audit quality. The fee is a commercial matter that does not change the auditor's obligations.

Question 41Planning and risk assessment

Which document sets out the auditor's understanding of the entity, the planned scope and timing of the audit, and the significant risks identified during planning?

  1. The subsequent events review schedule
  2. The engagement letter
  3. The management representation letter
  4. The audit strategy memorandum Correct answer.

Explanation

The audit strategy sets the scope, timing and direction of the audit and guides the development of the more detailed audit plan, including significant risks. The engagement letter records the terms of the engagement, while representation letters and subsequent events schedules are completion-stage documents.

Question 42Planning and risk assessment

At which stage of the audit is the auditor required to perform risk assessment procedures?

  1. Only when the client is listed
  2. Only if internal controls are found to be ineffective
  3. During the planning stage to provide a basis for identifying risks Correct answer.
  4. After the audit report has been issued

Explanation

Risk assessment procedures are performed during planning to obtain an understanding of the entity and its environment, including internal control, so that risks of material misstatement can be identified and assessed. They are not conditional on listing status or on control deficiencies.

Question 43Planning and risk assessment

Analytical procedures performed as risk assessment procedures are primarily used to:

  1. Eliminate the need for substantive testing of balances
  2. Provide sufficient appropriate evidence that the financial statements are free from error
  3. Confirm the reliability of the client's internal control system
  4. Identify unusual transactions or trends that may indicate risks of material misstatement Correct answer.

Explanation

At the planning stage, analytical procedures help the auditor identify inconsistencies, unusual fluctuations and areas of higher risk that require further attention. They are not by themselves sufficient evidence and do not remove the need for substantive work.

Question 44Planning and risk assessment

The auditor's assessment of materiality for the financial statements as a whole is best described as:

  1. A fixed percentage of revenue that must be applied to every client
  2. A figure agreed with management in the engagement letter
  3. A matter of professional judgement used to plan the nature, timing and extent of procedures Correct answer.
  4. An amount that can never be revised once set

Explanation

Materiality is a matter of professional judgement, and the auditor selects a benchmark and percentage appropriate to the entity. It is used to determine the scope of procedures and is revised during the audit if circumstances change.

Question 45Planning and risk assessment

Performance materiality is set at a level below overall materiality in order to:

  1. Provide a margin for the auditor's own fee estimate
  2. Satisfy the requirement to report all misstatements to those charged with governance
  3. Ensure that all misstatements, however trivial, are corrected
  4. Reduce to an appropriately low level the probability that uncorrected and undetected misstatements exceed materiality Correct answer.

Explanation

Performance materiality provides a buffer so that the aggregate of uncorrected and undetected misstatements does not exceed overall materiality. It does not require correction of trivial items or relate to fees.

Question 46Planning and risk assessment

Which of the following is an example of a risk assessment procedure?

  1. Sending a debtor a bank confirmation request
  2. Enquiring of management about changes in the business environment Correct answer.
  3. Observing the client's inventory count at year end
  4. Recalculating depreciation for the year

Explanation

Risk assessment procedures include enquiries of management and others, analytical procedures and observation and inspection. Enquiry about changes in the business environment is a planning procedure, while confirmations, count attendance and recalculation are substantive procedures.

Question 47Planning and risk assessment

The auditor is required to obtain an understanding of the entity's internal control. The primary purpose of this understanding is to:

  1. Identify and assess risks of material misstatement and design further audit procedures Correct answer.
  2. Determine the client's tax liability
  3. Replace the need to test controls
  4. Express an opinion on the effectiveness of internal control

Explanation

Understanding internal control helps the auditor identify types of potential misstatement and design the nature, timing and extent of further procedures. It does not involve expressing an opinion on controls in a standard audit.

Question 48Planning and risk assessment

The auditor identifies a risk of material misstatement that is assessed as significant. Which of the following is a required response?

  1. Reduce the extent of testing because the risk is already documented
  2. Withdraw from the engagement
  3. Perform substantive procedures specifically responsive to that risk Correct answer.
  4. Rely exclusively on analytical procedures at the assertion level

Explanation

For significant risks, the auditor must design and perform substantive procedures specifically responsive to the risk. Reliance on analytical procedures alone is not sufficient for significant risks.

Question 49Planning and risk assessment

Which of the following best describes the relationship between the audit strategy and the audit plan?

  1. The plan is prepared first and the strategy is derived from it
  2. The strategy is only required for group audits
  3. The two documents are identical in content
  4. The strategy is broader in scope and guides the development of the more detailed audit plan Correct answer.

Explanation

The audit strategy sets the overall scope, timing and direction, and the audit plan then sets out the detailed nature, timing and extent of procedures. The plan is developed from the strategy, not the reverse.

Question 50Planning and risk assessment

An auditor uses a benchmark of 5% of profit before tax to determine overall materiality. Profit before tax is volatile and close to breakeven. Which benchmark would be more appropriate?

  1. Use the prior year's profit before tax without adjustment
  2. Continue with profit before tax because it is the most common benchmark
  3. Use total assets or revenue, which are more stable for this entity Correct answer.
  4. Use a fixed amount of 1% of share capital

Explanation

Where profit is volatile or near breakeven, a more stable benchmark such as total assets, revenue or gross profit is generally more appropriate. Using the prior year's profit perpetuates the volatility problem.