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CPA Australia Advanced Audit and Assurance study materials
CPA Australia Advanced Audit and Assurance study resources

CPA Australia Advanced Audit and Assurance practice questions

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Question 1Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 700, which element must the auditor's report contain to identify the financial reporting framework applied in preparing the financial statements?

  1. An opinion section that names the applicable financial reporting framework Correct answer.
  2. An emphasis of matter paragraph referring to the framework
  3. A management responsibility section that lists internal controls tested
  4. A key audit matters section describing significant risks

Explanation

ASA 700 requires the opinion section to identify the entity whose financial statements are audited and to state the title of each statement, and to identify the financial reporting framework applied. The framework identification belongs in the opinion, not in key audit matters or an emphasis of matter.

Question 2Advanced audit and assurance (domain structure not enumerated in source)

An auditor concludes that a material uncertainty related to going concern exists and that the disclosures in the financial statements are adequate. How should the auditor report this under ASA 570?

  1. Include a Material Uncertainty Related to Going Concern section under the heading required by the standard Correct answer.
  2. Disclose the uncertainty only in the key audit matters section
  3. Issue a qualified opinion because the uncertainty is material
  4. Issue an adverse opinion because the entity may not continue

Explanation

Where the going concern basis is appropriate and the related disclosures are adequate but a material uncertainty exists, ASA 570 requires a separate section headed 'Material Uncertainty Related to Going Concern'. The opinion remains unmodified in that circumstance.

Question 3Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 701, which entities are required to communicate key audit matters in the auditor's report?

  1. Only entities with a public interest entity audit committee
  2. Listed entities, and other entities where the auditor is required or chooses to do so Correct answer.
  3. All entities subject to statutory audit regardless of listing status
  4. Only entities operating in regulated financial services industries

Explanation

ASA 701 applies to audits of complete sets of general purpose financial statements of listed entities, and may be applied voluntarily or by regulation to other entities. It is not triggered by listing status alone for unlisted entities.

Question 4Advanced audit and assurance (domain structure not enumerated in source)

An auditor identifies a fraud risk relating to revenue recognition and management override of controls. Which response is required by ASA 240?

  1. Report the fraud risk to the regulator before completing fieldwork
  2. Rely solely on management representations about the fraud risk
  3. Design and perform procedures responsive to the assessed risk, including journal entry testing Correct answer.
  4. Treat the entire population of revenue transactions as immaterial and disclaim an opinion

Explanation

ASA 240 requires the auditor to treat management override as a significant risk and to design and perform procedures responsive to assessed fraud risks, including testing journal entries and other adjustments. Management representations alone are insufficient audit evidence.

Question 5Advanced audit and assurance (domain structure not enumerated in source)

Which statement correctly describes the auditor's responsibility for detecting material misstatements arising from fraud under ASA 240?

  1. 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.
  2. The auditor may rely entirely on the entity's internal controls to detect fraud
  3. The auditor guarantees detection of all fraud regardless of materiality
  4. The auditor is responsible only for fraud involving management, not employees

Explanation

The auditor obtains reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor does not guarantee detection, and the inherent limitations of an audit mean some material misstatements may remain undetected.

Question 6Advanced audit and assurance (domain structure not enumerated in source)

An auditor plans to use the work of an auditor's expert in valuing a complex derivative. Which matter should the auditor evaluate under ASA 620?

  1. The expert's competence, capabilities and objectivity, and the adequacy of the expert's work as audit evidence Correct answer.
  2. The expert's fee arrangement with the audit firm
  3. The expert's membership of the client's board of directors
  4. Whether the expert has audited the entity in prior years

Explanation

ASA 620 requires the auditor to evaluate the competence, capabilities and objectivity of the auditor's expert and to obtain an understanding of the expert's field of expertise. The auditor must also evaluate whether the expert's work is adequate for audit purposes.

Question 7Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 600, which matter is the group engagement partner required to communicate to component auditors?

  1. The component auditor's own fee arrangements with the component
  2. The group engagement team's assessment of component performance materiality only
  3. The component auditor's internal quality review results
  4. The group audit instructions, including the work to be performed and any ethical requirements relevant to the group audit Correct answer.

Explanation

ASA 600 requires the group engagement team to communicate its requirements to component auditors, including the work to be performed, the use to be made of their work, and relevant ethical and independence requirements. This ensures the component work meets the group audit's needs.

Question 8Advanced audit and assurance (domain structure not enumerated in source)

Which of the following best describes the purpose of the engagement quality reviewer under ASQM 2?

  1. To approve the audit fee and engagement letter terms
  2. To provide an objective evaluation of the significant judgments made and conclusions reached by the engagement team Correct answer.
  3. To perform the audit procedures for the most significant risk areas
  4. To supervise the engagement team's daily fieldwork

Explanation

The engagement quality review is an objective evaluation of the significant judgments made and conclusions reached by the engagement team before the report is issued. It is not a substitute for the engagement partner's responsibility or for performing audit procedures.

Question 9Advanced audit and assurance (domain structure not enumerated in source)

An auditor discovers that the client has changed an accounting policy without adequate disclosure, and the effect is material but not pervasive. What opinion is appropriate under ASA 705?

  1. Unmodified opinion with an other matter paragraph
  2. Disclaimer of opinion
  3. Adverse opinion
  4. Qualified opinion Correct answer.

Explanation

A material misstatement that is material but not pervasive results in a qualified opinion under ASA 705. An adverse opinion is used when the misstatement is both material and pervasive, and a disclaimer applies to inability to obtain evidence that is material and pervasive.

Question 10Advanced audit and assurance (domain structure not enumerated in source)

Which condition would lead an auditor to disclaim an opinion under ASA 705?

  1. The financial statements contain a material but not pervasive misstatement
  2. The auditor is unable to obtain sufficient appropriate audit evidence, and the possible effects are material and pervasive Correct answer.
  3. The entity has disclosed a material uncertainty adequately
  4. The auditor disagrees with a management estimate that is immaterial

Explanation

A disclaimer is issued when the auditor is unable to obtain sufficient appropriate audit evidence and the possible effects of undetected misstatements could be both material and pervasive. Inability to obtain evidence is the key trigger, not disagreement with management.

Question 11Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 560, which procedure should the auditor perform to identify subsequent events up to the date of the auditor's report?

  1. Obtain an understanding of management's procedures for identifying subsequent events and inquire of management Correct answer.
  2. Recalculate all depreciation charges for the period
  3. Confirm all accounts receivable balances directly with customers
  4. Review the entity's budget for the following year

Explanation

ASA 560 requires the auditor to obtain an understanding of management's procedures for identifying subsequent events and to inquire of management and those charged with governance. The auditor also considers whether other information obtained indicates events requiring adjustment or disclosure.

Question 12Advanced audit and assurance (domain structure not enumerated in source)

An auditor identifies that a client has recognised revenue for goods shipped after year-end. Which assertion is most directly affected?

  1. Presentation
  2. Rights and obligations
  3. Cut-off Correct answer.
  4. Classification

Explanation

Recognising revenue for goods shipped after the reporting period affects cut-off, which concerns whether transactions are recorded in the correct accounting period. Cut-off is an assertion within the period-end recording area.

Question 13Advanced audit and assurance (domain structure not enumerated in source)

Which factor is most relevant to the auditor's assessment of the risk of material misstatement at the financial statement level?

  1. The design of a single control over cash receipts
  2. The number of sales invoices issued during the period
  3. The specific pricing of individual inventory items
  4. The existence of a complex regulatory environment affecting the entity Correct answer.

Explanation

Risks at the financial statement level relate pervasively to the financial statements as a whole and often arise from the entity's environment, such as a complex regulatory regime or going concern issues. Transaction-level matters such as invoice volume or individual control design relate to assertion-level risks.

Question 14Advanced audit and assurance (domain structure not enumerated in source)

An auditor plans to test controls over the approval of purchase orders. Which approach provides evidence about the operating effectiveness of the control?

  1. Reading the entity's purchasing policy manual
  2. Inquiring of the purchasing manager about the control's design
  3. Inspecting evidence of approval on a sample of purchase orders and reperforming the approval test Correct answer.
  4. Reviewing the prior year's audit file for the same control

Explanation

Testing operating effectiveness requires evidence that the control operated as designed throughout the period, such as inspecting approval evidence on a sample and reperforming the control. Inquiry and policy review alone provide little evidence of operating effectiveness.

Question 15Advanced audit and assurance (domain structure not enumerated in source)

Which sampling approach is appropriate when the auditor expects a low rate of deviation from a control and wants a statistical conclusion about the deviation rate?

  1. Attribute sampling Correct answer.
  2. Haphazard selection with no evaluation
  3. Judgmental selection of the largest items only
  4. Classical variables sampling for monetary misstatement

Explanation

Attribute sampling is used to estimate the rate of deviation from a prescribed control and supports a statistical conclusion about that rate. Variables sampling is directed at monetary misstatement rather than control deviations.

Question 16Advanced audit and assurance (domain structure not enumerated in source)

Which matter would most likely be identified as a significant risk under ASA 315?

  1. Routine processing of low-value utility payments
  2. A complex related-party transaction with unusual terms Correct answer.
  3. Recurring monthly depreciation of office furniture
  4. Standard payroll processing with no changes during the year

Explanation

Significant risks often relate to non-routine or complex transactions, judgemental matters, or related-party transactions outside the normal course of business. Routine, low-value and standardised transactions are less likely to be assessed as significant risks.

Question 17Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating the work of an internal audit function to determine whether it can be used to reduce the extent of external audit procedures. Which matter is most relevant under ASA 610?

  1. The number of internal audit staff located at head office
  2. The internal audit budget relative to the external audit fee
  3. The internal auditors' objectivity and technical competence, and the systematic and disciplined approach applied Correct answer.
  4. The internal audit function's reporting line to the CFO only

Explanation

ASA 610 requires the external auditor to evaluate the internal audit function's objectivity, technical competence, and application of a systematic and disciplined approach, including quality control. Only after that evaluation can the auditor consider using its work.

Question 18Advanced audit and assurance (domain structure not enumerated in source)

Which of the following is an example of an appropriate substantive analytical procedure for a stable, high-volume revenue stream?

  1. Developing an expectation of revenue using prior periods and industry data and comparing it with recorded revenue Correct answer.
  2. Inspecting the entity's revenue recognition policy
  3. Vouching every sales invoice to the dispatch note
  4. Sending confirmations to all customers with balances over a threshold

Explanation

Substantive analytical procedures involve developing an expectation and comparing it with recorded amounts, and are most effective for large volumes of predictable transactions. Confirmation and vouching are tests of detail rather than analytical procedures.

Question 19Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 550, when the auditor identifies related party transactions that are outside the normal course of business, what should the auditor do?

  1. Obtain an understanding of the business rationale and inspect underlying agreements and approvals Correct answer.
  2. Exclude the transactions from the audit scope as immaterial
  3. Rely on management's representation that the transactions are at arm's length
  4. Assume the transactions are fraudulent and report to the regulator

Explanation

ASA 550 requires the auditor to obtain an understanding of the business rationale for significant related party transactions outside the normal course of business. The auditor also inspects underlying contracts and evaluates whether the transactions were properly authorised and disclosed.

Question 20Advanced audit and assurance (domain structure not enumerated in source)

Which statement best describes the auditor's use of professional scepticism under ASA 200?

  1. Relying primarily on the entity's internal controls without testing
  2. Maintaining a questioning mind and being alert to conditions indicating possible misstatement due to error or fraud Correct answer.
  3. Accepting management explanations unless contradicted by written evidence
  4. Assuming management is dishonest in all matters

Explanation

Professional scepticism involves a questioning mind, being alert to conditions that may indicate possible misstatement, and critically evaluating audit evidence. It does not require assuming dishonesty or accepting explanations without corroboration.

Question 21Advanced audit and assurance (domain structure not enumerated in source)

An auditor is considering whether to accept a new engagement. Which matter is most relevant to the client acceptance decision under ASQM 1?

  1. The client's preference for a specific audit software
  2. The integrity of the client's principal owners and key management Correct answer.
  3. The length of the engagement letter
  4. The number of audit staff available in the office

Explanation

Client acceptance decisions under ASQM 1 consider the integrity and ethical values of the client's principal owners and key management, and whether the firm can perform the engagement competently and ethically. Resource availability is relevant but integrity is a core acceptance consideration.

Question 22Advanced audit and assurance (domain structure not enumerated in source)

Which of the following would most likely indicate a heightened risk of material misstatement due to fraud in revenue recognition?

  1. Sales incentives tied to meeting period-end revenue targets Correct answer.
  2. Segregation of duties between dispatch and invoicing
  3. Monthly reconciliation of the sales ledger to the general ledger
  4. A stable pricing policy unchanged for several years

Explanation

Pressure to meet revenue targets, particularly where remuneration is linked to reported revenue, increases the risk of fraudulent revenue recognition through premature or fictitious sales. Stable pricing and effective reconciliations and segregation reduce risk.

Question 23Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 720, which action should the auditor take if a material inconsistency is identified between the other information and the audited financial statements?

  1. Disclose the inconsistency in the auditor's report without discussing it with management
  2. Ignore the inconsistency because other information is outside the audit scope
  3. Immediately resign from the engagement
  4. Discuss the matter with management and, if necessary, request correction and consider the effect on the auditor's report Correct answer.

Explanation

ASA 720 requires the auditor to discuss material inconsistencies with management and request correction where needed. If uncorrected, the auditor considers the effect on the auditor's report, including whether to describe the matter.

Question 24Advanced audit and assurance (domain structure not enumerated in source)

An auditor has obtained sufficient appropriate evidence but concludes that the going concern basis of accounting is inappropriate. What opinion should be issued under ASA 570?

  1. Qualified opinion limited to disclosure
  2. Adverse opinion Correct answer.
  3. Unmodified opinion with a going concern paragraph
  4. Disclaimer of opinion

Explanation

If the financial statements have been prepared on a going concern basis but the auditor concludes that basis is inappropriate, the resulting misstatement is material and pervasive, so an adverse opinion is issued. A material uncertainty with adequate disclosure leads to a separate section, not an adverse opinion.

Question 25Advanced audit and assurance (domain structure not enumerated in source)

Which circumstance requires the auditor to include an Emphasis of Matter paragraph rather than a Key Audit Matter description?

  1. A significant risk identified during the audit that required substantial auditor judgement
  2. A material uncertainty relating to a litigation outcome that is adequately disclosed and fundamental to users' understanding Correct answer.
  3. A material misstatement that has been corrected by management
  4. A change in the entity's accounting policy for leases

Explanation

An Emphasis of Matter paragraph is used where a matter is appropriately presented or disclosed and is fundamental to users' understanding, such as a significant uncertainty. Key audit matters describe matters of most significance in the audit, including significant risks, but do not replace an emphasis of matter for fundamental uncertainties.

Question 26Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 701, which matter qualifies as a Key Audit Matter for the auditor's report?

  1. A matter that was communicated to the predecessor auditor before the engagement was accepted
  2. A matter that the client's management has voluntarily disclosed in the notes to the financial statements
  3. A matter that was of most significance in the audit and was selected from matters communicated with those charged with governance Correct answer.
  4. A routine reconciliation difference that was resolved during the audit with no adjustment required

Explanation

ASA 701 defines Key Audit Matters as those matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements, selected from matters communicated with those charged with governance. The determination is the auditor's, not management's, and it requires significance in the audit rather than merely being disclosed or resolved trivially.

Question 27Advanced audit and assurance (domain structure not enumerated in source)

An auditor is documenting the audit strategy for a new engagement. Which element belongs to the audit strategy rather than the detailed audit plan?

  1. The characteristics of the engagement that define its scope and the reporting objectives Correct answer.
  2. The names of the staff assigned to perform each substantive procedure
  3. The nature, timing and extent of planned risk assessment procedures for each significant account balance
  4. The specific tests of details designed for each class of transactions

Explanation

Under ASA 300, the audit strategy sets the scope, timing and direction of the audit and guides the development of the audit plan; the characteristics of the engagement and reporting objectives are core strategy elements. Detailed procedures, tests of details and staff assignments belong to the more granular audit plan.

Question 28Advanced audit and assurance (domain structure not enumerated in source)

During an audit of a manufacturer, the auditor obtains a bank confirmation directly from the bank and reviews the reply. Which assertion does this procedure most directly address for the bank balance?

  1. Valuation of inventory on hand
  2. Rights and obligations relating to leased plant
  3. Completeness of disclosed contingent liabilities
  4. Existence of the recorded cash balance Correct answer.

Explanation

A direct confirmation from the bank provides external evidence that the recorded cash balance exists at the reporting date. It is primarily an existence test for the bank balance, although the reply may also provide information relevant to other matters such as loan terms and security.

Question 29Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing the reliability of audit evidence. Which source generally provides the most reliable evidence?

  1. A photocopy of an invoice retained in the client's filing system
  2. An internally generated sales report reviewed only by the sales manager
  3. Documents obtained directly from an independent third party Correct answer.
  4. A verbal representation made by the financial controller during the closing meeting

Explanation

ASA 500 ranks evidence obtained directly from independent external sources as more reliable than internal evidence, and documentary evidence as more reliable than oral representations. Original external documents therefore generally outrank internal reports and verbal statements.

Question 30Advanced audit and assurance (domain structure not enumerated in source)

An auditor is designing tests of controls over the credit approval process. Which procedure provides evidence about the operating effectiveness of the control?

  1. Reviewing the aged receivables report for balances overdue beyond 90 days
  2. Inspecting the credit policy manual to confirm that a policy exists
  3. Reperforming a sample of credit approvals and inspecting evidence of authorisation Correct answer.
  4. Inquiring of the credit manager whether approvals are performed consistently

Explanation

Testing operating effectiveness requires evidence that the control operated as designed throughout the period, which is obtained by reperforming the control or inspecting evidence of authorisation on a sample of transactions. Inquiry alone and inspection of a policy manual address design and implementation rather than consistent operation.

Question 31Advanced audit and assurance (domain structure not enumerated in source)

An auditor identifies a fraud risk factor in the payroll function. Under ASA 240, what is the auditor's primary responsibility in relation to fraud?

  1. To guarantee that no fraud of any amount has occurred during the period
  2. To obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error Correct answer.
  3. To design and implement the entity's internal controls to prevent payroll fraud
  4. To report every suspected fraud directly to the Australian Securities and Investments Commission

Explanation

ASA 240 confirms that the auditor's objective is reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error; the auditor is not responsible for preventing fraud or guaranteeing its absence. Prevention and detection of fraud remain responsibilities of those charged with governance and management.

Question 32Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing the appropriateness of the going concern assumption. Which condition most clearly indicates a material uncertainty that may cast significant doubt on the entity's ability to continue?

  1. The entity has net current liabilities and its major lender has indicated it will not renew the facility on maturity Correct answer.
  2. The entity has changed its depreciation method for plant and equipment
  3. The entity reported a profit in the current year after three loss-making years
  4. The entity has increased its dividend payout ratio relative to the prior year

Explanation

ASA 570 identifies indicators such as net current liabilities and the withdrawal or non-renewal of financing as events that may cast significant doubt on the going concern assumption. These conditions affect the entity's ability to meet obligations as they fall due.

Question 33Advanced audit and assurance (domain structure not enumerated in source)

Under ASA 580, which statement best describes the purpose of obtaining written representations from management?

  1. To provide the primary evidence supporting the valuation of complex financial instruments
  2. To replace substantive procedures that the auditor was unable to perform
  3. To confirm that management acknowledges responsibility for the financial statements and has provided all relevant information Correct answer.
  4. To transfer to management the auditor's responsibility for detecting material misstatement

Explanation

ASA 580 requires written representations to confirm that management has fulfilled its responsibilities for preparing the financial statements and has provided the auditor with all relevant information and access. They support, but never replace, other audit evidence.

Question 34Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating the sufficiency of audit evidence obtained for a significant account balance. Which action best describes the auditor's response when evidence is insufficient?

  1. Issue an unmodified opinion because sufficient evidence was planned at the strategy stage
  2. Perform additional procedures to obtain further evidence before concluding on the balance Correct answer.
  3. Rely on the prior year's working papers without updating the evidence
  4. Reduce the assessed risk of material misstatement to match the evidence obtained

Explanation

Sufficiency is a matter of professional judgement, and where evidence is insufficient the auditor must perform additional procedures to obtain more evidence. Evidence cannot be assumed from planning, prior years or by adjusting the risk assessment to fit the evidence available.

Question 35Advanced audit and assurance (domain structure not enumerated in source)

A component auditor reports a material misstatement in a component's inventory valuation to the group engagement team. Under ASA 600, what should the group engagement team do first?

  1. Report the matter to the group's regulator without further evaluation
  2. Immediately disclaim the group audit opinion because a component misstatement exists
  3. Evaluate the misstatement and communicate with the component auditor to understand and resolve the matter Correct answer.
  4. Ignore the matter because the component is not significant to the group

Explanation

Under ASA 600 the group engagement team evaluates the findings of component auditors and communicates with them to resolve matters affecting the group financial statements. A misstatement is assessed for its effect on the group, not treated as automatic grounds for disclaimer or ignored.

Question 36Advanced audit and assurance (domain structure not enumerated in source)

An auditor is using statistical sampling to test the occurrence of sales invoices. Which combination best supports a conclusion that the population is not materially misstated?

  1. A random sample where projected misstatement plus tolerable misstatement exceeds materiality
  2. A random sample where the upper misstatement limit is below tolerable misstatement Correct answer.
  3. A sample selected haphazardly with no projection of misstatement to the population
  4. A sample of the largest invoices only, with results extrapolated to all invoices

Explanation

In statistical sampling the auditor projects misstatement and compares the upper misstatement limit with tolerable misstatement; if the limit is below tolerable misstatement the population can be accepted. Haphazard selection without projection and sampling only large items do not support a statistical conclusion about the population.

Question 37Advanced audit and assurance (domain structure not enumerated in source)

An auditor identifies that a client has classified a short-term loan as non-current. Which assertion is most directly affected by this error?

  1. Occurrence of interest expense
  2. Classification and presentation of the loan liability Correct answer.
  3. Existence of the loan liability
  4. Completeness of finance cost accruals

Explanation

Presenting a loan falling due within twelve months as non-current is a classification and presentation error. Existence, occurrence and completeness are not the assertions directly breached because the liability and its costs are recorded.

Question 38Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing control risk over cash receipts. Which circumstance would most likely lead the auditor to conclude that controls cannot be relied upon?

  1. The control is documented in a detailed procedures manual
  2. The control is subject to periodic monitoring by internal audit
  3. The control operates over a high volume of routine transactions
  4. The control is performed by the same person who reconciles the bank account monthly Correct answer.

Explanation

Segregation of duties is fundamental to the reliability of cash controls; where the person performing the control also reconciles the bank account, the control is compromised by incompatible duties. Documentation, volume and monitoring do not by themselves undermine reliance.

Question 39Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating whether to use the work of an internal audit function to modify the nature, timing or extent of external audit procedures. Which factor is most relevant to that evaluation?

  1. The number of staff employed in the internal audit function
  2. The reporting line of the internal audit function to the chief financial officer
  3. The objectivity of the internal audit function and the rigour of its systematic and disciplined approach Correct answer.
  4. The length of time the internal audit function has existed

Explanation

ASA 610 requires the external auditor to evaluate the objectivity of the internal audit function and the level of competence and systematic and disciplined approach it applies. Size, age and reporting to the CFO are not the criteria and a CFO reporting line would actually undermine objectivity.

Question 40Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating a management expert's valuation of an unlisted equity investment. Which action best reflects the requirements of ASA 500?

  1. Rely on the valuation only if the expert is a member of a professional accounting body
  2. Replace the expert's valuation with the auditor's own estimate in all cases
  3. Accept the valuation without further work because the expert is employed by the client
  4. Evaluate the expert's competence, capabilities and objectivity and the appropriateness of the valuation Correct answer.

Explanation

When using the work of a management expert, ASA 500 requires the auditor to evaluate the expert's competence, capabilities and objectivity, and the appropriateness of the work as audit evidence. Acceptance without evaluation, automatic replacement and membership-based reliance do not satisfy this.

Question 41Advanced audit and assurance (domain structure not enumerated in source)

An auditor is reviewing subsequent events after the reporting date. Which event, occurring after the reporting date but before the auditor's report is signed, would most likely require adjustment to the financial statements?

  1. A fire destroying a warehouse after the reporting date with no indication of prior impairment
  2. A decline in the market value of investments after the reporting date
  3. A dividend declared after the reporting date in respect of the current year
  4. A major customer becoming insolvent, where the customer was already in financial difficulty at the reporting date Correct answer.

Explanation

ASA 560 requires adjustment for events that provide evidence of conditions existing at the reporting date, such as a customer's insolvency where financial difficulty was already present. Events arising after the reporting date, such as a new fire or market decline, are generally non-adjusting and require disclosure if material.

Question 42Advanced audit and assurance (domain structure not enumerated in source)

An auditor has concluded that the financial statements contain a material misstatement and management refuses to correct it. Which opinion is appropriate under ASA 705?

  1. An unmodified opinion because management has accepted responsibility
  2. A disclaimer of opinion in all cases
  3. An unmodified opinion with an Emphasis of Matter paragraph
  4. A qualified opinion or an adverse opinion, depending on how pervasive the misstatement is Correct answer.

Explanation

Under ASA 705, a material misstatement leads to a qualified opinion where it is material but not pervasive, and to an adverse opinion where it is both material and pervasive. A disclaimer is used where the auditor cannot obtain sufficient evidence, not where a known misstatement exists.

Question 43Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating a change in accounting estimate. Which matter would most likely require the auditor to consider the effect on the auditor's report?

  1. A change in the useful life of plant that is adequately disclosed and supported by evidence
  2. A change in the entity's bank account signatories
  3. A change in the depreciation method that is applied without disclosure of its effect Correct answer.
  4. A change in the composition of the audit committee

Explanation

A change in accounting policy or estimate that is not adequately disclosed can cause the financial statements to be materially misstated, which affects the auditor's opinion. Changes in bank signatories or audit committee membership are governance matters that do not directly affect the financial statements.

Question 44Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing the risk of material misstatement at the financial statement level. Which factor is most likely to have a pervasive effect on the audit?

  1. A difference in the classification of one sundry debtor
  2. An error in the calculation of one employee's annual leave accrual
  3. A misstatement in the valuation of one obsolete inventory line
  4. A deficiency in the control environment caused by the dominant influence of a single director Correct answer.

Explanation

Risks at the financial statement level relate pervasively to the financial statements as a whole and often arise from a weak control environment or management dominance. Individual misstatements in one balance or one transaction affect specific assertions at the assertion level.

Question 45Advanced audit and assurance (domain structure not enumerated in source)

An auditor is planning procedures for a significant risk identified under ASA 315. Which response is required?

  1. Perform only analytical procedures at the planning stage
  2. Rely entirely on the entity's automated controls because they are presumed reliable
  3. Perform substantive procedures specifically responsive to the risk, regardless of the assessed level of control risk Correct answer.
  4. Reduce the extent of testing because significant risks are rare

Explanation

ASA 330 requires the auditor to design and perform substantive procedures that are specifically responsive to significant risks, irrespective of the assessed level of control risk. Automation is not presumed reliable and planning analytics alone are not a sufficient response.

Question 46Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing whether a client's related party transaction is on normal commercial terms. Which procedure provides the most appropriate evidence?

  1. Confirming that the transaction was recorded in the general ledger
  2. Reviewing the board minutes for approval of the transaction
  3. Inquiring of the managing director whether the terms are fair
  4. Comparing the terms with those of similar transactions with independent third parties Correct answer.

Explanation

Under ASA 550, the auditor inspects underlying contracts and compares terms with market or third-party equivalents to assess whether a related party transaction was conducted on normal commercial terms. Inquiry, board approval and ledger recording do not establish the arm's length nature of the terms.

Question 47Advanced audit and assurance (domain structure not enumerated in source)

An auditor is assessing the objectivity of an engagement quality reviewer under ASQM 2. Which arrangement best supports the reviewer's objectivity?

  1. The reviewer is the client's chief financial officer acting in an advisory capacity
  2. The reviewer is selected from outside the engagement team and does not otherwise participate in the engagement Correct answer.
  3. The reviewer is the engagement partner's direct subordinate in the same office
  4. The reviewer is the partner who led the engagement in the prior year

Explanation

ASQM 2 requires the engagement quality reviewer to be objective and independent of the engagement team, so the reviewer must not be a member of the team or otherwise involved in the engagement. Prior leadership of the engagement or a subordinate relationship would compromise that objectivity.

Question 48Advanced audit and assurance (domain structure not enumerated in source)

An auditor is evaluating a client's revenue recognition for long-term construction contracts. Which condition most likely indicates a heightened risk of fraud under ASA 240?

  1. Revenue is recognised on completion of the contract with no estimates involved
  2. The entity uses a standardised contract template for all projects
  3. Management receives bonuses linked to reported revenue and pressures exist to meet analyst forecasts Correct answer.
  4. Revenue is recognised using percentage of completion with estimates of total costs reviewed quarterly

Explanation

ASA 240 identifies incentives such as performance-based bonuses and pressure to meet market expectations as fraud risk factors, particularly where revenue recognition involves judgement. Standardised contracts and conservative completion-based recognition reduce rather than increase the risk.

Question 49Advanced audit and assurance (domain structure not enumerated in source)

An auditor identifies a material inconsistency between the audited financial statements and the client's sustainability report included in the annual report. Under ASA 720, what is the auditor's appropriate course of action?

  1. Take no action because the sustainability report is outside the scope of the audit
  2. Report the inconsistency directly to the stock exchange without informing the client
  3. Discuss the matter with management and, if unresolved, consider its effect on the auditor's report and communicate with those charged with governance Correct answer.
  4. Amend the auditor's report to include an adverse opinion on the sustainability report

Explanation

ASA 720 requires the auditor to discuss a material inconsistency with management and, where it remains unresolved, to consider the implications for the auditor's report and communicate with those charged with governance. The auditor does not opine on the other information and does not report to regulators without first following the required process.

Question 50Advanced audit and assurance (domain structure not enumerated in source)

An auditor has concluded that the going concern basis of accounting is appropriate but a material uncertainty exists that is adequately disclosed. Which reporting treatment is required?

  1. An adverse opinion because a material uncertainty always requires modification
  2. An unmodified opinion with no reference to the uncertainty
  3. A qualified opinion for a scope limitation
  4. An unmodified opinion with a separate section under ASA 570 headed Material Uncertainty Related to Going Concern Correct answer.

Explanation

Where the going concern basis is appropriate and the material uncertainty is adequately disclosed, ASA 570 requires an unmodified opinion with a separate section drawing attention to the uncertainty. The opinion itself is not modified, and the uncertainty must be highlighted in the auditor's report.