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EPSO Auditors practice questions

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Question 1Audit

Under the International Standards on Auditing, what is the primary purpose of the auditor's report on general purpose financial statements?

  1. To guarantee the future viability of the entity
  2. To provide reasonable assurance that the financial statements are free from material misstatement
  3. 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.
  4. To certify that the financial statements are accurate in every respect

Explanation

The auditor's report conveys an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Reasonable assurance is the level of assurance obtained, but the report's stated conclusion is an opinion, not a certification or guarantee.

Question 2Audit

An auditor identifies a risk of material misstatement and concludes that substantive procedures alone cannot provide sufficient appropriate audit evidence. What is the required response?

  1. Issue a qualified opinion immediately
  2. Perform tests of controls to obtain evidence about their operating effectiveness Correct answer.
  3. Increase the extent of substantive testing only
  4. Rely entirely on analytical procedures

Explanation

When substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level, the auditor is required to perform tests of controls to obtain evidence about their operating effectiveness. Analytical procedures and increased substantive testing alone do not address the identified need for control evidence.

Question 3Audit

Which of the following best describes the concept of materiality in an audit of financial statements?

  1. The threshold above which misstatements could influence the economic decisions of users Correct answer.
  2. The total value of assets reported in the balance sheet
  3. The maximum amount an auditor is willing to pay in fees
  4. The absolute size of every misstatement regardless of context

Explanation

Materiality is the threshold or magnitude of misstatements that could influence the economic decisions of users taken on the basis of the financial statements. It is a matter of professional judgement and is not defined by fee levels or total asset values.

Question 4Audit

An auditor plans to use the work of an internal audit function. Which factor is most relevant to determining whether the internal auditors' work can be relied upon?

  1. The number of years the internal audit function has existed
  2. The internal auditors' organisational status and the objectivity of their reporting lines Correct answer.
  3. Whether internal audit uses the same software as the external auditor
  4. The size of the internal audit budget relative to the external audit fee

Explanation

The objectivity of the internal audit function, including its organisational status and reporting lines, is central to assessing whether its work can be used. Competence and a systematic and disciplined approach are also relevant, but organisational independence underpins objectivity.

Question 5Audit

Which sampling method gives every item in the population an equal chance of selection and is most appropriate when the auditor wants a statistically valid sample?

  1. Haphazard selection
  2. Random selection Correct answer.
  3. Judgemental selection
  4. Block selection

Explanation

Random selection gives each item in the population an equal probability of selection, which supports statistical sampling and allows the auditor to project results. Haphazard, block and judgemental methods do not provide a known selection probability for each item.

Question 6Audit

During the audit of inventory, the auditor observes the client's count and notes that certain slow-moving items are recorded at cost. Which assertion is most directly at risk?

  1. Completeness
  2. Classification
  3. Valuation and allocation Correct answer.
  4. Rights and obligations

Explanation

Recording slow-moving inventory at cost without considering net realisable value puts the valuation and allocation assertion at risk. Completeness concerns whether all items are recorded, rights concerns ownership, and classification concerns presentation.

Question 7Audit

Which of the following is an example of a substantive analytical procedure?

  1. Observing the client's physical inventory count
  2. Confirming bank balances directly with the bank
  3. Comparing the current year's gross margin with prior years and budget to identify unusual fluctuations Correct answer.
  4. Vouching a sample of sales invoices to shipping documents

Explanation

Analytical procedures evaluate financial information through analysis of plausible relationships, such as comparing margins with prior periods and budgets. Vouching, observing and confirming are tests of detail rather than analytical procedures.

Question 8Audit

An auditor identifies a fraud risk involving management override of controls. Which procedure is specifically required in response?

  1. Reviewing the client's marketing strategy
  2. Inspecting the client's tax returns for prior years
  3. Recalculating depreciation on all fixed assets
  4. Testing journal entries and other adjustments made in the preparation of the financial statements Correct answer.

Explanation

Because management is in a unique position to perpetrate fraud through override of controls, the auditor is required to design and perform procedures to test the appropriateness of journal entries and other adjustments. This is a mandated response to the risk of management override.

Question 9Audit

Which of the following best describes the auditor's responsibility regarding compliance with laws and regulations that have a direct effect on the determination of material amounts in the financial statements?

  1. The auditor refers all such matters to the tax authority
  2. The auditor has no responsibility for such laws
  3. The auditor guarantees full compliance with all laws
  4. The auditor shall obtain sufficient appropriate audit evidence regarding compliance with those provisions Correct answer.

Explanation

For laws and regulations with a direct effect on the determination of material amounts and disclosures, the auditor is required to obtain sufficient appropriate audit evidence about compliance. For other laws, the auditor's responsibility is limited to procedures directed at identifying non-compliance.

Question 10Audit

What is the purpose of the engagement letter in an audit?

  1. To serve as the auditor's report
  2. To confirm the auditor's fee in a legally binding contract
  3. To document the agreed terms of the audit engagement between the auditor and management or those charged with governance Correct answer.
  4. To replace the audit plan

Explanation

The engagement letter documents the agreed terms of the engagement, including the objective and scope of the audit and the responsibilities of the parties. It helps avoid misunderstandings and is agreed before the engagement begins.

Question 11Audit

An auditor is assessing the appropriateness of management's going concern assessment. Which condition most likely casts significant doubt on the entity's ability to continue as a going concern?

  1. Net current liabilities and a breach of a loan covenant that has not been waived Correct answer.
  2. A committed undrawn credit facility with a stable bank
  3. A long-term supply contract with a major customer
  4. A net asset position and positive operating cash flows

Explanation

Net current liabilities combined with an unwaived covenant breach indicate liquidity and financing pressure that may cast significant doubt on going concern. Positive cash flows, committed facilities and long-term contracts generally support the going concern assumption.

Question 12Audit

Under ISA 700, which elements must an auditor's report on general purpose financial statements include?

  1. The opinion, the basis for opinion, and the responsibilities of the auditor and of management Correct answer.
  2. The auditor's fee and timesheet summary
  3. Only the auditor's opinion
  4. The detailed audit programme and working papers

Explanation

A standard auditor's report includes the opinion, the basis for opinion, and descriptions of the responsibilities of management and of the auditor, among other elements. The fee and detailed working papers are not part of the report.

Question 13Audit

An auditor concludes that the financial statements as a whole are materially misstated and the effect is both material and pervasive. Which type of opinion is appropriate?

  1. Adverse opinion Correct answer.
  2. Disclaimer of opinion
  3. Unmodified opinion
  4. Qualified opinion

Explanation

An adverse opinion is expressed when the auditor concludes that misstatements are both material and pervasive to the financial statements. A qualified opinion applies when misstatements are material but not pervasive, and a disclaimer applies when the auditor cannot obtain sufficient evidence.

Question 14Audit

Which of the following is a key difference between reasonable assurance and absolute assurance in an audit?

  1. Absolute assurance is always achievable with more testing
  2. Reasonable assurance applies only to small entities
  3. Reasonable assurance is a high but not absolute level of assurance because of inherent limitations of an audit Correct answer.
  4. Reasonable assurance means the auditor has no risk of error

Explanation

Reasonable assurance is a high level of assurance but is not absolute because of inherent limitations such as sampling risk, judgement, and the nature of evidence. Absolute assurance is not attainable in a financial statement audit.

Question 15Audit

An auditor uses a monetary unit sampling approach to select receivables for confirmation. What is the primary advantage of this method?

  1. It guarantees that all large balances will be selected
  2. It gives larger balances a higher probability of selection and focuses on overstatement Correct answer.
  3. It eliminates the need for professional judgement
  4. It is only suitable for testing completeness

Explanation

Monetary unit sampling selects individual monetary units, so larger balances have a higher chance of selection and the method is particularly effective for testing overstatement. It does not guarantee selection of any particular balance and still requires judgement.

Question 16Audit

Which of the following procedures would best provide evidence about the completeness assertion for accounts payable?

  1. Vouching payments to recorded payables
  2. Confirming a sample of recorded supplier balances
  3. Recalculating accrued interest
  4. Searching for unrecorded liabilities after the year-end Correct answer.

Explanation

The completeness assertion concerns whether all liabilities that should be recorded have been recorded. Searching for unrecorded liabilities, for example by reviewing post year-end payments and unmatched receiving reports, directly addresses this assertion.

Question 17Audit

An auditor is evaluating the reliability of audit evidence. Which of the following is generally considered the most reliable?

  1. Oral representations from a junior employee
  2. Internally generated draft reports
  3. Documentary evidence obtained directly from an independent third party Correct answer.
  4. Management's verbal explanation of a complex transaction

Explanation

Evidence obtained directly by the auditor from an independent external source is generally more reliable than internally generated or oral evidence. Reliability increases with independence of the source and the auditor's direct involvement.

Question 18Audit

An auditor is testing a client's revenue recognition and suspects that sales may be recorded in the wrong period. Which procedure is most appropriate?

  1. Testing cut-off by examining shipping documents and invoices around the year-end Correct answer.
  2. Confirming the client's bank balance
  3. Reviewing the client's marketing plan
  4. Comparing the sales ledger to the payroll register

Explanation

Cut-off testing examines transactions around the reporting date to determine whether they were recorded in the correct period. Shipping documents and invoices around year-end provide direct evidence about period allocation of revenue.

Question 19Audit

What is the purpose of a management representation letter obtained at the end of an audit?

  1. To serve as the auditor's opinion
  2. To replace substantive testing
  3. To confirm that management has fulfilled its responsibilities and to corroborate other audit evidence Correct answer.
  4. To transfer the auditor's liability to management

Explanation

Written representations confirm that management has fulfilled its responsibilities and support other audit evidence. They are not a substitute for other procedures and do not transfer liability or constitute the auditor's opinion.

Question 20Audit

An auditor identifies that a significant risk requires special audit consideration. Which of the following best reflects the required approach?

  1. Rely solely on the client's internal control report
  2. Treat it like any other risk with standard procedures
  3. Reduce the extent of substantive testing
  4. Obtain a detailed understanding of the entity's controls, including the relevant controls, and design tailored substantive procedures Correct answer.

Explanation

For significant risks, the auditor must obtain an understanding of the entity's controls relevant to the risk and design and perform substantive procedures specifically responsive to that risk. Standard procedures and reduced testing are not adequate responses.

Question 21Audit

Which of the following describes the auditor's responsibility when using the work of an auditor's expert?

  1. The expert assumes the auditor's reporting responsibility
  2. The expert's work replaces the need for audit evidence
  3. The auditor remains responsible for the audit opinion and must evaluate the adequacy of the expert's work Correct answer.
  4. The auditor may accept the expert's findings without evaluation

Explanation

The auditor remains responsible for the audit opinion and must evaluate whether the expert's work is adequate for audit purposes, including the expert's competence, capabilities and objectivity. The expert's work supports but does not replace the auditor's judgement.

Question 22Audit

In the context of quality management for audit engagements, what is the primary purpose of an engagement quality review?

  1. To calculate the audit fee
  2. To provide an objective evaluation of the significant judgements made and conclusions reached before the report is issued Correct answer.
  3. To perform the detailed substantive testing
  4. To replace the engagement partner's responsibilities

Explanation

An engagement quality review provides an objective evaluation of the significant judgements and conclusions of the engagement team before the report is issued. It does not replace the engagement partner's responsibilities or perform the detailed testing.

Question 23Audit

An auditor discovers that a client has changed its accounting policy for revenue recognition without adequate disclosure. The effect is material but not pervasive. What is the appropriate audit opinion?

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

Explanation

A material but not pervasive departure from the applicable financial reporting framework results in a qualified opinion. An adverse opinion is reserved for material and pervasive matters, and an emphasis of matter paragraph does not address a misstatement.

Question 24Audit

Which of the following is the most appropriate description of the audit risk model?

  1. Audit risk equals inherent risk plus control risk plus detection risk
  2. Audit risk equals inherent risk multiplied by control risk multiplied by detection risk Correct answer.
  3. Audit risk equals inherent risk minus detection risk
  4. Audit risk equals detection risk divided by control risk

Explanation

The audit risk model expresses audit risk as the product of inherent risk, control risk and detection risk. The auditor manages detection risk through the nature, timing and extent of procedures to keep overall audit risk at an acceptably low level.

Question 25Audit

An auditor is assessing the risk of material misstatement at the assertion level for a complex derivative. Which factor would most likely increase inherent risk?

  1. The derivative involves complex valuation models with unobservable inputs Correct answer.
  2. The derivative was reviewed by the client's internal lawyer
  3. The derivative is straightforward and actively traded
  4. The derivative is disclosed in a single note

Explanation

Complex valuation models with unobservable inputs increase the susceptibility of the derivative to misstatement, raising inherent risk. Simplicity and active trading generally reduce risk, and legal review does not eliminate valuation uncertainty.

Question 26Audit

An auditor is evaluating an entity's accounting estimates for a warranty provision. Which characteristic most strongly indicates that management's estimate carries a high risk of material misstatement?

  1. The estimate was reviewed by the internal audit function before the year-end close.
  2. The estimate depends on unobservable assumptions about future claim rates and settlement costs. Correct answer.
  3. The estimate is based on historical data that has been stable for several reporting periods.
  4. The estimate is derived from a simple contractual formula applied consistently across prior periods.

Explanation

Estimates with high estimation uncertainty rely on unobservable inputs and management judgement, which raises the risk that the recorded amount is materially misstated. Stable historical data, contractual formulas and prior internal review tend to reduce rather than increase that risk.

Question 27Audit

Which of the following best describes the purpose of the auditor's documentation of the audit strategy and audit plan?

  1. To provide evidence that the engagement team designed and performed the audit in accordance with standards. Correct answer.
  2. To guarantee that no material misstatement remains undetected at the end of the audit.
  3. To replace the need for a written management representation letter.
  4. To serve as the entity's official record of its internal control environment.

Explanation

Audit documentation provides evidence of the basis for the auditor's report and that the audit was planned and performed in accordance with ISAs and applicable legal requirements. It does not substitute for management representations or eliminate audit risk.

Question 28Audit

An auditor plans to reduce the extent of substantive testing because the assessed risk of material misstatement is low. Which condition most appropriately supports that decision?

  1. The engagement partner has extensive prior experience with the client's industry.
  2. The financial statements were prepared using a well-known accounting software package.
  3. Tests of controls have provided evidence that controls operate effectively throughout the period. Correct answer.
  4. The entity has a large number of immaterial transactions that are individually below the performance materiality level.

Explanation

When controls are tested and found to operate effectively, the auditor may rely on them and reduce substantive procedures, provided the assessed risk of material misstatement remains low. Experience, software choice, or the volume of immaterial items do not by themselves justify reducing substantive work.

Question 29Audit

An auditor is assessing whether related party transactions have been identified and disclosed. Which procedure is most likely to be effective for identifying undisclosed related party relationships?

  1. Reviewing the board minutes and prior-year working papers for information about significant transactions and relationships. Correct answer.
  2. Recalculating the depreciation charge on the entity's property, plant and equipment.
  3. Confirming the entity's bank balances directly with its primary lender.
  4. Observing the physical inventory count at the year-end date.

Explanation

Reviewing minutes, prior-year files and other records is a recognised procedure for identifying related parties and transactions that management may not have disclosed. Bank confirmations, depreciation recalculation and inventory observation address other assertions.

Question 30Audit

In an audit of a public interest entity, which matter is most appropriate for communication to those charged with governance?

  1. The individual fee arrangements negotiated with each member of the engagement team.
  2. The auditor's assessment of the qualitative aspects of the entity's accounting practices. Correct answer.
  3. The detailed working paper references used by the engagement team to document testing.
  4. The personal performance ratings of the client's accounting staff.

Explanation

ISAs require the auditor to communicate significant findings, including the auditor's views on the qualitative aspects of accounting practices and significant difficulties encountered. Internal working paper references and staff performance matters are not appropriate governance communications.

Question 31Audit

An auditor has obtained a bank confirmation that was received directly from the bank in a sealed envelope and returned to the auditor. Which assertion does this evidence most directly support for the bank balances?

  1. Completeness of the entity's recorded liabilities.
  2. Existence of the recorded cash and borrowing balances. Correct answer.
  3. Rights and obligations relating to inventory held on consignment.
  4. Classification of the balances in the statement of cash flows.

Explanation

A confirmation obtained directly from the bank provides strong external evidence that the recorded balances exist at the reporting date. It does not, on its own, establish completeness of liabilities, cash flow classification, or rights over consigned inventory.

Question 32Audit

An auditor is designing tests for a client whose sales are processed through an automated system with no manual intervention. Which approach is most appropriate for testing the completeness of recorded revenue?

  1. Select a sample of recorded sales invoices and agree them to the shipping documents.
  2. Obtain a representation from management that all revenue has been recorded.
  3. Rely solely on substantive analytical procedures comparing monthly revenue with prior periods.
  4. Perform tests of the automated controls and consider using computer-assisted audit techniques over the transaction file. Correct answer.

Explanation

For highly automated processing, testing the general and application controls and using data analytics over the full transaction file provides better evidence about completeness than testing recorded items. Vouching recorded invoices tests occurrence rather than completeness.

Question 33Audit

Which of the following best explains why an auditor sets performance materiality below overall materiality for the financial statements as a whole?

  1. To eliminate the need to evaluate uncorrected misstatements at the end of the audit.
  2. To provide a margin of safety for undetected and uncorrected misstatements that could aggregate to a material amount. Correct answer.
  3. To comply with the requirement that all misstatements above zero must be corrected.
  4. To reduce the number of audit procedures that need to be performed.

Explanation

Performance materiality is set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It does not remove the need to evaluate uncorrected misstatements.

Question 34Audit

An auditor is considering whether to use the work of an internal audit function. Which factor is most relevant to the auditor's evaluation of the adequacy of that work for audit purposes?

  1. The internal auditors' objectivity and the level of competence of the internal audit function. Correct answer.
  2. The number of years the internal audit function has existed within the entity.
  3. The physical location of the internal audit office within the entity's premises.
  4. The size of the internal audit budget relative to the entity's total expenditure.

Explanation

The external auditor evaluates the objectivity of the internal audit function and its level of competence, together with whether a systematic and disciplined approach is applied, before relying on its work. Longevity, budget size and office location are not the relevant criteria.

Question 35Audit

During the audit of a construction company, the auditor identifies a risk that revenue may be recognised before the related performance obligation is satisfied. Which procedure best responds to this risk?

  1. Confirming the entity's trade payables with major suppliers.
  2. Recalculating the entity's depreciation on construction equipment.
  3. Reviewing the entity's insurance coverage for construction sites.
  4. Agreeing a sample of recorded revenue to signed contracts and evidence of progress or completion. Correct answer.

Explanation

Testing recorded revenue against contracts and evidence of progress or completion directly addresses whether revenue was recognised in the correct period and only when the performance obligation was satisfied. The other procedures address unrelated balances or risks.

Question 36Audit

An auditor discovers that a client has classified a long-term loan as current in the statement of financial position despite the loan agreement requiring repayment after three years. Which assertion is most directly affected?

  1. Accuracy of interest expense.
  2. Classification of the loan. Correct answer.
  3. Existence of the loan.
  4. Occurrence of the loan.

Explanation

Classification concerns whether transactions and events have been recorded in the proper accounts and presented appropriately, so misclassifying a non-current loan as current is a classification matter. The loan's existence and occurrence are unaffected by the presentation error.

Question 37Audit

Which of the following best describes the auditor's responsibility when information accompanying the audited financial statements contains a material inconsistency with those statements?

  1. The auditor must immediately withdraw from the engagement without further communication.
  2. The auditor has no responsibility because the accompanying information is outside the financial statements.
  3. The auditor must correct the accompanying information directly in the entity's records.
  4. The auditor must discuss the matter with management and, if uncorrected, consider the effect on the auditor's report. Correct answer.

Explanation

The auditor reads the other information to identify material inconsistencies with the audited financial statements and, where necessary, discusses the matter with management and those charged with governance. If the inconsistency remains uncorrected, the auditor considers the implications for the report.

Question 38Audit

An auditor is performing a review of subsequent events up to the date of the auditor's report. Which procedure is most appropriate for identifying events that may require adjustment or disclosure?

  1. Reviewing the cash book and interim management accounts for the period after the year-end. Correct answer.
  2. Testing the entity's payroll calculations for the final month of the year.
  3. Confirming the entity's share capital with the company registry.
  4. Recalculating the entity's deferred tax balance at the year-end date.

Explanation

Reviewing post-year-end management accounts, cash records and other information helps identify conditions arising after the reporting date that may require adjustment or disclosure. The other procedures test balances at the reporting date and do not address subsequent events.

Question 39Audit

Which of the following best describes the auditor's objective when performing a risk assessment at the financial statement level?

  1. To replace the need for understanding the entity's internal control system.
  2. To determine the exact amount of every misstatement in the financial statements.
  3. To provide absolute assurance that the financial statements are free from error.
  4. To identify risks that affect the audit as a whole and may influence the nature, timing and extent of further procedures. Correct answer.

Explanation

Risks at the financial statement level relate pervasively to the financial statements as a whole and inform the overall audit strategy and the nature, timing and extent of further procedures. They do not quantify misstatements or provide absolute assurance.

Question 40Audit

An auditor has identified that a client's inventory valuation depends on a complex discounted cash flow model prepared by a specialist engaged by management. What is the auditor's most appropriate response?

  1. Accept the valuation because management engaged the specialist.
  2. Evaluate the competence and objectivity of management's specialist and consider whether to engage an auditor's expert. Correct answer.
  3. Rely solely on the prior-year valuation of the same inventory.
  4. Ignore the valuation because inventory is not a significant balance.

Explanation

Where management uses a specialist, the auditor evaluates the specialist's competence, capabilities and objectivity and the adequacy of the work, and may engage an auditor's expert if needed. Management's engagement of the specialist does not by itself make the valuation reliable.

Question 41Audit

Which of the following best describes the auditor's approach when the assessed risk of material misstatement is significant and relates to an assertion about a complex accounting estimate?

  1. The auditor may reduce testing because the estimate is inherently uncertain.
  2. The auditor must obtain more persuasive audit evidence and give special consideration to the estimate. Correct answer.
  3. The auditor may rely entirely on management's representation about the estimate.
  4. The auditor must disclaim an opinion on the financial statements.

Explanation

For significant risks, the auditor is required to obtain more persuasive audit evidence and give special attention to the areas concerned, including complex estimates. A representation or inherent uncertainty does not justify reduced testing or an automatic disclaimer.

Question 42Audit

An auditor is assessing the risk of material misstatement in the payroll cycle. Which condition most likely indicates a heightened risk of fraud?

  1. Payroll reports are reviewed by the financial controller each month.
  2. Payroll is processed monthly using a standard software package.
  3. Payroll is processed by a single clerk who also maintains the personnel records and authorises payments. Correct answer.
  4. Payroll transactions are approved by the department manager before processing.

Explanation

Combining processing, record maintenance and authorisation in one person removes segregation of duties, creating an opportunity for fictitious employees or unauthorised payments. Standard software, managerial approval and controller review are control features that reduce risk.

Question 43Audit

Which of the following statements about the auditor's use of analytical procedures at the planning stage is most accurate?

  1. They are required only when the auditor has decided not to rely on controls.
  2. They are used to obtain an understanding of the entity and to identify areas of potential risk. Correct answer.
  3. They may only be performed using computer-assisted audit techniques.
  4. They provide conclusive evidence that the financial statements are free from misstatement.

Explanation

At the planning stage, analytical procedures help the auditor understand the entity and identify unusual relationships and areas of potential risk. They are not conclusive evidence and are not restricted to computer-assisted techniques.

Question 44Audit

An auditor concludes that the financial statements contain a material misstatement that is pervasive to the financial statements. What is the most appropriate form of modified opinion?

  1. An adverse opinion with a basis for adverse opinion paragraph. Correct answer.
  2. A disclaimer of opinion because the misstatement is pervasive.
  3. A qualified opinion with a basis for qualified opinion paragraph.
  4. An unmodified opinion with an emphasis of matter paragraph.

Explanation

A material and pervasive misstatement leads to an adverse opinion, because the financial statements as a whole are not fairly presented. A disclaimer arises from an inability to obtain sufficient appropriate evidence, not from a known misstatement.

Question 45Audit

Which of the following best describes the auditor's responsibility for the entity's compliance with laws and regulations that have an indirect effect on the financial statements?

  1. The auditor must report every instance of non-compliance directly to the police.
  2. The auditor's procedures are limited to enquiring of management and inspecting correspondence with regulators. Correct answer.
  3. The auditor must test compliance with all such laws and regulations in detail.
  4. The auditor has no responsibility whatsoever for these laws and regulations.

Explanation

For laws and regulations with an indirect effect, the auditor's responsibility is limited to undertaking specified procedures, such as enquiry of management and inspection of correspondence with licensing or regulatory authorities. The auditor does not test compliance with all such laws.

Question 46Audit

An auditor is evaluating whether a change in an accounting estimate is a change in accounting policy. Which factor is most relevant to that determination?

  1. Whether the change increases the entity's reported profit for the year.
  2. Whether the change results from new information or developments rather than from a change in the measurement basis. Correct answer.
  3. Whether the change was approved by the entity's largest shareholder.
  4. Whether the change was disclosed in the prior year's financial statements.

Explanation

A change in accounting estimate results from new information or new developments and is not a correction of an error or a change in policy. A change in the measurement basis, by contrast, is a change in accounting policy.

Question 47Audit

Which of the following best describes the auditor's responsibility regarding the going concern basis of accounting when events or conditions are identified that may cast significant doubt on the entity's ability to continue?

  1. The auditor must cease the audit until the doubt is resolved.
  2. The auditor must automatically issue an adverse opinion.
  3. The auditor must prepare revised financial statements on a break-up basis.
  4. The auditor must obtain sufficient appropriate evidence about the appropriateness of management's use of the going concern basis. Correct answer.

Explanation

Where events or conditions cast significant doubt, the auditor evaluates management's assessment and obtains sufficient appropriate evidence about the appropriateness of the going concern basis and the adequacy of disclosures. The auditor does not prepare the financial statements or automatically modify the opinion.

Question 48Audit

An auditor is selecting a sample of purchase invoices to test whether recorded purchases occurred. Which population and direction of testing is most appropriate?

  1. Select from the supplier statements and trace to the purchase orders.
  2. Select from the purchases journal and vouch to receiving reports and supplier invoices. Correct answer.
  3. Select from the payments ledger and trace to the bank statements.
  4. Select from the goods received notes and trace to the purchases journal.

Explanation

To test occurrence, the auditor selects from the recorded population (the purchases journal) and vouches backwards to supporting documents such as receiving reports and invoices. Tracing from receiving notes to the journal tests completeness instead.

Question 49Audit

Which of the following best describes the purpose of the engagement quality review for an audit of a listed entity?

  1. To negotiate the audit fee with the entity's management.
  2. To perform detailed substantive testing of the entity's transactions.
  3. To provide an objective evaluation of the significant judgements and conclusions of the engagement team before the report is issued. Correct answer.
  4. To replace the engagement partner's responsibility for the audit opinion.

Explanation

An engagement quality review provides an objective evaluation of the significant judgements made and conclusions reached by the engagement team before the auditor's report is issued. It does not transfer the engagement partner's responsibility or involve detailed testing.

Question 50Audit

An auditor is assessing the reliability of evidence obtained from a management-prepared schedule of trade receivables. Which factor most affects the reliability of that evidence?

  1. The schedule was reviewed by the auditor's engagement partner.
  2. The schedule was prepared by the financial controller rather than a junior clerk.
  3. The schedule was generated from the accounting system and agreed to the general ledger. Correct answer.
  4. The schedule was printed on the entity's letterhead.

Explanation

Evidence generated internally is more reliable when the related controls are effective and the information is produced from a system and reconciled to the ledger. Who prepared it, who reviewed it, or the paper it is printed on does not determine reliability.