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ICAEW Assurance practice questions

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Question 1Audit and Assurance

Which of the following best describes the primary purpose of an external audit of a company's financial statements?

  1. To detect all instances of fraud and error within the entity's accounting records
  2. To guarantee that the entity will remain a going concern for the next twelve months
  3. To prepare the financial statements on behalf of management and confirm their accuracy
  4. To provide an independent opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Correct answer.

Explanation

An external audit gives reasonable (not absolute) assurance that the financial statements are free from material misstatement, expressed as an opinion on fair presentation under the applicable framework. It is not a guarantee against all fraud, nor does the auditor prepare the statements or guarantee future solvency.

Question 2Audit and Assurance

ISA 200 states that an auditor should obtain reasonable assurance. Which statement correctly describes the concept of reasonable assurance?

  1. It is a low level of assurance appropriate only for review engagements
  2. It is a high but not absolute level of assurance, reflecting the inherent limitations of an audit Correct answer.
  3. It is an absolute level of assurance because the auditor tests all transactions
  4. It is a level of assurance determined solely by the size of the audit fee

Explanation

Reasonable assurance is a high level of assurance, but it is not absolute because of inherent limitations such as sampling, judgement, and the nature of evidence. It sits above the limited assurance of a review engagement and is unrelated to fees.

Question 3Audit and Assurance

Under ISA 315, which of the following is the auditor required to obtain an understanding of?

  1. The credit rating of the entity's bank
  2. The personal tax affairs of the finance director
  3. The pricing strategy of the entity's competitors
  4. The entity and its environment, including its internal control Correct answer.

Explanation

ISA 315 requires the auditor to understand the entity and its environment, the applicable financial reporting framework, and the entity's system of internal control to identify and assess risks of material misstatement. Competitor pricing, personal tax affairs, and bank credit ratings are not required areas of understanding.

Question 4Audit and Assurance

An auditor is assessing the risk that revenue is overstated through recording sales before goods are shipped. Which assertion is most directly affected?

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

Explanation

Recording sales before shipment means the transactions recorded may not have occurred, which is an occurrence assertion issue. Completeness concerns understatement, classification concerns whether items are in the correct account, and rights and obligations concern ownership and liabilities.

Question 5Audit and Assurance

Which of the following procedures provides the most reliable audit evidence?

  1. Inspection of externally held bank confirmations obtained directly by the auditor Correct answer.
  2. Inquiry of management supported by verbal assurances
  3. Analytical review of budgeted figures prepared by the client
  4. Observation of a control performed on a single occasion

Explanation

External confirmations obtained directly by the auditor are generally more reliable than internally generated evidence because they come from an independent source and are not filtered through the client. Inquiry alone, budgets, and single observations provide weaker or limited evidence.

Question 6Audit and Assurance

In a sampling context, what is the meaning of the term 'tolerable misstatement'?

  1. The maximum misstatement in a population that the auditor is willing to accept and still conclude the population is not materially misstated Correct answer.
  2. The total value of the population being tested
  3. The level of misstatement that the auditor expects to find in the population
  4. The amount of audit fee allocated to the sampling exercise

Explanation

Tolerable misstatement is the maximum monetary misstatement the auditor is willing to accept in a population and still conclude the population is fairly stated; it is often set based on performance materiality. It is not the population value, the expected misstatement, or a fee allocation.

Question 7Audit and Assurance

Which of the following best describes the auditor's responsibility in relation to laws and regulations under ISA 250?

  1. The auditor is responsible for obtaining sufficient appropriate evidence regarding compliance with laws and regulations that have a material effect on the financial statements Correct answer.
  2. The auditor must verify compliance with all laws regardless of materiality
  3. The auditor is responsible for preventing non-compliance with laws by the entity
  4. The auditor must report every breach of law to the police

Explanation

ISA 250 limits the auditor's responsibility to laws and regulations that have a material effect on the financial statements, and the auditor is not responsible for preventing non-compliance. Reporting to authorities depends on legal and ethical obligations, not a blanket duty to report all breaches.

Question 8Audit and Assurance

An engagement letter is issued by the auditor before accepting an audit engagement. What is its main purpose?

  1. To serve as the auditor's report on the financial statements
  2. To provide a guarantee that no material misstatements exist
  3. To confirm the auditor's acceptance of the appointment and to set out the terms of the engagement in writing Correct answer.
  4. To replace the need for a written representation letter at the end of the audit

Explanation

The engagement letter documents the agreed terms of the audit engagement, including responsibilities of management and the auditor, helping to avoid misunderstandings. It is not a report, a guarantee, or a substitute for written representations.

Question 9Audit and Assurance

An auditor identifies a risk of material misstatement at the assertion level for inventory valuation. Which response is most appropriate?

  1. Reduce the extent of testing because the risk has already been identified
  2. Ignore the risk because it is only at the assertion level
  3. Design and perform substantive procedures specifically directed at the valuation of inventory Correct answer.
  4. Rely solely on inquiry of the warehouse manager

Explanation

ISA 330 requires the auditor to design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks at the assertion level. Identifying a risk does not reduce testing; it drives targeted substantive work.

Question 10Audit and Assurance

Which of the following is an example of a test of control rather than a substantive procedure?

  1. Inspecting evidence that a supervisor has signed off each credit note before it is processed Correct answer.
  2. Recalculating the year-end depreciation charge
  3. Confirming a bank balance directly with the bank
  4. Reviewing a post year-end sales ledger for evidence of cut-off errors

Explanation

A test of control evaluates the operating effectiveness of a control, such as documented supervisory sign-off. Recalculation, external confirmation, and cut-off review are substantive procedures that detect misstatement rather than test controls.

Question 11Audit and Assurance

An auditor plans to rely on a control over the completeness of payroll. Which factor most affects the auditor's decision on the extent of tests of controls?

  1. The size of the audit team's office
  2. The number of prior year audit files retained
  3. The length of the client's accounting policy document
  4. The frequency with which the control operates during the period Correct answer.

Explanation

The extent of tests of controls depends on matters such as the frequency of operation, the period covered, and the expected rate of deviation. Office size, policy document length, and file retention do not determine the extent of control testing.

Question 12Audit and Assurance

Under ISA 320, which of the following is used to determine performance materiality?

  1. A percentage of overall materiality, set lower to reduce to an appropriately low level the probability that aggregate undetected misstatements exceed materiality Correct answer.
  2. The audit fee agreed with the client
  3. The total assets figure exactly, with no judgement applied
  4. The prior year's net profit, always applied without adjustment

Explanation

Performance materiality is set at an amount less than overall materiality to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It requires professional judgement and is not based on fees or a mechanical application of a single figure.

Question 13Audit and Assurance

An auditor is unable to obtain sufficient appropriate evidence about a subsidiary's trade receivables because the subsidiary's records were destroyed. The possible effect is material but not pervasive. What opinion is most appropriate?

  1. Adverse opinion
  2. Qualified opinion due to a limitation on the scope of the audit Correct answer.
  3. Unmodified opinion with no modification
  4. Disclaimer of opinion

Explanation

When the auditor cannot obtain sufficient appropriate evidence and the possible effects are material but not pervasive, a qualified opinion is issued. A disclaimer is used when the possible effects are both material and pervasive, and an adverse opinion relates to material misstatement, not scope limitation.

Question 14Audit and Assurance

Which of the following situations would most likely require the auditor to modify the audit opinion with an 'except for' qualification due to misstatement?

  1. Inventory is materially overstated and management refuses to correct it Correct answer.
  2. The auditor has a minor difference of view on a disclosure footnote's wording
  3. Management adopts a new accounting policy permitted by the framework
  4. The auditor disagrees with a trivial rounding difference

Explanation

A material misstatement that management refuses to correct leads to a qualified opinion where the effect is material but not pervasive. Trivial differences and permissible policy changes do not warrant modification, and minor wording disagreements are not material.

Question 15Audit and Assurance

Which of the following best describes the purpose of the management representation letter obtained under ISA 580?

  1. To confirm in writing representations made by management during the audit, complementing other audit evidence Correct answer.
  2. To replace all other substantive testing performed by the auditor
  3. To transfer legal liability for the financial statements from management to the auditor
  4. To confirm that the auditor's work has been reviewed by a partner

Explanation

Written representations confirm management's representations and support other audit evidence, but they are not a substitute for other procedures. They do not transfer responsibility for the financial statements, which remains with management.

Question 16Audit and Assurance

An auditor discovers that a fraud involving the finance director has been concealed. Which course of action is most consistent with ISA 240?

  1. Communicate the matter to those charged with governance and consider the auditor's responsibilities regarding reporting Correct answer.
  2. Immediately resign without any further communication
  3. Report the fraud only to the finance director
  4. Conceal the matter to preserve client confidentiality

Explanation

ISA 240 requires the auditor to communicate fraud to the appropriate level of management and, where relevant, those charged with governance, and to consider legal and ethical reporting responsibilities. Concealment is not appropriate, and reporting only to the perpetrator is inadequate.

Question 17Audit and Assurance

Which of the following best describes the auditor's use of analytical procedures during the overall review at the end of the audit?

  1. To satisfy a requirement to test every journal entry
  2. To determine the audit fee for the following year
  3. To assist in forming an overall conclusion on whether the financial statements are consistent with the auditor's understanding of the entity Correct answer.
  4. To replace the need for substantive testing of all account balances

Explanation

ISA 520 requires analytical procedures at the end of the audit to help the auditor form an overall conclusion on the consistency of the financial statements with the auditor's understanding. They do not replace substantive testing or relate to fee setting.

Question 18Audit and Assurance

An auditor is considering the use of an audit software tool to test the accuracy of the sales ledger. Which statement is correct?

  1. Audit software guarantees the accuracy of the sales ledger
  2. Audit software removes the need for professional scepticism
  3. The auditor should consider whether the tool is appropriate for the intended purpose and whether the data used is complete and accurate Correct answer.
  4. Audit software can only be used for small populations

Explanation

When using automated tools and techniques, the auditor must assess the tool's suitability and the completeness and accuracy of the underlying data. Scepticism is still required, and no tool guarantees accuracy.

Question 19Audit and Assurance

Which of the following is a key element of the auditor's consideration of going concern under ISA 570?

  1. Guaranteeing the entity will continue in operation for at least five years
  2. Confirming that the entity has no outstanding bank loans
  3. Assessing management's use of the going concern basis and evaluating the appropriateness of the disclosures Correct answer.
  4. Preparing a cash flow forecast on behalf of management

Explanation

ISA 570 requires the auditor to evaluate management's assessment of the entity's ability to continue as a going concern and the adequacy of related disclosures. The auditor does not guarantee survival or prepare management's forecast.

Question 20Audit and Assurance

An auditor concludes that the financial statements are materially misstated and that the effect is pervasive. Which opinion should be expressed?

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

Explanation

An adverse opinion is expressed when misstatements are both material and pervasive to the financial statements. A qualified opinion applies where the effect is material but not pervasive, and an emphasis of matter paragraph does not address misstatement.

Question 21Audit and Assurance

During the audit, the auditor becomes aware of a subsequent event between the reporting date and the date of the auditor's report that requires adjustment to the financial statements, but management refuses to adjust. How should the auditor respond?

  1. Extend the audit to cover events after the date of the auditor's report
  2. Issue an unmodified opinion with a note explaining the event
  3. Consider the matter in forming the opinion and modify it where the uncorrected misstatement is material Correct answer.
  4. Ignore the event because it occurred after the reporting date

Explanation

Under ISA 560, the auditor must consider the effect of subsequent events on the financial statements and modify the opinion where the uncorrected misstatement is material. The auditor does not ignore the event or extend responsibility indefinitely beyond the report date.

Question 22Audit and Assurance

Which of the following best describes the auditor's consideration of related party transactions under ISA 550?

  1. The auditor should disclose all related party transactions in the audit report
  2. The auditor should ignore related parties unless management raises them
  3. The auditor is responsible for approving related party transactions
  4. The auditor should obtain an understanding of related party relationships and transactions to identify risks of material misstatement, including undisclosed transactions Correct answer.

Explanation

ISA 550 requires the auditor to understand related party relationships and transactions, and to remain alert for undisclosed related party transactions that may indicate misstatement or fraud risk. The auditor does not approve transactions or make disclosures on behalf of the entity.

Question 23Audit and Assurance

An auditor is evaluating the sufficiency of evidence obtained for a significant risk. Which consideration is most relevant to determining sufficiency?

  1. Whether the audit file is stored electronically
  2. Whether the engagement partner is a member of the client's golf club
  3. The quantity of evidence needed, which is affected by the quality of evidence and the assessed level of risk Correct answer.
  4. Whether the client has agreed to the audit fee

Explanation

Sufficiency relates to the quantity of evidence, which is influenced by the quality of that evidence and the level of assessed risk; higher risk generally requires more persuasive evidence. Fee agreement, file storage, and personal relationships do not determine sufficiency.

Question 24Audit and Assurance

Which of the following is the most appropriate action when the auditor identifies a deficiency in internal control that is significant but not material to the financial statements?

  1. Communicate the significant deficiency in writing to those charged with governance on a timely basis Correct answer.
  2. Remain silent because the deficiency is not material
  3. Report the deficiency to the entity's external regulator immediately
  4. Report the deficiency only in the auditor's report on the financial statements

Explanation

ISA 265 requires the auditor to communicate significant deficiencies in internal control in writing to those charged with governance on a timely basis. Such matters are not reported in the auditor's report on the financial statements unless they affect the opinion.

Question 25Audit and Assurance

An auditor uses a substantive analytical procedure to test payroll costs, comparing the current year to the prior year adjusted for a known headcount increase. Which condition is most important for this procedure to provide reliable evidence?

  1. The relationship between the data is expected to be predictable and sufficiently plausible Correct answer.
  2. The payroll system is fully automated
  3. The auditor has performed a test of controls over payroll
  4. The client has provided a signed representation letter

Explanation

Substantive analytical procedures rely on an expectation of a predictable relationship between data; the more plausible and predictable the relationship, the more reliable the evidence. A representation letter, automation, or control testing does not by itself make the procedure reliable.

Question 26Audit and Assurance

Which of the following best describes the purpose of the International Standards on Auditing issued by the IAASB?

  1. To establish the ethical framework for all professional accountants in public practice
  2. To specify the format and content of the auditor's report for listed entities only
  3. To prescribe the accounting treatments an entity must apply when preparing its financial statements
  4. To set out the objectives and requirements for the conduct of an audit of financial statements Correct answer.

Explanation

ISAs are written in an objectives-based format and contain requirements and application material governing how an audit of financial statements is performed. They are auditing standards, so they do not dictate accounting treatments or the general ethical code.

Question 27Audit and Assurance

An auditor is assessing whether the financial statements as a whole are free from material misstatement. Which concept explains why the auditor provides only reasonable, rather than absolute, assurance?

  1. The prohibition on auditors communicating with those charged with governance
  2. The requirement for the auditor to guarantee that no fraud has occurred
  3. The need for the auditor to prepare the financial statements on management's behalf
  4. The inherent limitations of an audit arising from sampling, judgement and the nature of evidence Correct answer.

Explanation

Reasonable assurance reflects the inherent limitations of an audit, including the use of sampling, the exercise of judgement and the persuasive rather than conclusive nature of most audit evidence. These constraints mean some material misstatement may remain undetected.

Question 28Audit and Assurance

Which of the following best describes the purpose of the auditor's assessment of the entity's risk assessment process as part of understanding the entity?

  1. To replace the need for substantive procedures on significant account balances
  2. To provide management with a written guarantee that internal controls are effective
  3. To identify and assess risks of material misstatement and design further audit procedures Correct answer.
  4. To determine the exact amount of the entity's tax liability for the year

Explanation

Understanding the entity and its environment, including its risk assessment process, allows the auditor to identify and assess risks of material misstatement and to design appropriate further audit procedures. It supports the risk-based approach rather than replacing substantive work.

Question 29Audit and Assurance

An auditor is documenting the audit plan. Which of the following is the most appropriate description of the overall audit strategy?

  1. It lists every individual transaction to be vouched during the audit
  2. It sets the scope, timing and direction of the audit and guides the development of the audit plan Correct answer.
  3. It records the auditor's conclusion on the going concern assumption
  4. It is the letter sent to the client confirming the terms of the engagement

Explanation

The overall audit strategy establishes the scope, timing and direction of the audit and guides the more detailed development of the audit plan. The plan then sets out the nature, timing and extent of audit procedures.

Question 30Audit and Assurance

Which of the following is the auditor's primary responsibility when planning the audit under ISA 300?

  1. Avoiding any communication with component auditors
  2. Involving the engagement partner and key team members in planning discussions Correct answer.
  3. Completing all substantive testing before planning begins
  4. Delegating all planning decisions to the client's finance team

Explanation

ISA 300 requires the engagement partner and other key members of the engagement team to be involved in planning, including discussion of the susceptibility of the financial statements to material misstatement. Planning is an ongoing and iterative process led by the audit team.

Question 31Audit and Assurance

An auditor is designing procedures to obtain an understanding of the entity's control environment. Which of the following is most relevant to this assessment?

  1. The commitment of those charged with governance to integrity and ethical values Correct answer.
  2. The number of years the entity has been trading
  3. The market price of the entity's shares at the year end
  4. The depreciation method applied to plant and machinery

Explanation

The control environment encompasses the governance and management functions and the attitudes, awareness and actions of those charged with governance regarding internal control, including their commitment to integrity and ethical values. Other options are unrelated to the control environment.

Question 32Audit and Assurance

Which of the following best describes the purpose of the auditor's communication with those charged with governance under ISA 260?

  1. To obtain their approval of the audit opinion before it is issued
  2. To provide those charged with governance with information relevant to their oversight of the financial reporting process Correct answer.
  3. To obtain their consent before the auditor can use sampling
  4. To transfer management's responsibility for the financial statements to them

Explanation

ISA 260 requires the auditor to communicate matters of governance interest, such as the auditor's views on significant accounting and auditing matters, to those charged with governance to support their oversight role. It does not transfer responsibility or require approval of the opinion.

Question 33Audit and Assurance

Which of the following best describes the purpose of the engagement quality control review performed for certain audit engagements?

  1. To re-perform all substantive procedures carried out by the engagement team
  2. To provide an objective evaluation of the significant judgements made and conclusions reached by the engagement team Correct answer.
  3. To certify that the entity's internal controls are free from all deficiencies
  4. To replace the engagement partner's responsibility for the audit opinion

Explanation

An engagement quality control review is an objective evaluation of the significant judgements made and the conclusions reached by the engagement team before the report is issued. It supports quality and does not transfer the engagement partner's responsibility.

Question 34Audit and Assurance

An auditor is testing the operating effectiveness of a control that requires the credit controller to approve all new customer credit limits above £10,000. Which procedure provides the most appropriate evidence of operating effectiveness?

  1. Recalculating the ageing of trade receivables at the year end
  2. Reviewing the entity's credit policy manual
  3. Enquiring of the sales director whether the control operates
  4. Inspecting a sample of credit limit approvals and agreeing them to the credit controller's authorisation Correct answer.

Explanation

Testing operating effectiveness requires evidence that the control operated as designed throughout the period, for example by inspecting evidence of authorisation for a sample of approvals. Enquiry alone and reviewing the policy provide limited evidence that the control actually operated.

Question 35Audit and Assurance

An auditor is using monetary unit sampling to test the existence of trade receivables. Which population characteristic makes this method particularly appropriate?

  1. The population is expected to contain few, if any, misstatements and items vary widely in value Correct answer.
  2. The population is made up of non-monetary qualitative items
  3. The auditor needs to test controls rather than account balances
  4. The population consists entirely of small, uniform balances with many expected errors

Explanation

Monetary unit sampling is most suited to populations where misstatements are expected to be rare and values are highly variable, because larger balances have a higher chance of selection. It is a substantive sampling method rather than a test of controls.

Question 36Audit and Assurance

An auditor is evaluating the reliability of audit evidence obtained from several sources. Which of the following sources generally provides the most reliable evidence?

  1. Photocopies of internal documents supplied by the client
  2. Management's budgeted figures for the following year
  3. Oral representations from the entity's finance director
  4. Original documents inspected directly by the auditor from an independent external source Correct answer.

Explanation

Evidence is more reliable when it is obtained from independent external sources, when it is in original form and when it is obtained directly by the auditor. Documentary evidence from an external source inspected by the auditor is therefore stronger than internal or oral evidence.

Question 37Audit and Assurance

An auditor is performing a test of details on a sample of purchase invoices and discovers that a purchase of £50,000 was recorded in the wrong accounting period. Which assertion is most directly affected?

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

Explanation

Cut-off concerns whether transactions and events have been recorded in the correct accounting period. Recording a purchase in the wrong period directly breaches cut-off, whereas rights, classification and valuation address different aspects.

Question 38Audit and Assurance

An auditor is considering reliance on the work of an internal audit function. Which of the following factors most affects the extent to which the auditor may use that work?

  1. The location of the internal audit office within the entity's premises
  2. The objectivity and competence of the internal audit function and the rigour of its systematic approach Correct answer.
  3. Whether the internal audit function reports its findings to the finance director
  4. The number of employees in the internal audit department

Explanation

When deciding whether and to what extent to use internal audit work, the external auditor evaluates the objectivity of the function, its level of competence and whether it applies a systematic and disciplined approach, including quality control. Size and location are not the key criteria.

Question 39Audit and Assurance

An auditor is designing substantive procedures for a significant risk identified over revenue recognition. Which of the following responses best addresses the risk?

  1. Reducing the sample size to save time on the engagement
  2. Deferring the testing until after the auditor's report is issued
  3. Extending testing to transactions near the year end and obtaining external evidence of delivery Correct answer.
  4. Relying solely on the entity's revenue recognition policy

Explanation

For a significant risk, the auditor must obtain sufficient appropriate evidence and design procedures specifically responsive to that risk, such as extending cut-off testing and obtaining external evidence of delivery. Reducing work or relying on policy alone is not an adequate response.

Question 40Audit and Assurance

An auditor is testing the accuracy of a batch of inventory records using computer-assisted audit techniques. Which statement best describes the benefit of this approach?

  1. It removes the need for the auditor to understand the entity's IT environment
  2. It replaces the need for professional scepticism during the audit
  3. It guarantees that the inventory records contain no misstatements
  4. It allows the auditor to test the entire population rather than a sample of items Correct answer.

Explanation

Computer-assisted audit techniques allow the auditor to interrogate a whole population, providing more extensive evidence than sampling. They do not guarantee accuracy and still require an understanding of the IT environment and the exercise of scepticism.

Question 41Audit and Assurance

An auditor is assessing whether a misstatement identified during the audit is material. Which of the following considerations is most relevant?

  1. The auditor's personal opinion of management's competence
  2. The number of hours spent by the audit team on the engagement
  3. The size and nature of the misstatement and the circumstances surrounding it Correct answer.
  4. The length of the financial statements

Explanation

Materiality depends on the size and nature of the misstatement, judged in the surrounding circumstances, including qualitative factors such as the effect on trends or compliance with covenants. Team hours and document length are not relevant to materiality.

Question 42Audit and Assurance

An auditor is evaluating the appropriateness of the going concern assumption for an entity that has suffered recurring losses and has a net current liability position. Which of the following procedures is most relevant?

  1. Reviewing the prior year's audit report for consistency of wording
  2. Obtaining and reviewing management's cash flow forecasts and the support for the underlying assumptions Correct answer.
  3. Testing the existence of the entity's plant and machinery
  4. Confirming the entity's share capital with the registrar

Explanation

When events or conditions cast doubt on going concern, the auditor evaluates management's assessment, including the reliability of cash flow forecasts and the reasonableness of the assumptions supporting them. Other procedures do not address the entity's ability to continue.

Question 43Audit and Assurance

An auditor is considering whether a subsequent event occurring after the date of the financial statements but before the date of the auditor's report requires adjustment. Which factor is most relevant?

  1. Whether the event affects the following year's budget
  2. Whether the event provides evidence of conditions that existed at the reporting date Correct answer.
  3. Whether the entity's management has already disclosed the event to its bank
  4. Whether the event was reported in the financial press

Explanation

Events that provide evidence of conditions existing at the reporting date are adjusting events, while those arising after that date are generally non-adjusting and may require disclosure. Media coverage or management's separate communication is not the determining factor.

Question 44Audit and Assurance

An auditor is reviewing a related party transaction where the entity purchased goods at a price significantly above market value from a company controlled by the managing director. Which response is most appropriate?

  1. Assume the transaction is fraudulent and issue an adverse opinion immediately
  2. Disclose the transaction in the auditor's report in place of the financial statements
  3. Ignore the transaction because it is a matter for management's judgement
  4. Assess whether the transaction has been properly disclosed and consider its implications for the reliability of other evidence Correct answer.

Explanation

The auditor evaluates whether related party transactions have been identified, accounted for and disclosed in accordance with the framework, and considers whether such matters affect the reliability of other representations. The auditor does not disclose transactions in place of the entity.

Question 45Audit and Assurance

An auditor is assessing the risk of material misstatement due to fraud in revenue recognition. Which of the following best reflects the presumption in ISA 240?

  1. There is a risk of fraud in revenue recognition, and the auditor must evaluate which revenue streams give rise to such risk Correct answer.
  2. Fraud risk only arises in entities with external investors
  3. Revenue recognition can never give rise to fraud risk
  4. The presumption of fraud risk can be rebutted without documentation

Explanation

ISA 240 presumes risks of material misstatement due to fraud in revenue recognition and requires the auditor to evaluate which types of revenue transactions give rise to such risk. Any rebuttal of the presumption must be documented.

Question 46Audit and Assurance

An auditor is reviewing a draft auditor's report where the opinion is unmodified but the auditor wishes to draw attention to a matter that is fundamental to users' understanding of the financial statements. Which section is appropriate?

  1. A statement that the financial statements are free from all misstatement
  2. A qualification of the opinion in the basis for opinion
  3. An Emphasis of Matter paragraph placed after the basis for opinion Correct answer.
  4. A Key Audit Matters section in an entity where it is not required

Explanation

An Emphasis of Matter paragraph is used when the auditor considers it necessary to draw attention to a matter appropriately presented and disclosed in the financial statements, without modifying the opinion. It is placed after the basis for opinion section.

Question 47Audit and Assurance

An auditor is evaluating the sufficiency and appropriateness of evidence obtained for a significant risk. Which of the following considerations is most relevant?

  1. Whether the evidence was obtained quickly
  2. Whether the evidence was provided by the client's staff
  3. Whether the evidence is relevant to the specific risk and corroborates other evidence obtained Correct answer.
  4. Whether the evidence supports the auditor's initial expectation

Explanation

Sufficiency and appropriateness require evidence that is relevant and reliable in relation to the specific risk, and corroboration with other evidence strengthens the auditor's conclusions. Speed of obtaining evidence and confirmation of prior expectations are not valid criteria.

Question 48Audit and Assurance

An auditor is assessing the appropriateness of using the work of an expert engaged to value a complex derivative portfolio. Which of the following is the most important consideration?

  1. The length of the expert's report
  2. The expert's fee relative to the audit fee
  3. Whether the expert is a member of the same firm as the auditor
  4. The expert's competence, capabilities and objectivity, and the relevance of the valuation methodology Correct answer.

Explanation

When using the work of an auditor's expert, the auditor evaluates the expert's competence, capabilities and objectivity, and the appropriateness of the expert's work, including the methodology and assumptions used. Fee and report length are not relevant criteria.

Question 49Audit and Assurance

An auditor identifies a deficiency in internal control that, in the auditor's judgement, is significant. Which of the following is the most appropriate action?

  1. Communicate the significant deficiency in writing to those charged with governance on a timely basis Correct answer.
  2. Include it in the auditor's report as a qualification of the opinion
  3. Take no action because control deficiencies are management's responsibility
  4. Report it only orally to the finance manager at the end of the audit

Explanation

Significant deficiencies in internal control must be communicated in writing to those charged with governance on a timely basis. The communication is separate from, and does not automatically affect, the audit opinion.

Question 50Audit and Assurance

An auditor is evaluating whether a component auditor's work can be used in the group audit. The component is significant because of its size. Which of the following best describes the group engagement team's responsibility?

  1. Delegation of the group audit opinion to the component auditor
  2. Re-performance of all of the component auditor's substantive procedures
  3. Involvement in the component auditor's risk assessment and the direction, supervision and review of its work Correct answer.
  4. Reliance on the component auditor's report without any further involvement

Explanation

Where a component is significant because of its size, the group engagement team is involved in the component auditor's work, including risk assessment and direction, supervision and review. The group engagement partner remains responsible for the group audit opinion.