I85PREP
⌘ K
CA Final Paper 3: Advanced Auditing study materials
CA Final Paper 3: Advanced Auditing study resources

CA Final Paper 3: Advanced Auditing practice questions

One question at a time. Build your CA Final Paper 3: Advanced Auditing understanding.

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

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

Question 1Audit Planning, Risk Assessment and Materiality

During the planning phase of a statutory audit, the engagement partner establishes an overall materiality level. Which benchmark is most commonly used when auditing a listed manufacturing company whose profitability has been stable for several years?

  1. Gross turnover including excise duty
  2. Profit before tax from continuing operations Correct answer.
  3. Total assets at the beginning of the year
  4. Total equity reported at the prior year end

Explanation

For a profit-oriented entity with stable earnings, profit before tax from continuing operations is the standard benchmark because users focus on earnings performance. A common threshold is around 5% of profit before tax, though professional judgement applies. Other benchmarks are used when profits are volatile or when the entity is not profit-oriented.

Question 2Audit Planning, Risk Assessment and Materiality

An auditor sets performance materiality at 60% of overall materiality. Which statement best explains the purpose of this lower threshold?

  1. To reduce to an appropriately low level the probability that uncorrected and undetected misstatements exceed overall materiality Correct answer.
  2. To guarantee that every individual misstatement above the threshold is reported to those charged with governance
  3. To replace the need for evaluating misstatements identified during the audit
  4. To fix the sample size before any risk assessment procedures are performed

Explanation

Performance materiality is set below overall materiality to create a buffer so that the aggregate of uncorrected and undetected misstatements does not exceed overall materiality. It also drives the extent of audit procedures. It is a planning tool, not a reporting threshold or a substitute for evaluating misstatements.

Question 3Audit Planning, Risk Assessment and Materiality

An auditor of a trading company decides to use total revenue as the materiality benchmark. Which factor most supports this choice?

  1. The entity has a large balance of property, plant and equipment
  2. The entity has recently changed its statutory auditor
  3. The entity is loss-making and revenue is the metric users rely on to assess performance Correct answer.
  4. The entity's profit before tax has been stable and predictable

Explanation

When profitability is volatile or negative, revenue often becomes the more stable and relevant benchmark for users. Stable profit would normally point to profit before tax. Asset balances and auditor changes do not by themselves justify a revenue benchmark.

Question 4Audit Planning, Risk Assessment and Materiality

While obtaining an understanding of the entity and its environment, an auditor identifies that a key customer accounting for 40% of revenue is in financial distress. How should this finding be treated in the risk assessment?

  1. As a matter solely for the client's management to resolve without audit response
  2. As a reason to withdraw from the engagement immediately
  3. As a significant risk affecting the valuation of receivables and revenue recognition Correct answer.
  4. As an immaterial matter that can be ignored until the final review stage

Explanation

Customer concentration combined with financial distress heightens the risk of misstatement in receivable valuation and revenue cut-off, making it a significant risk. Significant risks require specific audit attention and are not deferred to final review. Withdrawal is not an automatic consequence of identifying a risk.

Question 5Audit Planning, Risk Assessment and Materiality

Which procedure is required to be performed during risk assessment to obtain an understanding of the entity's internal control?

  1. Reperformance of all automated controls across every system
  2. Substantive analytical review of the entire general ledger
  3. Confirmation of bank balances with external parties
  4. Inspection of documents and inquiry combined with observation of control operation Correct answer.

Explanation

Risk assessment procedures to understand internal control include inquiry of personnel, inspection of documents, and observation of operations. Substantive procedures and confirmations are responses to assessed risk, not part of obtaining the understanding. Reperformance of every automated control is excessive and not a required planning procedure.

Question 6Audit Planning, Risk Assessment and Materiality

An auditor is assessing inherent risk for a complex derivative portfolio held by a bank. Which characteristic most likely increases inherent risk?

  1. Adequate segregation of duties in the treasury department
  2. High estimation uncertainty and complex valuation models Correct answer.
  3. A long-standing relationship with a reputable external valuer
  4. Routine processing of transactions through a standard system

Explanation

Inherent risk increases with complexity, subjectivity and estimation uncertainty, all present in complex derivative valuations. Routine processing, reputable valuation experts and good segregation of duties are factors that may reduce risk or relate to control risk. They do not by themselves heighten inherent risk.

Question 7Audit Planning, Risk Assessment and Materiality

An engagement team plans to rely on controls over sales invoicing. Which condition must be satisfied before the auditor can reduce substantive testing on the basis of that reliance?

  1. The controls must be tested and found to be operating effectively throughout the period of intended reliance Correct answer.
  2. The internal audit function must have reviewed the controls in the same period
  3. The controls must have been designed by an external consultant
  4. Management must provide a written representation that the controls are adequate

Explanation

Reliance on controls requires the auditor to obtain evidence that the controls operated effectively throughout the period of reliance. Design alone is insufficient. Written representations or internal audit review do not replace the auditor's own testing of operating effectiveness.

Question 8Audit Planning, Risk Assessment and Materiality

Which of the following best describes the auditor's responsibility regarding the entity's going concern assessment at the planning stage?

  1. Prepare the cash flow forecast that supports management's assessment
  2. Evaluate whether events or conditions exist that cast significant doubt on the entity's ability to continue as a going concern Correct answer.
  3. Guarantee that the entity will remain solvent for the next twelve months
  4. Confirm the going concern basis with the entity's bankers as a mandatory procedure

Explanation

The auditor's role is to evaluate management's assessment and consider whether events or conditions create significant doubt about going concern. The auditor cannot guarantee solvency and does not prepare management's forecast. Bank confirmation is not a mandatory going concern procedure.

Question 9Audit Planning, Risk Assessment and Materiality

An auditor determines that a misstatement of INR 5 lakh would influence the economic decisions of users of the financial statements. Which concept does this illustrate?

  1. Clearly trivial threshold
  2. Tolerable misstatement for a sampling application
  3. Overall materiality Correct answer.
  4. Performance materiality

Explanation

Overall materiality is the amount of misstatement that could influence users' economic decisions taken on the basis of the financial statements. Performance materiality is set below it, tolerable misstatement applies to a sampling application, and the clearly trivial threshold is a much smaller accumulation cut-off.

Question 10Audit Planning, Risk Assessment and Materiality

An auditor plans to apply a lower percentage to the chosen benchmark because the entity is listed and has significant debt covenants. Which factor is being reflected?

  1. A conclusion that inherent risk is low
  2. A reduction in the scope of audit procedures required
  3. An intention to avoid documenting the materiality rationale
  4. Higher sensitivity of users' decisions because of public interest and covenant compliance Correct answer.

Explanation

Listed entities and debt covenant compliance increase the sensitivity of users' decisions, so a lower percentage of the benchmark is often appropriate. This does not reduce required procedures, lower inherent risk, or reduce documentation. The materiality rationale must still be documented.

Question 11Audit Planning, Risk Assessment and Materiality

An auditor is deciding the direction of testing for revenue. Given the assessed risk of overstated revenue, which approach is most appropriate?

  1. Rely solely on analytical procedures at year end
  2. Test from recorded entries back to supporting dispatch documents Correct answer.
  3. Test from dispatch documents forward to recorded entries
  4. Test only the first and last week of the financial year

Explanation

When revenue may be overstated, the auditor traces from recorded entries back to source documents to detect entries without substance. Testing from source documents forward is the appropriate direction when understatement is the concern. Analytical procedures alone and testing only two weeks are insufficient coverage.

Question 12Audit Planning, Risk Assessment and Materiality

Which matter would ordinarily be communicated to those charged with governance during the planning phase of the audit?

  1. The exact wording of the expected audit opinion
  2. An overview of the planned scope and timing of the audit Correct answer.
  3. The auditor's preliminary conclusion on each account balance
  4. The detailed audit programme with all planned sample sizes

Explanation

The auditor communicates an overview of the planned scope and timing of the audit to those charged with governance. Detailed programmes and preliminary conclusions are internal working papers, and the opinion cannot be determined before evidence is obtained.

Question 13Audit Planning, Risk Assessment and Materiality

An auditor plans to use the work of an internal audit function to modify the nature and timing of external audit procedures. Which factor is most important in evaluating the adequacy of that work?

  1. The number of staff employed in the internal audit function
  2. The objectivity and competence of the internal auditors and the rigour of their systematic approach Correct answer.
  3. The physical location of the internal audit department
  4. The frequency of internal audit meetings with management

Explanation

When using internal audit work, the auditor evaluates objectivity, technical competence, and whether the work was performed with due professional care and a systematic approach. Staff numbers, location and meeting frequency are not adequate indicators of work quality.

Question 14Audit Planning, Risk Assessment and Materiality

An auditor's preliminary assessment of a significant risk involves complex related-party transactions. Which response is most appropriate?

  1. Assign more experienced staff and involve a specialist in the review of the transaction terms Correct answer.
  2. Defer all work on the transactions until the subsequent period
  3. Reduce the extent of substantive procedures because the risk is already identified
  4. Rely on management's written representation that the transactions are at arm's length

Explanation

For significant risks, the auditor increases the extent and quality of procedures, often using more experienced staff or specialists. Identifying a risk does not justify reducing procedures. Representations do not substitute for evidence, and deferral is inappropriate.

Question 15Audit Planning, Risk Assessment and Materiality

An auditor calculates a clearly trivial threshold for accumulating misstatements. What is the primary purpose of this threshold?

  1. To determine the fee for the audit engagement
  2. To replace the need for an evaluation of identified misstatements
  3. To set the level above which the audit opinion is modified
  4. To avoid accumulating misstatements that are clearly inconsequential in aggregate Correct answer.

Explanation

The clearly trivial threshold is set so that misstatements below it need not be accumulated because they are clearly inconsequential, individually and in aggregate. It is not an opinion-modification threshold, does not affect fees, and does not remove the need to evaluate misstatements.

Question 16Audit Planning, Risk Assessment and Materiality

An auditor discovers that a fraud risk relating to management override of controls exists at every entity. How should the audit response be designed?

  1. Design procedures to address the risk regardless of the assessed level of other fraud risks Correct answer.
  2. Exclude journal entry testing because it is too costly
  3. Rely on the entity's code of conduct as the sole response
  4. Address the risk only if the entity has a history of fraud

Explanation

Management override of controls is a fraud risk present in all entities, so the auditor designs procedures to address it irrespective of other assessed fraud risks. History, codes of conduct and cost are not valid reasons to omit the response. Journal entry testing is a typical procedure for this risk.

Question 17Audit Planning, Risk Assessment and Materiality

An auditor is assessing whether a misstatement is material. Which consideration is most relevant?

  1. The size of the audit team assigned to the engagement
  2. The nature of the item and the circumstances, including whether it affects compliance with covenants Correct answer.
  3. The number of years the auditor has served the client
  4. The currency in which the financial statements are presented

Explanation

Materiality is judged both quantitatively and qualitatively, considering the nature of the item and the circumstances, such as covenant compliance or regulatory matters. Currency, tenure and team size are not determinants of materiality.

Question 18Audit Planning, Risk Assessment and Materiality

Which document is typically prepared at the end of the planning phase to record the auditor's assessment of risks and planned responses?

  1. The management representation letter
  2. The audit strategy and audit plan memorandum Correct answer.
  3. The engagement completion document
  4. The auditor's report

Explanation

The audit strategy and plan memorandum records the scope, timing, direction and the assessed risks with planned responses. The representation letter is obtained near the end of the audit, the report is issued after completion, and the completion document is prepared at the end of the engagement.

Question 19Audit Planning, Risk Assessment and Materiality

An auditor plans to use audit sampling to test a population of purchase invoices. Which factor directly increases the required sample size?

  1. A larger tolerable misstatement for the population
  2. A lower level of desired assurance from the sample
  3. A higher assessed risk of material misstatement for the population Correct answer.
  4. A population that is entirely homogeneous

Explanation

Higher assessed risk of material misstatement increases the required sample size because the auditor needs more evidence. Larger tolerable misstatement, lower desired assurance and a homogeneous population all tend to reduce sample size.

Question 20Audit Planning, Risk Assessment and Materiality

An auditor is evaluating the risk of material misstatement at the assertion level for inventory. Which assertion is most directly affected by a failure to record obsolete stock?

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

Explanation

Obsolete stock affects the valuation assertion because inventory must be measured at the lower of cost and net realisable value. Completeness concerns whether transactions and balances are recorded, rights concern ownership, and classification concerns presentation.

Question 21Audit Planning, Risk Assessment and Materiality

An auditor determines that a component of a group is significant due to its individual financial significance. What is the consequence for the audit approach?

  1. The group auditor excludes the component from the consolidation scope
  2. The component is tested solely through inquiry of component management
  3. The component auditor performs an audit of the component using component materiality Correct answer.
  4. The component auditor performs only analytical procedures at group level

Explanation

A component that is individually financially significant is audited using component materiality to obtain sufficient evidence for the group audit. Analytical procedures alone or inquiry alone are insufficient for a significant component. Excluding it from scope would be improper.

Question 22Audit Planning, Risk Assessment and Materiality

In planning the audit of a bank, an auditor identifies a high volume of small, similar loan transactions processed through an automated system. Which approach is most efficient while maintaining sufficient evidence?

  1. Perform vouching of every individual loan transaction
  2. Perform only a walkthrough of the loan process
  3. Rely solely on the bank's internal audit reports
  4. Rely on automated controls after testing their operating effectiveness and use data analytics for the population Correct answer.

Explanation

For high-volume, homogeneous transactions processed by automated systems, testing automated controls and applying data analytics provides efficient and sufficient evidence. Vouching every transaction is inefficient, internal audit reports alone are insufficient, and a walkthrough alone does not provide sufficient evidence.

Question 23Audit Planning, Risk Assessment and Materiality

An auditor identifies a risk of material misstatement arising from a change in accounting policy for revenue recognition. Which planning procedure is most appropriate?

  1. Review the revised policy against the applicable financial reporting framework and assess the impact on revenue recognition Correct answer.
  2. Accept management's explanation without further evaluation
  3. Reduce substantive testing because the policy was approved by the board
  4. Defer the evaluation to the subsequent year's audit

Explanation

A change in accounting policy creates risk that the revised policy is not in accordance with the applicable framework or is applied incorrectly. The auditor evaluates the policy and its impact on recognition. Management explanation, deferral or board approval do not substitute for this evaluation.

Question 24Audit Planning, Risk Assessment and Materiality

An auditor is assessing the risk of material misstatement related to a related-party transaction that was not disclosed. Which assertion is primarily affected?

  1. Completeness of related-party disclosures Correct answer.
  2. Valuation of the related-party balance
  3. Existence of the related-party balance
  4. Occurrence of the underlying transaction

Explanation

Non-disclosure of a related-party transaction primarily affects the completeness of related-party disclosures, because required information is omitted. Existence, valuation and occurrence concern whether recorded amounts and transactions are genuine and properly measured.

Question 25Audit Evidence, Audit Procedures and Documentation

Under the Standards on Auditing, which of the following best describes the relationship between the reliability of audit evidence and the source from which it is obtained?

  1. Evidence generated internally is more reliable because the auditor understands the client's internal controls.
  2. Documents in physical form are always more reliable than electronic records irrespective of controls.
  3. Evidence obtained from external independent sources is generally more reliable than evidence generated internally. Correct answer.
  4. Oral representations from management are as reliable as written confirmations from third parties.

Explanation

SA 500 establishes that evidence from independent external sources is generally more reliable than evidence obtained only from within the entity. Reliability also increases when evidence exists in documentary form and when it is obtained directly by the auditor. These are guidelines rather than absolute rules and must be applied with professional judgement.

Question 26Audit Evidence, Audit Procedures and Documentation

An auditor designs substantive procedures and wishes to obtain more persuasive evidence regarding the existence of trade receivables. Which procedure provides the most persuasive audit evidence for existence?

  1. Inspection of the sales ledger and monthly reconciliation.
  2. Reviewing the aged receivables listing prepared by the finance team.
  3. External confirmation of balances directly with selected customers. Correct answer.
  4. Inquiry of the credit controller about collection status.

Explanation

External confirmation provides evidence obtained directly by the auditor from an independent third party, which is more persuasive for existence. The other procedures rely on internally generated records or management representations. Direct third-party corroboration reduces the risk of management bias.

Question 27Audit Evidence, Audit Procedures and Documentation

When an external confirmation request is returned with a discrepancy, which of the following is the auditor's most appropriate next step?

  1. Ignore the discrepancy provided the difference is below performance materiality.
  2. Investigate the difference to determine whether a misstatement exists and document the resolution. Correct answer.
  3. Treat the confirmation as a non-response and perform alternative procedures.
  4. Accept the customer's figure if it is lower than the recorded balance.

Explanation

SA 505 requires the auditor to investigate exceptions and determine whether they indicate a misstatement. The auditor should reconcile the difference and evaluate its implications for the financial statements and the audit approach. The investigation and conclusion must be documented.

Question 28Audit Evidence, Audit Procedures and Documentation

Which of the following best describes the purpose of audit documentation in accordance with SA 230?

  1. To replace the need for written representations from those charged with governance.
  2. To provide a sufficient and appropriate record of the basis for the auditor's report. Correct answer.
  3. To serve as the primary evidence supporting the entity's financial statement assertions.
  4. To demonstrate to the tax authorities that the audit was appropriately priced.

Explanation

SA 230 states that the purpose of audit documentation is to provide evidence of the auditor's basis for the report and evidence that the audit was performed in accordance with Standards on Auditing. Documentation is not a substitute for the entity's own accounting records. It also supports the auditor's accountability and planning of future audits.

Question 29Audit Evidence, Audit Procedures and Documentation

Under SA 230, within what period must the auditor assemble the final audit file after the date of the auditor's report?

  1. 90 days
  2. 120 days
  3. 60 days Correct answer.
  4. 30 days

Explanation

SA 230 requires the auditor to assemble the audit documentation in an audit file within 60 days after the date of the auditor's report. This is a mandatory administrative deadline. Completing assembly later without documentation of the reason may indicate non-compliance with the standard.

Question 30Audit Evidence, Audit Procedures and Documentation

After the final audit file has been assembled, the auditor discovers that a working paper requires correction. Which action is most consistent with SA 230?

  1. Amend the file without recording the change because the correction is minor.
  2. Record the specific circumstances, the person making the change, and the date of the modification. Correct answer.
  3. Delete the original working paper and replace it with the corrected version.
  4. Reopen the entire file and re-perform all substantive procedures for that area.

Explanation

SA 230 permits modifications after assembly only if the auditor documents the specific circumstances, the person making the change, and the date of the modification. This preserves the audit trail and accountability. Unrecorded alterations undermine the integrity of the file.

Question 31Audit Evidence, Audit Procedures and Documentation

An auditor performs a test of controls over the authorisation of purchase orders. Which assertion is most directly addressed by this procedure?

  1. Classification of purchases in the statement of profit and loss.
  2. Occurrence and authorisation of transactions. Correct answer.
  3. Valuation of purchases.
  4. Cut-off of purchases.

Explanation

Testing authorisation of purchase orders addresses whether transactions occurred and were properly authorised. Controls over authorisation relate to the occurrence and authorisation of recorded transactions. Valuation, cut-off and classification are addressed by other controls and substantive procedures.

Question 32Audit Evidence, Audit Procedures and Documentation

Which of the following is the most appropriate way for the auditor to obtain evidence about the operating effectiveness of a control that leaves no documentary evidence?

  1. Observation of the control being performed, combined with inquiry. Correct answer.
  2. Inspection of the control manual.
  3. Review of the prior year's audit file.
  4. Reliance on management's written representation.

Explanation

Where a control leaves no audit trail, observation combined with inquiry is an appropriate method to obtain evidence of operating effectiveness. Observation provides direct evidence of performance at a point in time. Inquiry alone is insufficient and must be corroborated.

Question 33Audit Evidence, Audit Procedures and Documentation

An auditor selects a sample of journals and traces them to supporting documentation to verify that the transactions recorded actually occurred. Which assertion is being tested?

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

Explanation

Tracing recorded entries forward to supporting documentation tests whether recorded transactions actually occurred. This is a test of occurrence, also referred to as vouching. Completeness would be tested by tracing from source documents to the records.

Question 34Audit Evidence, Audit Procedures and Documentation

Which of the following best describes the relationship between the direction of testing and the assertion addressed?

  1. Tracing from source documents to the ledger primarily tests completeness. Correct answer.
  2. Tracing from the ledger to source documents primarily tests rights and obligations.
  3. Tracing from the ledger to source documents primarily tests completeness.
  4. Tracing from source documents to the ledger primarily tests occurrence.

Explanation

Tracing from source documents to the ledger tests whether all transactions that should be recorded have been recorded, addressing completeness. The reverse direction, vouching from the ledger to source documents, addresses occurrence. Direction of testing determines which assertion is being examined.

Question 35Audit Evidence, Audit Procedures and Documentation

An auditor is unable to obtain sufficient appropriate audit evidence regarding an investment in an unquoted entity because the client refuses access to the investee's records. What is the most likely consequence for the audit opinion?

  1. An adverse opinion regardless of the size of the investment.
  2. An unmodified opinion with an emphasis of matter paragraph.
  3. A qualified opinion or a disclaimer of opinion, depending on pervasiveness. Correct answer.
  4. No modification is required if management provides a written representation.

Explanation

A scope limitation arising from inability to obtain evidence leads to a qualified opinion if the effect is material but not pervasive, or a disclaimer if it is material and pervasive. Written representations cannot substitute for the missing evidence. The classification depends on the auditor's judgement of pervasiveness.

Question 36Audit Evidence, Audit Procedures and Documentation

Which of the following procedures would the auditor most likely perform to obtain evidence about the completeness of recorded liabilities at year end?

  1. Confirming recorded balances with suppliers.
  2. Vouching recorded liabilities to supplier invoices.
  3. Inspecting the prior year's financial statements.
  4. Reviewing subsequent payments and searching for unrecorded invoices. Correct answer.

Explanation

Searching for unrecorded liabilities, including reviewing payments made after year end and unmatched invoices, addresses completeness. Vouching recorded items and confirming recorded balances test existence or valuation rather than completeness. Subsequent payments can reveal obligations that existed at year end but were not recorded.

Question 37Audit Evidence, Audit Procedures and Documentation

The auditor's documentation of the audit strategy and plan should be sufficient to demonstrate which of the following?

  1. That the audit was planned and that the planned nature, timing and extent of procedures were based on the assessed risks. Correct answer.
  2. That the audit fee was negotiated in accordance with the Code of Ethics.
  3. That the auditor has guaranteed the accuracy of the financial statements.
  4. That the client's internal controls were designed by the auditor.

Explanation

SA 300 requires documentation of the audit strategy and plan, including the nature, timing and extent of planned risk assessment and further audit procedures. This demonstrates that planning was responsive to assessed risks. The auditor does not design the entity's controls or guarantee the financial statements.

Question 38Audit Evidence, Audit Procedures and Documentation

Which of the following is a characteristic of a well-designed audit sampling plan for tests of controls?

  1. Defining the population and sampling unit and selecting a sample expected to be representative. Correct answer.
  2. Selecting only the largest items in the population.
  3. Selecting items based only on the auditor's judgement without a defined population.
  4. Relying on a single item selected haphazardly.

Explanation

A sound sampling plan defines the population and sampling unit and selects a representative sample so that conclusions can be projected to the population. Judgemental selection of only large or single items does not support statistical projection. Representativeness is central to the validity of sampling conclusions.

Question 39Audit Evidence, Audit Procedures and Documentation

An auditor identifies a deviation in a sample selected for a test of controls. Which of the following is the most appropriate response?

  1. Automatically issue a qualified opinion.
  2. Increase the sample size without evaluating the cause of the deviation.
  3. Evaluate the deviation, consider its cause, and assess its effect on the assessed risk of material misstatement. Correct answer.
  4. Ignore the deviation if the sample size was large.

Explanation

The auditor must evaluate deviations, including their nature and cause, and consider the effect on the assessed risk of material misstatement and the planned reliance on controls. Deviations may indicate control deficiencies requiring further investigation. The response must be proportionate and documented.

Question 40Audit Evidence, Audit Procedures and Documentation

Which of the following best describes the auditor's responsibility regarding the use of information produced by the entity (IPE) in audit procedures?

  1. The auditor must independently recreate all IPE used in the audit.
  2. The auditor may rely on IPE without any evaluation if management accepts responsibility.
  3. IPE can only be used if it has been audited by another firm.
  4. The auditor should evaluate whether the IPE is sufficiently complete and accurate for the purpose. Correct answer.

Explanation

When using information produced by the entity, the auditor must evaluate whether the information is sufficiently complete and accurate for the intended purpose. This may involve testing the completeness and accuracy of the underlying data or the controls over its generation. The auditor is not required to recreate all IPE independently.

Question 41Audit Evidence, Audit Procedures and Documentation

Which of the following is the most reliable form of audit evidence regarding the existence of inventory held by a third party?

  1. A schedule prepared by the client's warehouse staff.
  2. A written confirmation obtained directly from the third party, supplemented by other procedures where necessary. Correct answer.
  3. A copy of the client's purchase order.
  4. A verbal assurance from the third-party custodian.

Explanation

A confirmation obtained directly from an independent third party provides more persuasive evidence about the existence of inventory held by that party. Where the confirmation is insufficient, the auditor may also inspect the third party's records or attend the count. Verbal assurances and internal documents are less reliable.

Question 42Audit Evidence, Audit Procedures and Documentation

Under SA 580, written representations from management are required to be dated:

  1. As of the date the audit fieldwork commenced.
  2. As of the date the engagement letter was signed.
  3. As of the date of the financial statements.
  4. As of the date of the auditor's report. Correct answer.

Explanation

SA 580 requires written representations to be dated as near as practicable to, but not after, the date of the auditor's report. This ensures that the representations cover the period up to the report date. Representations dated after the report would not support the conclusions reached.

Question 43Audit Evidence, Audit Procedures and Documentation

Which of the following best describes the auditor's use of analytical procedures as substantive procedures?

  1. They are only permitted during the planning phase.
  2. They involve developing expectations and comparing them with recorded amounts to identify significant fluctuations. Correct answer.
  3. They require no documentation because they are informal.
  4. They replace the need for any substantive tests of detail.

Explanation

Substantive analytical procedures involve developing an expectation of recorded amounts and comparing it with the recorded figures to identify and investigate significant fluctuations. They do not eliminate the need for tests of detail where risks are high. The procedures must be documented.

Question 44Audit Evidence, Audit Procedures and Documentation

An auditor plans to use the work of an auditor's expert. Which of the following is the auditor's primary responsibility?

  1. To disclose the expert's name in the auditor's report.
  2. To perform the expert's procedures personally.
  3. To accept the expert's findings without further evaluation.
  4. To evaluate the competence, capabilities and objectivity of the expert and the adequacy of the expert's work. Correct answer.

Explanation

SA 620 requires the auditor to evaluate the competence, capabilities and objectivity of the auditor's expert and to assess the adequacy of the expert's work for audit purposes. The auditor remains responsible for the audit opinion. The expert's work is not accepted uncritically.

Question 45Audit Evidence, Audit Procedures and Documentation

Which of the following is the most appropriate procedure for the auditor to verify the existence of property, plant and equipment acquired during the year?

  1. Reviewing the prior year's fixed asset register.
  2. Reviewing the depreciation schedule.
  3. Physical inspection of the asset and inspection of supporting purchase documentation. Correct answer.
  4. Inquiry of the finance manager.

Explanation

Physical inspection combined with inspection of purchase documentation provides direct evidence of the existence and acquisition of the asset. The depreciation schedule and prior year register do not evidence current-year existence. Inquiry alone is insufficient.

Question 46Audit Evidence, Audit Procedures and Documentation

An auditor is evaluating the sufficiency of audit evidence. Which of the following best describes sufficiency?

  1. The extent to which evidence supports the financial statements as a whole.
  2. The measure of the quality of audit evidence in terms of its relevance and reliability.
  3. The measure of the quantity of audit evidence obtained. Correct answer.
  4. The degree to which evidence is obtained in documentary form.

Explanation

Sufficiency refers to the quantity of audit evidence, while appropriateness refers to its quality in terms of relevance and reliability. The auditor must obtain sufficient appropriate evidence to support the audit opinion. Quantity alone does not compensate for poor quality.

Question 47Audit Evidence, Audit Procedures and Documentation

During the audit of a bank, the auditor sends a confirmation request to a borrower but receives no reply after follow-up. Which of the following is the most appropriate course of action?

  1. Rely on the client's internal records without further work.
  2. Perform alternative procedures to obtain evidence about the balance. Correct answer.
  3. Treat the balance as confirmed because the borrower did not dispute it.
  4. Issue a qualified opinion immediately.

Explanation

When a confirmation request is not returned, the auditor should perform alternative procedures to obtain the required evidence, such as inspecting subsequent receipts or other documentation. Silence is not confirmation. A modified opinion is considered only if alternative procedures fail to provide sufficient evidence.

Question 48Audit Evidence, Audit Procedures and Documentation

An auditor uses audit software to test the completeness of the sales ledger by comparing the total of individual invoices with the general ledger posting. Which assertion is primarily being tested?

  1. Completeness. Correct answer.
  2. Cut-off.
  3. Occurrence.
  4. Valuation.

Explanation

Reconciling the total of individual invoices to the general ledger posting tests whether all invoices have been recorded, addressing completeness. Occurrence would be tested by vouching recorded entries to source documents. Valuation and cut-off require different procedures.

Question 49Audit Reports, Modifications and Auditor Communications

Under SA 700 (Revised), which element must be included in the auditor's report on a complete set of general purpose financial statements prepared under a fair presentation framework?

  1. A reference to the ethical requirements the auditor complied with and the independence statement Correct answer.
  2. A guarantee of the entity's future viability
  3. A statement that the financial statements are the responsibility of the auditor
  4. An explicit assurance that the financial statements are free from all misstatement

Explanation

SA 700 requires the auditor's report to describe the auditor's responsibilities, including compliance with relevant ethical requirements and independence, and to state that management is responsible for the financial statements. The auditor expresses an opinion on fair presentation, not a guarantee of absolute accuracy or future viability.

Question 50Audit Reports, Modifications and Auditor Communications

An auditor concludes that the financial statements as a whole are materially misstated and management refuses to correct the misstatement. Which modification is appropriate?

  1. Unmodified opinion with an emphasis of matter paragraph
  2. Qualified or adverse opinion depending on pervasiveness Correct answer.
  3. Unmodified opinion with an other matter paragraph
  4. Disclaimer of opinion in all cases

Explanation

Under SA 705, when the auditor has obtained sufficient appropriate evidence and concludes the financial statements are materially misstated, the opinion is qualified if the effect is material but not pervasive and adverse if it is both material and pervasive. Emphasis of matter and other matter paragraphs cannot substitute for a modification.