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KASNEB CPA Advanced study materials
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KASNEB CPA Advanced practice questions

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Question 1Financial Reporting and Analysis

Under the IASB Conceptual Framework for Financial Reporting, which pair of qualitative characteristics is fundamental?

  1. Prudence, consistency and materiality
  2. Relevance and faithful representation Correct answer.
  3. Comparability, verifiability and timeliness
  4. Understandability and accrual accounting

Explanation

The Conceptual Framework classifies relevance and faithful representation as the two fundamental qualitative characteristics that make information useful. Comparability, verifiability, timeliness and understandability are enhancing characteristics, while prudence and accrual are concepts supporting faithful representation and the accrual basis respectively.

Question 2Financial Reporting and Analysis

Under IAS 2 'Inventories', inventory is measured at:

  1. The lower of cost and net realisable value Correct answer.
  2. The higher of cost and net realisable value
  3. Net realisable value, with any excess over cost taken to equity
  4. Cost, or fair value if fair value is lower

Explanation

IAS 2 requires inventory to be carried at the lower of cost and net realisable value, so that assets are not stated above the amount expected to be recovered from their sale or use. The write-down is recognised as an expense in the period it arises.

Question 3Financial Reporting and Analysis

Under IAS 16, depreciation of an item of property, plant and equipment begins when:

  1. The asset is physically installed at the entity's premises
  2. It is available for use as intended by management Correct answer.
  3. The first full accounting period after acquisition begins
  4. The purchase order is confirmed by the supplier

Explanation

IAS 16 requires depreciation to commence when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Installation alone, or the start of a new accounting period, does not trigger depreciation.

Question 4Financial Reporting and Analysis

Under IAS 38 'Intangible Assets', expenditure incurred during the research phase of an internal project is:

  1. Recognised as an intangible asset at cost
  2. Capitalised and amortised over the expected useful life
  3. Recognised as an expense when incurred Correct answer.
  4. Capitalised where the project is technically feasible

Explanation

IAS 38 prohibits capitalising research expenditure because the entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits at that stage. Development expenditure may be capitalised only once all six recognition criteria are met.

Question 5Financial Reporting and Analysis

Under IAS 37, a provision is recognised only where there is a present obligation, a probable outflow of resources, and:

  1. The board has approved the amount to be paid
  2. The amount can be reliably estimated Correct answer.
  3. A contract with a supplier has been signed
  4. The obligation will be settled within one year

Explanation

IAS 37 requires a reliable estimate of the obligation before a provision can be recognised; where no reliable estimate is possible, a contingent liability is disclosed instead. Settlement timing and internal approvals are not recognition criteria.

Question 6Financial Reporting and Analysis

Which of the following events occurring after the reporting period is an adjusting event under IAS 10?

  1. A decline in the market value of investments after the year end
  2. Insolvency of a customer with a year-end receivable Correct answer.
  3. A fire that destroyed the entity's warehouse after the year end
  4. A major business combination announced after the year end

Explanation

IAS 10 requires adjustment where events after the reporting period provide evidence of conditions that existed at the reporting date. A customer's insolvency confirms the receivable was already impaired at year end, so the carrying amount must be adjusted.

Question 7Financial Reporting and Analysis

Under IFRS 15, the transaction price is allocated to each performance obligation in proportion to:

  1. Their relative stand-alone selling prices Correct answer.
  2. The amounts invoiced to the customer for each obligation
  3. The costs expected to be incurred on each obligation
  4. The time elapsed before each obligation is satisfied

Explanation

IFRS 15 requires the transaction price to be allocated on a relative stand-alone selling price basis, using observable prices or a suitable estimation method where prices are not observable. Cost or invoicing patterns are not the allocation basis.

Question 8Financial Reporting and Analysis

Under IAS 1, an entity prepares its financial statements on a going concern basis unless:

  1. The entity has negative operating cash flows
  2. Management intends to liquidate the entity Correct answer.
  3. The entity has no formal dividend policy
  4. The entity reported a loss in the current period

Explanation

IAS 1 requires the going concern basis unless management either intends to liquidate the entity or cease trading, or has no realistic alternative but to do so. Losses or cash outflows may create doubt but do not by themselves displace the basis.

Question 9Financial Reporting and Analysis

Under IAS 36, the recoverable amount of an asset is:

  1. The lower of fair value less costs of disposal and value in use
  2. The higher of fair value less costs of disposal and value in use Correct answer.
  3. The lower of carrying amount and value in use
  4. The higher of cost and net realisable value

Explanation

IAS 36 defines recoverable amount as the higher of fair value less costs of disposal and value in use, reflecting the most advantageous course of action available to the entity. An impairment loss is the excess of carrying amount over that figure.

Question 10Financial Reporting and Analysis

At the commencement date, an IFRS 16 lease liability is measured at the present value of:

  1. Total undiscounted lease payments over the lease term
  2. Unpaid lease payments discounted at the implicit interest rate Correct answer.
  3. The fair value of the right-of-use asset less lease incentives
  4. Fixed payments only, ignoring any residual value guarantees

Explanation

IFRS 16 measures the lease liability at the present value of lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or, if unavailable, the lessee's incremental borrowing rate. The payments include fixed payments less incentives, variable payments linked to an index, residual guarantees and purchase or extension options expected to be exercised.

Question 11Financial Reporting and Analysis

Under IAS 12, a deferred tax liability arises where the:

  1. Carrying amount of an asset exceeds its tax base Correct answer.
  2. Related expense is deductible in the current period
  3. Entity has unused tax losses available to carry forward
  4. Accounting profit exceeds taxable profit in the current period

Explanation

A taxable temporary difference exists where the carrying amount of an asset exceeds its tax base, because future taxable amounts will exceed future deductible amounts. That difference is multiplied by the expected tax rate to give the deferred tax liability.

Question 12Financial Reporting and Analysis

Under IAS 21, foreign currency monetary items outstanding at the reporting date are translated using:

  1. The average rate for the reporting period
  2. The closing rate at the reporting date Correct answer.
  3. The rate at which the related revenue was recorded
  4. The rate on the date the item was initially recognised

Explanation

IAS 21 requires monetary items to be translated at the closing rate, with resulting exchange differences recognised in profit or loss. Non-monetary items measured at historical cost continue to use the transaction-date rate.

Question 13Financial Reporting and Analysis

Under IAS 19, remeasurements of the net defined benefit liability, such as actuarial gains and losses, are recognised in:

  1. Retained earnings as a prior period adjustment
  2. Profit or loss as an operating expense
  3. Other comprehensive income Correct answer.
  4. Deferred tax, until the obligation is settled

Explanation

IAS 19 requires remeasurements, including actuarial gains and losses, the return on plan assets excluding interest and the effect of the asset ceiling, to be recognised in other comprehensive income. They are not reclassified to profit or loss in later periods.

Question 14Financial Reporting and Analysis

Under IFRS 9, an entity measures the loss allowance at an amount equal to 12-month expected credit losses for instruments that:

  1. Have been past due for more than 30 days at the reporting date
  2. Are credit-impaired at initial recognition
  3. Are trade receivables using the simplified approach
  4. Have no significant increase in credit risk since inception Correct answer.

Explanation

The IFRS 9 general approach starts with 12-month expected credit losses and moves to lifetime expected credit losses once credit risk has increased significantly since initial recognition. A rebuttable presumption of significant increase applies when payments are more than 30 days past due.

Question 15Financial Reporting and Analysis

Under the fair value model of IAS 40, a gain arising from remeasuring an investment property to fair value is recognised in:

  1. Deferred income and released over the property's useful life
  2. Profit or loss for the period Correct answer.
  3. Retained earnings directly, bypassing profit or loss
  4. Other comprehensive income and presented in a revaluation surplus

Explanation

Under the fair value model, investment property is remeasured at each reporting date with changes in fair value recognised in profit or loss. This differs from the IAS 16 revaluation model, where increases go to other comprehensive income.

Question 16Financial Reporting and Analysis

Under IAS 23, capitalisation of borrowing costs on a qualifying asset ceases when:

  1. The asset is substantially ready for its intended use Correct answer.
  2. The asset is ordered from the supplier
  3. The entity's financial year ends
  4. The borrowing is fully repaid

Explanation

IAS 23 requires capitalisation to cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Repayment of the related borrowing is irrelevant to that determination.

Question 17Financial Reporting and Analysis

Under IFRS 3, acquisition-related costs such as advisory and legal fees are:

  1. Debited to goodwill at the acquisition date
  2. Expensed in the period in which they are incurred Correct answer.
  3. Recognised in other comprehensive income
  4. Added to the consideration transferred

Explanation

IFRS 3 requires acquisition-related costs to be expensed as incurred, because they are not part of the consideration transferred for the acquiree. Only consideration transferred, plus any non-controlling interest and previously held interest, forms part of goodwill.

Question 18Financial Reporting and Analysis

Under IAS 7, interest paid by an entity that is not a financial institution may be classified as:

  1. A financing cash flow only
  2. An operating or a financing cash flow, applied consistently Correct answer.
  3. An operating or an investing cash flow, applied consistently
  4. An investing cash flow only

Explanation

IAS 7 permits interest paid to be classified as an operating cash flow because it enters the determination of profit, or as a financing cash flow because it is a cost of obtaining finance. The chosen presentation must be applied consistently.

Question 19Financial Reporting and Analysis

An entity's inventory turnover (cost of sales divided by average inventory) falls from 8.0 to 5.0 while its gross margin is unchanged. Which explanation is most consistent with these figures?

  1. Inventory levels have risen relative to cost of sales Correct answer.
  2. Purchase prices have been renegotiated downwards
  3. Average inventory holdings have been reduced
  4. Receivables are being collected more quickly

Explanation

A falling inventory turnover means cost of sales is being generated from a larger average inventory, that is, inventory days have lengthened. An unchanged gross margin indicates that pricing and cost per unit have not shifted, pointing to higher stock holding rather than margin effects.

Question 20Financial Reporting and Analysis

An entity reports profit attributable to ordinary shareholders of 1,000,000, a weighted average of 500,000 ordinary shares, and 100,000 convertible preference shares that would convert into 200,000 ordinary shares and would save preference dividends of 60,000. What is diluted earnings per share?

  1. 1.67 per share
  2. 1.51 per share Correct answer.
  3. 1.80 per share
  4. 2.00 per share

Explanation

Diluted earnings per share adds back the preference dividend saved to the numerator and adds the incremental shares to the denominator: (1,000,000 + 60,000) divided by (500,000 + 200,000) equals 1.51. The convertible instrument is dilutive because 1.51 is below basic earnings per share of 2.00.

Question 21Financial Reporting and Analysis

Under IFRS 15, variable consideration is included in the transaction price:

  1. In full, with any constraint recognised as a separate provision
  2. Only once the customer confirms the final amount in writing
  3. In full, provided the contract is expected to be profitable
  4. Only where a significant reversal is highly improbable Correct answer.

Explanation

IFRS 15 requires variable consideration to be estimated and included only to the extent that it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. The constraint is applied to the transaction price itself rather than to a separate liability.

Question 22Financial Reporting and Analysis

Under IAS 36, an impairment loss for a cash-generating unit to which goodwill has been allocated is apportioned:

  1. First to goodwill, then pro rata to the other assets Correct answer.
  2. First to the assets with the shortest remaining useful lives
  3. Pro rata across all assets of the unit, including goodwill
  4. Pro rata to the other assets, with any excess to goodwill

Explanation

An impairment loss on a cash-generating unit is allocated first to reduce the carrying amount of goodwill and then pro rata to the other assets of the unit. No asset may be reduced below the highest of its fair value less costs of disposal, value in use and zero.

Question 23Financial Reporting and Analysis

On disposal of a foreign operation, the cumulative exchange differences previously recognised in other comprehensive income are:

  1. Left in equity and never reclassified
  2. Transferred directly to goodwill on disposal
  3. Reclassified to retained earnings without touching profit
  4. Reclassified to profit or loss on disposal Correct answer.

Explanation

IAS 21 requires the cumulative amount of exchange differences recognised in other comprehensive income to be reclassified to profit or loss as a gain or loss on disposal. This applies to the whole interest disposed of, including any related non-controlling interest.

Question 24Financial Reporting and Analysis

Under IFRS 2, equity-settled share options granted to employees are measured at:

  1. The market price of the shares on the vesting date
  2. The exercise price multiplied by the option count
  3. The intrinsic value at each reporting date
  4. The fair value of the options at the grant date Correct answer.

Explanation

IFRS 2 requires equity-settled share-based payments to be measured at the fair value of the equity instruments granted, determined at the grant date using an option pricing model. That fair value is recognised over the vesting period and is not subsequently remeasured.

Question 25Financial Reporting and Analysis

On consolidation, a fair value uplift to inventory acquired in a business combination that remains unsold at the reporting date gives rise to:

  1. No deferred tax, because the uplift is adjusted in consolidated equity
  2. A deferred tax liability on the temporary difference Correct answer.
  3. An increase in current tax payable to the tax authority
  4. A deferred tax asset on the temporary difference

Explanation

The uplift raises the consolidated carrying amount of inventory above its tax base, creating a taxable temporary difference on which a deferred tax liability is recognised. The liability is measured at the tax rate expected to apply when the inventory is sold and the tax deduction is obtained.

Question 26Financial Reporting and Analysis

Under IAS 38, expenditure incurred during the research phase of an internal project to develop a new product is:

  1. Expensed as incurred Correct answer.
  2. Recognised in other comprehensive income until commercial production begins
  3. Recognised as an intangible asset provided the project is expected to be profitable
  4. Deferred and amortised over the expected useful life of the resulting product

Explanation

IAS 38 prohibits the recognition of intangible assets arising from research, because at that stage the entity cannot demonstrate that a probable future economic benefit exists. Research expenditure is therefore written off as an expense when it is incurred. Capitalisation begins only once the development phase criteria in IAS 38 are all met.

Question 27Financial Reporting and Analysis

Within the IFRS 13 fair value hierarchy, Level 2 inputs are:

  1. Inputs other than quoted prices included in Level 1 that are observable, directly or indirectly Correct answer.
  2. Model-derived valuations using only unobservable management forecasts
  3. Quoted prices in active markets for identical assets or liabilities
  4. The present value of expected future cash flows based on management's own assumptions

Explanation

The hierarchy ranks inputs by observability: Level 1 uses unadjusted quoted prices in active markets for identical items, Level 2 uses other observable inputs, and Level 3 uses unobservable inputs. Level 2 therefore covers observable inputs such as quoted prices for similar items, or market-corroborated data. Unobservable management assumptions belong to Level 3.

Question 28Financial Reporting and Analysis

Under IFRS 10, an investor controls an investee where it is exposed to variable returns from its involvement and has the ability to affect those returns through:

  1. Power over the investee Correct answer.
  2. Significant influence over the financial and operating policies of the investee
  3. A contractual right to appoint half of the investee's board of directors
  4. Ownership of more than half of the investee's ordinary shares

Explanation

IFRS 10 defines control as the combination of power over the investee, exposure to variable returns, and the ability to use that power to affect the returns. Power is the capacity to direct the relevant activities, and it must be substantive. Holding a majority of shares or board seats is only evidence that may support a conclusion of power.

Question 29Financial Reporting and Analysis

Under IAS 36, an impairment loss recognised in respect of goodwill is:

  1. Reversed only when the entire cash-generating unit is disposed of
  2. Not reversed in a subsequent period Correct answer.
  3. Reversed through other comprehensive income when value recovers
  4. Reversed through profit or loss when the recoverable amount increases

Explanation

IAS 36 treats goodwill impairment as permanent because any subsequent increase in value is regarded as internally generated goodwill, which cannot be recognised. Impairment losses on other assets may be reversed where the recoverable amount has genuinely increased, but goodwill is expressly excluded. Goodwill is removed from the accounts only on disposal of the related unit.

Question 30Financial Reporting and Analysis

An entity reports profit attributable to ordinary shareholders of Shs 2,000,000 and a weighted average of 1,000,000 ordinary shares. It also has Shs 2,000,000 of 8% convertible loan stock in issue, convertible into 400,000 ordinary shares. The tax rate is 25%. Diluted earnings per share is:

  1. Shs 1.54
  2. Shs 1.43
  3. Shs 1.51 Correct answer.
  4. Shs 2.12

Explanation

For diluted EPS, earnings are increased by the interest saved net of tax: Shs 160,000 x 75% = Shs 120,000, giving Shs 2,120,000. The denominator increases by the 400,000 shares assumed issued, giving 1,400,000 shares. Shs 2,120,000 / 1,400,000 = Shs 1.51.

Question 31Financial Reporting and Analysis

An item of plant with a carrying amount of Shs 500,000 is classified as held for sale on 1 October. Its fair value is Shs 480,000 and the costs to sell are Shs 20,000. In the financial statements for the year ended 31 December, the asset is measured at:

  1. Shs 460,000, with no depreciation charged after classification Correct answer.
  2. Shs 460,000, with depreciation charged up to the date of sale
  3. Shs 480,000, with no depreciation charged after classification
  4. Shs 500,000, with depreciation charged for three months

Explanation

IFRS 5 requires a non-current asset held for sale to be measured at the lower of carrying amount and fair value less costs to sell, here Shs 460,000. Depreciation ceases from the date the asset is classified as held for sale. The Shs 40,000 write-down is presented as an impairment loss.

Question 32Financial Reporting and Analysis

Under IAS 16, when a revalued item of property, plant and equipment is derecognised, the revaluation surplus previously accumulated in equity is:

  1. Reclassified to profit or loss as part of the gain or loss on disposal
  2. Transferred directly to retained earnings and not recycled through profit or loss Correct answer.
  3. Recognised in other comprehensive income in the year of disposal
  4. Offset against the cost of the replacement asset acquired

Explanation

IAS 16 allows the revaluation surplus to be transferred to retained earnings on derecognition, either on disposal or as the asset is used. The transfer is made directly within equity, so it never passes through profit or loss. This means realised revaluation gains do not form part of reported profit on disposal.

Question 33Financial Reporting and Analysis

An entity sells goods through an online platform. It sets the selling price, is responsible for delivering the goods, carries the inventory risk and cannot return unsold goods to the supplier. Under IFRS 15, the entity acts as:

  1. Agent, recognising commission income on each sale
  2. Agent, recognising revenue net of the supplier's price
  3. Principal, recognising revenue net of the amount remitted to the supplier
  4. Principal, recognising the gross amount billed to the customer as revenue Correct answer.

Explanation

IFRS 15 requires an assessment of whether the entity obtains control of the goods before transfer; primary responsibility for fulfilment, pricing discretion and inventory risk all indicate that it does. A principal recognises revenue at the gross amount it expects to be entitled to. Only an agent recognises revenue net of the supplier's charge.

Question 34Financial Reporting and Analysis

A provision is measured at the present value of the expenditure expected to be required to settle the obligation. The increase in the provision arising each year purely from the passage of time is recognised as:

  1. A charge to other comprehensive income
  2. An adjustment to the carrying amount of the related asset
  3. An operating expense presented on the same line as the original provision
  4. A finance cost in profit or loss Correct answer.

Explanation

IAS 37 requires the unwinding of the discount to be presented as a finance cost in the period in which it arises. The effect reflects the time value of money rather than a change in the estimate of the obligation. Changes in the estimate itself are treated separately.

Question 35Financial Reporting and Analysis

An entity enters into a 10-month lease of office equipment with no purchase option and no renewal option. Under IFRS 16, the lessee may:

  1. Recognise a right-of-use asset and lease liability measured over the 10-month term
  2. Classify the arrangement as a finance lease and allocate interest using the implicit rate
  3. Capitalise the lease payments as an intangible asset and amortise them
  4. Recognise the lease payments as an expense on a straight-line basis over the lease term Correct answer.

Explanation

IFRS 16 permits a lessee to elect not to recognise a right-of-use asset and lease liability for leases with a term of 12 months or less that contain no purchase option. The election is made by class of underlying asset. Where it is applied, lease payments are recognised as an expense on a straight-line basis or another systematic basis.

Question 36Financial Reporting and Analysis

Under IFRS 8, a segment is identified as reportable when its reported revenue, including both external sales and intersegment sales, is at least:

  1. 75% of the entity's external revenue
  2. 10% of the entity's total assets
  3. 5% of the combined revenue of all segments
  4. 10% of the combined revenue, internal and external, of all segments Correct answer.

Explanation

IFRS 8 sets three 10% quantitative thresholds based on revenue, reported profit or loss, and assets. For the revenue test, both external and intersegment revenue are included in both the numerator and the combined total. The 75% figure relates to the aggregate external revenue of reportable segments.

Question 37Financial Reporting and Analysis

An entity acquired a building with a fair value of Shs 5,000,000 by issuing ordinary shares. In the statement of cash flows for the year, the transaction is:

  1. Excluded from the statement and disclosed separately as a non-cash transaction Correct answer.
  2. Reported as an investing outflow of Shs 5,000,000 with no corresponding inflow
  3. Reported as a non-cash item within investing activities only
  4. Reported as an investing outflow and a financing inflow of Shs 5,000,000

Explanation

IAS 7 requires investing and financing transactions that do not require the use of cash or cash equivalents to be excluded from the statement of cash flows. They are disclosed elsewhere in the financial statements in a way that provides all relevant information. This avoids presenting gross flows that never occurred.

Question 38Financial Reporting and Analysis

An entity issues a convertible bond for proceeds of Shs 10,000,000. The fair value of the liability component, being the present value of the contractual cash flows discounted at the market rate for a similar non-convertible bond, is Shs 8,600,000. Transaction costs of Shs 200,000 are incurred. Under IAS 32, the amounts recognised initially are:

  1. Liability Shs 8,400,000; equity Shs 1,600,000
  2. Liability Shs 8,428,000; equity Shs 1,400,000
  3. Liability Shs 8,600,000; equity Shs 1,400,000
  4. Liability Shs 8,428,000; equity Shs 1,372,000 Correct answer.

Explanation

The liability is first measured at Shs 8,600,000 and the equity component is the residual Shs 1,400,000. IAS 32 requires transaction costs to be allocated to the liability and equity components pro rata to their initial carrying amounts. The liability bears 86% of the Shs 200,000 (Shs 172,000) and equity the remaining Shs 28,000, giving Shs 8,428,000 and Shs 1,372,000.

Question 39Financial Reporting and Analysis

P acquired 75% of S for consideration of Shs 800,000. At the acquisition date the fair value of S's identifiable net assets was Shs 600,000 and the fair value of the non-controlling interest was Shs 180,000. P measures the non-controlling interest at fair value. Goodwill arising on acquisition is:

  1. Shs 200,000
  2. Shs 380,000 Correct answer.
  3. Shs 150,000
  4. Shs 350,000

Explanation

Where the non-controlling interest is measured at fair value (the full goodwill method), goodwill equals consideration plus the fair value of the non-controlling interest less the fair value of identifiable net assets. Shs 800,000 + Shs 180,000 - Shs 600,000 = Shs 380,000. The Shs 30,000 difference from the proportionate method is the goodwill attributable to the non-controlling interest.

Question 40Financial Reporting and Analysis

An entity sells a building with a carrying amount of Shs 800,000 for its fair value of Shs 1,000,000 and immediately leases it back for 10 years, retaining a right-of-use asset equal to 40% of the building's fair value. Under IFRS 16, the gain the seller-lessee recognises at the transaction date is:

  1. Shs 80,000
  2. Nil, because the transfer does not qualify as a sale
  3. Shs 120,000 Correct answer.
  4. Shs 200,000

Explanation

IFRS 16 requires the seller-lessee to recognise only the portion of the gain relating to the rights transferred to the buyer-lessee. The total gain is Shs 1,000,000 - Shs 800,000 = Shs 200,000, and 60% of the asset's rights were transferred, giving Shs 120,000. The remaining Shs 80,000 is not recognised because it relates to the rights retained.

Question 41Advanced Auditing and Assurance

Which document should the auditor agree with management and, where appropriate, those charged with governance before commencing an audit engagement?

  1. The independence declaration
  2. The management representation letter
  3. The audit engagement letter Correct answer.
  4. The audit completion memorandum

Explanation

ISA 210 requires the auditor to agree the terms of the audit engagement with management or those charged with governance and to record them in an audit engagement letter before the audit begins. The letter confirms the scope, responsibilities and form of any report to be issued.

Question 42Advanced Auditing and Assurance

Performance materiality is best described as:

  1. An amount set below overall materiality to reduce aggregation risk Correct answer.
  2. The maximum misstatement that users of the statements could tolerate
  3. The threshold below which misstatements are treated as clearly trivial
  4. The level of materiality applied only to disclosures in the notes

Explanation

Performance materiality is an amount or amounts set by the auditor at less than materiality for the financial statements as a whole. It reduces to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

Question 43Advanced Auditing and Assurance

Under ISA 500, which of the following provides the most reliable audit evidence?

  1. A photocopy of a purchase invoice retained by the client
  2. An oral explanation given by the financial controller
  3. A client-produced schedule of trade payables
  4. A bank confirmation received directly by the auditor Correct answer.

Explanation

ISA 500 ranks evidence obtained directly by the auditor from an independent external source more highly than internally generated or oral evidence. Reliability increases where the evidence is external, obtained directly by the auditor, and in original documentary form.

Question 44Advanced Auditing and Assurance

Which of the following best describes an engagement quality control review?

  1. An assessment of whether the proposed audit fee is likely to be recoverable
  2. An objective evaluation of significant judgements before the report is issued Correct answer.
  3. A review that substitutes for the engagement partner's own review of the file
  4. A check that the working papers are properly completed and cross-referenced

Explanation

ISQC 1 and ISA 220 require an objective evaluation of the significant judgements made by the engagement team and the conclusions reached in reaching the report. It is performed before the auditor's report is dated and does not replace the engagement partner's own review.

Question 45Advanced Auditing and Assurance

Under ISA 230, the auditor shall complete the assembly of the final audit file no later than:

  1. 120 days after the date of the auditor's report
  2. 30 days after the date of the auditor's report
  3. 90 days after the date of the auditor's report
  4. 60 days after the date of the auditor's report Correct answer.

Explanation

ISA 230 sets a period ordinarily not exceeding 60 days after the date of the auditor's report for assembling the final audit file. After that date no further documentation may be deleted, and any additions must be documented with reasons.

Question 46Advanced Auditing and Assurance

Professional scepticism requires the auditor to:

  1. Remain alert to conditions that may indicate possible misstatement Correct answer.
  2. Verify every transaction recorded during the financial year
  3. Rely on written representations instead of other audit evidence
  4. Assume that management is dishonest in all material matters

Explanation

ISA 200 describes professional scepticism as an attitude of questioning and alertness to conditions that may indicate possible misstatement due to error or fraud. It does not require a presumption of dishonesty.

Question 47Advanced Auditing and Assurance

When the auditor concludes that misstatements are material but not pervasive, the opinion expressed should be:

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

Explanation

ISA 705 requires a qualified opinion where misstatements are material but not pervasive, or where sufficient appropriate evidence cannot be obtained and the possible effects are material but not pervasive. An adverse opinion or disclaimer is used only where the matter is both material and pervasive.

Question 48Advanced Auditing and Assurance

Which of the following is a test of controls?

  1. Vouching a sample of sales invoices to dispatch notes
  2. Inspecting evidence that a supervisor approves credit limits monthly Correct answer.
  3. Recomputing the depreciation charged for the year
  4. Confirming year-end bank balances with the client's bankers

Explanation

A test of controls provides evidence about the operating effectiveness of a control in preventing, or detecting and correcting, material misstatements. Inspecting evidence of supervisory approval of credit limits tests the operation of an authorisation control.

Question 49Advanced Auditing and Assurance

Under ISA 315, a significant risk is one that:

  1. Requires special audit consideration in the auditor's judgement Correct answer.
  2. Arises whenever the client operates in a regulated industry
  3. Is identified only when internal controls are absent
  4. Relates exclusively to the completeness assertion

Explanation

ISA 315 defines a significant risk as an identified risk of material misstatement that, in the auditor's judgement, requires special audit consideration. The determination is a matter of professional judgement rather than a mechanical rule based on industry, controls or a single assertion.

Question 50Advanced Auditing and Assurance

When is it appropriate for the auditor to use negative external confirmations for trade receivables?

  1. When risk is low, the population is large and balances are small Correct answer.
  2. When controls over receivables are known to be ineffective
  3. When individual account balances are large and material
  4. When there is doubt that recipients will respond to the request

Explanation

ISA 505 permits negative confirmations only where the assessed risk of material misstatement is low, a large number of small balances is involved, a very low exception rate is expected, and there is no reason to believe recipients will disregard the requests. Any doubt about response rates or weak controls favours positive confirmation.