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Sri Lanka Audit Officer Exam practice questions

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Question 1Financial Accounting and Reporting

Under Sri Lanka's financial reporting framework for entities with public accountability, which body issues the accounting standards that such entities apply?

  1. The Institute of Chartered Accountants of Sri Lanka, through its Accounting Standards Committee Correct answer.
  2. The Department of Inland Revenue, through its tax circulars
  3. The Colombo Stock Exchange, through its listing rules division
  4. The Central Bank of Sri Lanka, through its banking supervision unit

Explanation

Accounting standards in Sri Lanka are promulgated by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), which adopts and issues SLFRS and LKAS through its standard-setting process. The Colombo Stock Exchange, Inland Revenue and Central Bank impose regulatory or tax requirements but are not the standard-setting authority.

Question 2Financial Accounting and Reporting

A company's financial statements are prepared on the going concern basis. Which situation most directly undermines the appropriateness of that assumption?

  1. The entity has reported a net loss for the current year only
  2. The entity's current liabilities exceed its current assets by a wide margin and lenders have refused to renew facilities Correct answer.
  3. The entity has declared a dividend after the reporting date from post-year-end profits
  4. The entity has changed its depreciation method for plant and machinery

Explanation

Going concern is assessed on the entity's ability to continue for the foreseeable future, so severe liquidity shortfalls combined with withdrawal of financing are strong indicators of doubt. A single year's loss, a depreciation policy change, or a post-year-end dividend declaration from later profits does not by itself indicate the entity cannot continue.

Question 3Financial Accounting and Reporting

According to the LKAS 1 structure, which of the following is presented as a separate statement rather than within the statement of profit or loss?

  1. Finance costs
  2. Other comprehensive income Correct answer.
  3. Distribution costs
  4. Cost of sales

Explanation

LKAS 1 requires an entity to present a statement of profit or loss and other comprehensive income, with other comprehensive income shown separately from profit or loss. Cost of sales, distribution costs and finance costs are all components of profit or loss.

Question 4Financial Accounting and Reporting

An entity purchases machinery for Rs. 5,000,000. The supplier offers a 2% settlement discount if paid within 10 days, and the entity expects to take it. Freight and installation cost Rs. 150,000. What is the initial cost of the machinery under LKAS 16?

  1. Rs. 4,900,000
  2. Rs. 5,000,000
  3. Rs. 5,150,000
  4. Rs. 5,050,000 Correct answer.

Explanation

LKAS 16 measures cost at the cash price equivalent, so a settlement discount expected to be taken is deducted from the purchase price, giving Rs. 4,900,000, and directly attributable costs such as freight and installation of Rs. 150,000 are added. The resulting cost is Rs. 5,050,000.

Question 5Financial Accounting and Reporting

An entity uses the revaluation model for a building. On revaluation, the carrying amount rises by Rs. 2,000,000, of which Rs. 1,200,000 reverses a previously recognised revaluation deficit that had been charged to profit or loss. How should the increase be treated?

  1. Recognise Rs. 1,200,000 in other comprehensive income and Rs. 800,000 in profit or loss
  2. Recognise Rs. 2,000,000 in other comprehensive income
  3. Recognise Rs. 2,000,000 in profit or loss
  4. Recognise Rs. 1,200,000 in profit or loss and Rs. 800,000 in other comprehensive income Correct answer.

Explanation

Under LKAS 16, an increase on revaluation is recognised in other comprehensive income, except to the extent it reverses a previous decrease that was recognised in profit or loss, which is recognised in profit or loss. Here Rs. 1,200,000 reverses the earlier deficit and the remaining Rs. 800,000 goes to other comprehensive income.

Question 6Financial Accounting and Reporting

Which cost formula does LKAS 2 require for inventories that are not ordinarily interchangeable?

  1. First-in, first-out or weighted average cost
  2. Last-in, first-out
  3. Standard cost adjusted to actual at year end
  4. Specific identification of individual costs Correct answer.

Explanation

LKAS 2 requires specific identification of individual costs for inventories that are not ordinarily interchangeable and goods produced for specific projects. FIFO and weighted average cost are permitted only for interchangeable items, and LIFO is not permitted at all.

Question 7Financial Accounting and Reporting

An entity sells goods for Rs. 1,000,000 with a right of return allowing customers to return items within 30 days. Based on historical data, the entity expects 5% of goods to be returned. Under SLFRS 15, how much revenue should be recognised at the point of sale?

  1. Rs. 1,000,000
  2. Rs. 50,000
  3. Rs. 950,000 Correct answer.
  4. Rs. 900,000

Explanation

SLFRS 15 requires revenue to be recognised only to the extent that it is highly probable there will not be a significant reversal, so expected returns are excluded and a refund liability recognised. Revenue is therefore Rs. 950,000, with Rs. 50,000 recognised as a refund liability.

Question 8Financial Accounting and Reporting

A company issues 100,000 ordinary shares of Rs. 10 each at Rs. 15 per share, fully paid. How should the excess over par value be recorded?

  1. As share premium within equity Correct answer.
  2. As a liability to shareholders
  3. As share capital
  4. As a gain in profit or loss

Explanation

Amounts received above the nominal value of shares are credited to share premium, which is a component of equity, not profit or loss. Share capital is recorded only at nominal value, and the premium is not a liability because it is not repayable to shareholders.

Question 9Financial Accounting and Reporting

An entity recognises a provision for a lawsuit. Which condition must be satisfied for a provision to be recognised under LKAS 37?

  1. A future obligation that the entity intends to create
  2. A possible obligation that depends on a future event beyond the entity's control
  3. A present obligation arising from a past event, probable outflow, and a reliable estimate Correct answer.
  4. An obligation that can be settled only by a transfer of shares

Explanation

LKAS 37 requires a present obligation as a result of a past event, a probable outflow of resources embodying economic benefits, and a reliable estimate of the amount. A possible obligation is a contingent liability that is disclosed, not recognised.

Question 10Financial Accounting and Reporting

An entity has a defined benefit obligation of Rs. 10,000,000 and plan assets with a fair value of Rs. 9,200,000 at the reporting date. How is the net defined benefit position presented?

  1. A net liability of Rs. 800,000 Correct answer.
  2. A provision of Rs. 10,000,000
  3. A net asset of Rs. 800,000
  4. A contingent liability of Rs. 800,000

Explanation

Under LKAS 19 the net defined benefit liability or asset is the present value of the defined benefit obligation less the fair value of plan assets. Since the obligation exceeds the assets by Rs. 800,000, a net liability is recognised.

Question 11Financial Accounting and Reporting

Which of the following best describes the purpose of the statement of cash flows prepared under LKAS 7?

  1. To reconcile the opening and closing balances of retained earnings
  2. To disclose the fair value of financial instruments held
  3. To show the profit earned from operations during the period
  4. To provide information about the historical changes in cash and cash equivalents Correct answer.

Explanation

LKAS 7 requires a statement of cash flows that provides information about historical changes in cash and cash equivalents, classified into operating, investing and financing activities. It does not replace the income statement or the statement of changes in equity.

Question 12Financial Accounting and Reporting

An entity pays interest of Rs. 300,000 on borrowings used to finance general working capital. Under LKAS 7, how may this interest be classified?

  1. Only as a financing activity
  2. As either an operating or a financing activity, consistently applied Correct answer.
  3. Only as an operating activity
  4. Only as an investing activity

Explanation

LKAS 7 allows interest paid to be classified as either an operating cash flow or a financing cash flow, provided the classification is applied consistently. Interest paid cannot be classified as an investing activity.

Question 13Financial Accounting and Reporting

An entity's gross profit is Rs. 4,000,000, operating expenses are Rs. 2,500,000 and finance costs are Rs. 400,000. What is the profit before tax?

  1. Rs. 1,100,000 Correct answer.
  2. Rs. 1,500,000
  3. Rs. 1,900,000
  4. Rs. 4,000,000

Explanation

Profit before tax is gross profit less operating expenses less finance costs, i.e. Rs. 4,000,000 minus Rs. 2,500,000 minus Rs. 400,000, giving Rs. 1,100,000. Finance costs are deducted before arriving at profit before tax.

Question 14Financial Accounting and Reporting

An entity acquires a patent for Rs. 2,000,000 with a useful life of 10 years and no residual value. After 3 years, the recoverable amount is assessed at Rs. 1,200,000. What is the impairment loss under LKAS 36?

  1. Rs. 1,400,000
  2. Rs. 200,000 Correct answer.
  3. Nil
  4. Rs. 800,000

Explanation

Amortisation of Rs. 200,000 per year for 3 years reduces the carrying amount to Rs. 1,400,000. The recoverable amount of Rs. 1,200,000 is lower, so the impairment loss is the difference of Rs. 200,000.

Question 15Financial Accounting and Reporting

Which of the following items is recognised as an intangible asset under LKAS 38?

  1. Start-up costs of a new business
  2. Internally generated goodwill
  3. An acquired customer list with a measurable fair value at acquisition Correct answer.
  4. Research expenditure incurred in developing a new process

Explanation

LKAS 38 permits recognition of an intangible asset acquired in a business combination, such as a customer list, where it is separable or arises from contractual or legal rights and its fair value can be measured reliably. Internally generated goodwill, research expenditure and start-up costs are expensed.

Question 16Financial Accounting and Reporting

A company's trade receivables are Rs. 8,000,000. Based on historical experience, 3% of receivables are expected to be uncollectible. Under SLFRS 9, what is the loss allowance at initial recognition?

  1. Nil, because no default has occurred
  2. Rs. 80,000
  3. Rs. 240,000 Correct answer.
  4. Rs. 8,000,000

Explanation

SLFRS 9 requires an expected credit loss allowance to be recognised from initial recognition, even without evidence of default. Applying the 3% expected loss rate to Rs. 8,000,000 gives a loss allowance of Rs. 240,000.

Question 17Financial Accounting and Reporting

In a business combination accounted for under SLFRS 3, how is goodwill measured?

  1. As the difference between the purchase price and the target's retained earnings
  2. As the excess of the acquirer's share price over the target's book value
  3. As the fair value of consideration transferred plus non-controlling interest less the net identifiable assets acquired Correct answer.
  4. As the total of all intangible assets acquired

Explanation

SLFRS 3 measures goodwill at the acquisition date as the consideration transferred plus the amount of any non-controlling interest plus the fair value of previously held interests, less the net identifiable assets acquired and liabilities assumed. Book values are not the basis for this calculation.

Question 18Financial Accounting and Reporting

Which of the following is a related party of an entity under LKAS 24?

  1. A key management personnel member of the entity Correct answer.
  2. A major customer that purchases 40% of the entity's output
  3. A bank that provides a loan facility to the entity
  4. A government department that collects taxes from the entity

Explanation

LKAS 24 identifies key management personnel, and their close family members, as related parties because they have authority and responsibility for planning, directing and controlling the entity's activities. A major customer, a lender and a tax authority are not related parties merely by virtue of those relationships.

Question 19Financial Accounting and Reporting

An entity changes its accounting policy for inventory valuation. Which treatment is required under LKAS 8?

  1. Apply the change retrospectively, restating comparatives unless impracticable Correct answer.
  2. Apply the change only to future purchases
  3. Apply the change prospectively with no disclosure
  4. Recognise the cumulative effect in other comprehensive income

Explanation

LKAS 8 requires a voluntary change in accounting policy to be applied retrospectively, adjusting the opening balance of each affected component of equity and restating comparative information unless it is impracticable to do so. The effect is not taken to other comprehensive income.

Question 20Financial Accounting and Reporting

Which of the following is an adjusting event after the reporting date under LKAS 10?

  1. A major business combination announced after the year end
  2. A fire that destroyed the entity's warehouse after the year end
  3. A decline in market prices of the entity's inventory occurring after the year end
  4. The bankruptcy of a customer whose receivable existed at the reporting date Correct answer.

Explanation

A customer bankruptcy after the reporting date provides evidence of conditions that existed at the reporting date, so it is an adjusting event that affects the measurement of the receivable. The other events concern conditions arising after the reporting date and are non-adjusting.

Question 21Financial Accounting and Reporting

An entity leases equipment for 5 years with annual payments of Rs. 1,000,000 payable in arrears. The interest rate implicit in the lease is 10%, and the present value of the payments is Rs. 3,790,787. Under SLFRS 16, what is the initial lease liability?

  1. Rs. 500,000
  2. Rs. 3,790,787 Correct answer.
  3. Rs. 1,000,000
  4. Rs. 5,000,000

Explanation

SLFRS 16 requires the lease liability to be measured initially at the present value of the lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease. That present value is Rs. 3,790,787, not the undiscounted total of Rs. 5,000,000.

Question 22Financial Accounting and Reporting

Which of the following best describes the objective of general purpose financial reporting under the Conceptual Framework?

  1. To provide information to management for internal decision making
  2. To determine the taxable income of the entity
  3. To ensure compliance with stock exchange listing requirements
  4. To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors Correct answer.

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Internal management reporting and tax determination are separate objectives.

Question 23Financial Accounting and Reporting

An entity has taxable temporary differences of Rs. 2,000,000 and a tax rate of 30%. Assuming it is probable that taxable profit will be available, what deferred tax liability should be recognised?

  1. Rs. 600,000 Correct answer.
  2. Nil
  3. Rs. 30,000
  4. Rs. 2,000,000

Explanation

Under LKAS 12, a deferred tax liability is measured at the tax rates expected to apply when the liability is settled, applied to taxable temporary differences. Multiplying Rs. 2,000,000 by 30% gives Rs. 600,000.

Question 24Financial Accounting and Reporting

An entity's financial statements are approved for issue on 25 March 20X5 and cover the year ended 31 December 20X4. Which date is relevant for assessing whether events are after the reporting period under LKAS 10?

  1. The period between 31 December 20X4 and 25 March 20X5 Correct answer.
  2. 31 December 20X4 only
  3. 25 March 20X5 only
  4. The period after 25 March 20X5

Explanation

LKAS 10 defines events after the reporting period as those occurring between the end of the reporting period and the date the financial statements are authorised for issue. The relevant window is therefore 31 December 20X4 to 25 March 20X5.

Question 25Financial Accounting and Reporting

An entity has 100,000 ordinary shares outstanding throughout the year and 20,000 potential ordinary shares that are dilutive. Profit for the year is Rs. 3,600,000. What is the diluted earnings per share under LKAS 33?

  1. Rs. 30.00 Correct answer.
  2. Rs. 3.60
  3. Rs. 45.00
  4. Rs. 36.00

Explanation

Diluted EPS adjusts both the earnings and the weighted average number of shares for the dilutive potential ordinary shares. Dividing Rs. 3,600,000 by 120,000 shares gives Rs. 30.00 per share.

Question 26Financial Accounting and Reporting

Under LKAS 1, when an entity presents a classified statement of financial position, a liability is classified as current when it is due to be settled within how long after the reporting period?

  1. Six months
  2. Three months
  3. Twelve months Correct answer.
  4. Twenty-four months

Explanation

LKAS 1 requires a liability to be classified as current when the entity expects to settle it in its normal operating cycle, when it is held primarily for trading, or when it is due to be settled within twelve months after the reporting period. The twelve-month benchmark is the standard criterion examiners test.

Question 27Financial Accounting and Reporting

An entity purchases a machine for Rs. 5,000,000. Trade discount of 10% is deducted on the invoice, and import duty of Rs. 200,000 and freight of Rs. 150,000 are paid. At what amount should the machine be initially recognised under LKAS 16?

  1. Rs. 5,000,000
  2. Rs. 4,850,000 Correct answer.
  3. Rs. 4,500,000
  4. Rs. 5,350,000

Explanation

LKAS 16 requires cost to include the purchase price after deducting trade discounts and rebates, plus directly attributable costs such as import duties and freight. Cost is therefore (5,000,000 × 90%) + 200,000 + 150,000 = Rs. 4,850,000.

Question 28Financial Accounting and Reporting

An entity issues a financial instrument that is contractually obliging it to deliver a fixed number of its own ordinary shares in exchange for a fixed amount of cash. Under LKAS 32, how should this instrument be classified?

  1. As an equity instrument Correct answer.
  2. As a financial liability
  3. As a contingent asset disclosed only in the notes
  4. As a compound instrument split between liability and equity

Explanation

LKAS 32 treats a contract that will be settled by the entity receiving or delivering a fixed number of its own equity instruments for a fixed amount of cash as an equity instrument. This is the fixed-for-fixed condition, and no obligation to transfer cash arises.

Question 29Financial Accounting and Reporting

An entity recognises revenue from a construction contract over time using the input method based on costs incurred. Total contract price is Rs. 20,000,000 and total expected cost is Rs. 16,000,000. Costs incurred to date are Rs. 4,000,000. What revenue should be recognised to date under SLFRS 15?

  1. Rs. 5,000,000 Correct answer.
  2. Rs. 20,000,000
  3. Rs. 4,000,000
  4. Rs. 4,800,000

Explanation

Under SLFRS 15 the progress towards complete satisfaction is measured as costs incurred divided by total expected cost: 4,000,000 ÷ 16,000,000 = 25%. Revenue recognised to date is 25% of the transaction price, i.e. Rs. 5,000,000.

Question 30Financial Accounting and Reporting

Which of the following best describes the measurement basis that the Conceptual Framework identifies as the most common for assets and liabilities in general purpose financial statements?

  1. Historical cost only
  2. Fair value in every case
  3. A mixture of historical cost and current value Correct answer.
  4. Current value only

Explanation

The Conceptual Framework describes historical cost and current value (including fair value, value in use and current cost) and notes that entities commonly use a mixture of the two. No single basis is mandated for all items.

Question 31Financial Accounting and Reporting

An entity holds a building measured under the revaluation model. Its carrying amount is Rs. 12,000,000 and its fair value at the reporting date is Rs. 10,500,000. There is no previous revaluation surplus for this asset. How should the decrease be treated under LKAS 16?

  1. Recognised in other comprehensive income as a revaluation loss
  2. Recognised as a reduction of retained earnings directly
  3. Deferred and recognised over the remaining useful life
  4. Recognised in profit or loss as an expense Correct answer.

Explanation

LKAS 16 requires a decrease in carrying amount on revaluation to be recognised in profit or loss, except to the extent of any credit balance in the revaluation surplus for that asset. Since there is no prior surplus, the full Rs. 1,500,000 is an expense.

Question 32Financial Accounting and Reporting

An entity's statement of financial position shows total assets of Rs. 50,000,000 and total liabilities of Rs. 32,000,000. During the year the entity paid a dividend of Rs. 2,000,000 and reported profit after tax of Rs. 6,000,000. What is the closing equity balance?

  1. Rs. 18,000,000 Correct answer.
  2. Rs. 16,000,000
  3. Rs. 24,000,000
  4. Rs. 20,000,000

Explanation

Equity equals total assets less total liabilities: Rs. 50,000,000 − Rs. 32,000,000 = Rs. 18,000,000. The profit and dividend figures are already reflected in the reported assets and liabilities and should not be added again.

Question 33Financial Accounting and Reporting

Under LKAS 36, an entity identifies a cash-generating unit because an asset does not generate independent cash inflows. At which level should goodwill acquired in a business combination be tested for impairment?

  1. At the level of the individual asset
  2. At the entity level as a single unit in all cases
  3. At the level of the cash-generating unit or group of units to which it relates Correct answer.
  4. At the level of the reportable segment only

Explanation

LKAS 36 requires goodwill to be allocated to each cash-generating unit, or group of units, that is expected to benefit from the synergies of the combination. Impairment testing is then performed at that level, not for the individual asset.

Question 34Financial Accounting and Reporting

An entity's accounting records show cash sales of Rs. 3,000,000 and credit sales of Rs. 7,000,000. Trade receivables increased by Rs. 800,000 during the year and no receivables were written off. Under the indirect method, what adjustment to profit is required in the operating section of the statement of cash flows?

  1. Deduct Rs. 800,000 for the increase in receivables Correct answer.
  2. Deduct Rs. 7,000,000 for credit sales
  3. Add Rs. 800,000 for the increase in receivables
  4. No adjustment is required

Explanation

An increase in trade receivables means revenue recognised exceeds cash collected, so profit must be reduced by Rs. 800,000 to derive cash generated from operations. The increase is deducted, not added, in the indirect method.

Question 35Financial Accounting and Reporting

Under LKAS 12, how should deferred tax assets and liabilities be measured?

  1. At the average tax rate of the preceding three years
  2. At the tax rates expected to apply when the asset is realised or the liability settled Correct answer.
  3. At the tax rate prevailing at the date the temporary difference arose
  4. At a rate set annually by the entity's board of directors

Explanation

LKAS 12 requires deferred tax to be measured at the tax rates expected to apply in the period when the asset is realised or the liability settled, based on rates enacted or substantively enacted by the reporting date.

Question 36Financial Accounting and Reporting

An entity grants 1,000 share options to each of its 50 employees, vesting after three years of service. The fair value of each option at grant date is Rs. 60. All 50 employees are expected to remain. What is the expense recognised in the first year under SLFRS 2?

  1. Rs. 2,000,000
  2. Rs. 3,000,000
  3. Rs. 1,000,000 Correct answer.
  4. Rs. 60,000

Explanation

Total fair value of the award is 50 × 1,000 × Rs. 60 = Rs. 3,000,000, recognised over the three-year vesting period. First-year expense is therefore Rs. 3,000,000 ÷ 3 = Rs. 1,000,000.

Question 37Financial Accounting and Reporting

An entity holds a portfolio of equity investments measured at fair value through profit or loss. In a period of falling market prices, what is the effect on the financial statements?

  1. The decline is recognised in other comprehensive income
  2. A loss is recognised in profit or loss for the decline in fair value Correct answer.
  3. The decline is deferred until the investments are sold
  4. A revaluation surplus is recognised in equity

Explanation

For financial assets measured at fair value through profit or loss under SLFRS 9, changes in fair value, whether gains or losses, are recognised in profit or loss in the period they arise. No deferral is permitted.

Question 38Financial Accounting and Reporting

An entity's financial statements for the year ended 31 December 20X4 are authorised for issue on 20 March 20X5. On 5 March 20X5 a major customer that owed Rs. 2,000,000 was declared insolvent. The receivable was not impaired at the reporting date. How should this be treated under LKAS 10?

  1. As an adjusting event, restating the opening retained earnings of 20X3
  2. As an adjusting event, with the receivable written off in the 20X4 financial statements
  3. Ignored entirely because the insolvency occurred after the reporting date
  4. As a non-adjusting event, with disclosure if material Correct answer.

Explanation

The stem states that the receivable was not impaired at 31 December 20X4, so the insolvency represents a condition arising after the reporting date. It is therefore non-adjusting under LKAS 10: no adjustment is made to the 20X4 receivable, but the event is disclosed if material.

Question 39Financial Accounting and Reporting

An entity has a defined contribution plan to which it contributes 8% of each employee's gross salary. Total salaries for the year are Rs. 12,000,000 and contributions of Rs. 800,000 were unpaid at the reporting date. What liability and expense should be recognised under LKAS 19?

  1. Expense Rs. 960,000 and liability Rs. 960,000 Correct answer.
  2. Expense Rs. 960,000 and no liability
  3. Expense Rs. 960,000 and liability Rs. 800,000
  4. Expense Rs. 800,000 and liability Rs. 800,000

Explanation

For a defined contribution plan, the expense is the contribution payable for the period: 8% × Rs. 12,000,000 = Rs. 960,000. Since none has been paid, the full amount remains a liability at the reporting date.

Question 40Financial Accounting and Reporting

An entity is reviewing its accounting estimate for warranty provisions. New information indicates the warranty provision of Rs. 1,500,000 should be Rs. 2,000,000. Which treatment is correct under LKAS 8?

  1. Disclose the change but make no adjustment to the current period
  2. Recognise the additional Rs. 500,000 in profit or loss as a change in accounting estimate Correct answer.
  3. Adjust opening retained earnings for the earliest period presented
  4. Restate prior period financial statements retrospectively

Explanation

A change in an accounting estimate results from new information or developments and is applied prospectively, affecting profit or loss in the current period. Retrospective restatement is reserved for changes in accounting policy and corrections of prior period errors.

Question 41Auditing and Assurance Standards

Under Sri Lankan auditing practice, which document sets out the auditor's overall responsibilities when conducting an audit of financial statements in accordance with SLAuS?

  1. SLAuS 200, Overall Objectives of the Independent Auditor Correct answer.
  2. SLAuS 240, The Auditor's Responsibilities Relating to Fraud
  3. SLAuS 570, Going Concern
  4. SLAuS 700, Forming an Opinion and Reporting

Explanation

SLAuS 200 establishes the independent auditor's overall objectives and explains the nature and scope of an audit designed to express an opinion on the financial statements. It is the foundational standard against which the other engagement standards operate. SLAuS 700 deals only with reporting the opinion, not the overall objectives.

Question 42Auditing and Assurance Standards

In terms of the Sri Lanka Auditing Standards framework, the standards issued by the Institute of Chartered Accountants of Sri Lanka are collectively referred to as:

  1. Sri Lanka Financial Reporting Standards (SLFRS)
  2. Sri Lanka Standards on Quality Management (SLSQM)
  3. Sri Lanka Auditing Standards (SLAuS) Correct answer.
  4. Sri Lanka Public Sector Accounting Standards (SLPSAS)

Explanation

The auditing standards applicable to audits of financial statements in Sri Lanka are designated as Sri Lanka Auditing Standards, abbreviated SLAuS, and are modelled on the ISA framework. SLFRS and SLPSAS are accounting and financial reporting standards, not audit engagement standards. SLSQM relates to quality management at firm level.

Question 43Auditing and Assurance Standards

An auditor concludes that the possible effect of an uncorrected misstatement is material but not pervasive to the financial statements. Which opinion should be expressed under SLAuS 705?

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

Explanation

SLAuS 705 requires a qualified opinion where misstatements are material but not pervasive, because the auditor can still describe the matter while the statements remain broadly useful. An adverse opinion is used only when the misstatement is both material and pervasive. A disclaimer is reserved for inability to obtain sufficient appropriate evidence that is material and pervasive.

Question 44Auditing and Assurance Standards

Under SLAuS 315, the auditor's understanding of the entity and its environment is used primarily to:

  1. Identify and assess risks of material misstatement Correct answer.
  2. Replace the need for substantive testing
  3. Determine the fee to be charged for the audit
  4. Prepare the entity's financial statements

Explanation

SLAuS 315 requires the auditor to obtain an understanding of the entity and its environment, including internal control, to identify and assess risks of material misstatement at the financial statement and assertion levels. That risk assessment then drives the design of further audit procedures. It does not involve preparing the financial statements, which is management's responsibility.

Question 45Auditing and Assurance Standards

Which of the following best describes the purpose of audit documentation under SLAuS 230?

  1. To provide a marketing record for the audit firm
  2. To provide evidence supporting the auditor's report and that the audit was performed in accordance with standards Correct answer.
  3. To replace communication with those charged with governance
  4. To serve as the entity's statutory accounting record

Explanation

SLAuS 230 requires documentation sufficient to enable an experienced auditor with no previous connection to the engagement to understand the work performed, evidence obtained and conclusions reached. Its primary purpose is to evidence the basis for the auditor's report and compliance with standards. It is not an accounting record of the entity.

Question 46Auditing and Assurance Standards

Under SLAuS 560, an auditor is required to perform procedures regarding subsequent events up to which date?

  1. The date the financial statements were approved by management
  2. The date of the auditor's report Correct answer.
  3. The date the financial statements are issued to shareholders
  4. The end of the financial year

Explanation

SLAuS 560 requires the auditor to perform procedures designed to obtain sufficient appropriate evidence that events after the reporting period requiring adjustment or disclosure have been identified up to the date of the auditor's report. The auditor has no active duty to search for events after that date, although there are obligations if facts become known before issuance.

Question 47Auditing and Assurance Standards

Which party is responsible for designing and maintaining internal control relevant to the preparation of financial statements?

  1. Those charged with governance and management Correct answer.
  2. The audit committee only
  3. The external regulator
  4. The external auditor

Explanation

Under SLAuS 200, management, with oversight from those charged with governance, is responsible for the preparation of the financial statements and for the internal control necessary to enable that preparation. The auditor's role is to obtain an understanding of controls and test them where relevant, not to design or maintain them.

Question 48Auditing and Assurance Standards

SLAuS 580 requires the auditor to obtain written representations from management. Which of the following is the primary purpose of these representations?

  1. To guarantee that no fraud exists in the entity
  2. To replace substantive testing of account balances
  3. To transfer responsibility for the financial statements to the auditor
  4. To confirm management's responsibility for the financial statements and to support other audit evidence Correct answer.

Explanation

Written representations under SLAuS 580 confirm that management has fulfilled its responsibility for preparing the financial statements and has provided the auditor with all relevant information. They support other audit evidence but cannot substitute for it. They do not shift responsibility for the statements away from management.

Question 49Auditing and Assurance Standards

An auditor plans to rely on the operating effectiveness of a control over the entire period. Under SLAuS 330, testing of that control should generally cover:

  1. Only the first quarter of the period
  2. The entire period under audit Correct answer.
  3. Only the last month of the period
  4. Only the period after the auditor's interim visit

Explanation

SLAuS 330 requires that when the auditor intends to rely on the operating effectiveness of controls, evidence about their operating effectiveness must be obtained for the whole period on which the audit opinion is based. Testing only part of the period may require additional procedures to cover the remainder.

Question 50Auditing and Assurance Standards

Under SLAuS 320, performance materiality is set at an amount:

  1. Less than overall materiality to reduce the probability that aggregate uncorrected misstatements exceed materiality Correct answer.
  2. Equal to overall materiality in every case
  3. Greater than overall materiality to allow for sampling risk
  4. Based solely on the entity's profit before tax

Explanation

Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It is a planning tool, not a fixed percentage of profit.