ACA Audit and Assurance — Questions and Answers
Question 1: Under ISA (UK) 200, what is the overall objective of the auditor in conducting an audit of financial statements?
- To detect all fraud within the entity
- To obtain reasonable assurance that the financial statements as a whole are free from material misstatement (Correct answer)
- To guarantee the accuracy of the financial statements
- To ensure the entity complies with all applicable laws
Correct answer: To obtain reasonable assurance that the financial statements as a whole are free from material misstatement
ISA (UK) 200 states that the auditor's objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in accordance with the auditor's findings.
Question 2: Which of the following audit procedures provides the MOST reliable evidence?
- Enquiry of management
- Analytical review of financial data
- External confirmation from a third party (Correct answer)
- Inspection of internally generated documents
Correct answer: External confirmation from a third party
Under ISA (UK) 500, evidence obtained from independent external sources (such as bank confirmations or debtor circularisations) is generally more reliable than evidence generated internally. External confirmations provide independent third-party verification.
Question 3: Under the FRC's Ethical Standard, which threat arises when an audit firm provides non-audit services to an audit client?
- Intimidation threat
- Self-review threat (Correct answer)
- Familiarity threat
- Advocacy threat
Correct answer: Self-review threat
A self-review threat arises when an audit firm provides non-audit services (such as accounting or valuation work) to an audit client. The auditor may subsequently need to evaluate the results of their own firm's work, compromising objectivity.
Question 4: What is the purpose of an engagement letter in an audit?
- To replace the audit report
- To agree the terms of the audit engagement between the auditor and the entity (Correct answer)
- To communicate audit findings to shareholders
- To document the audit plan
Correct answer: To agree the terms of the audit engagement between the auditor and the entity
Under ISA (UK) 210, the engagement letter establishes the terms of the audit engagement, including the objective and scope of the audit, the responsibilities of the auditor and management, and the applicable financial reporting framework.
Question 5: Under ISA (UK) 315, which of the following is a component of an entity's internal control system?
- The audit committee's report to shareholders
- The control environment (Correct answer)
- The auditor's risk assessment
- The engagement partner's review
Correct answer: The control environment
ISA (UK) 315 identifies five components of internal control: the control environment, the entity's risk assessment process, the information system, control activities, and monitoring of controls. The control environment sets the tone at the top and is the foundation for all other components.
Question 6: An auditor discovers a potential material misstatement in the financial statements but management refuses to make an adjustment. What type of audit opinion should the auditor consider?
- Unmodified opinion
- Qualified or adverse opinion (Correct answer)
- Disclaimer of opinion
- No opinion is necessary
Correct answer: Qualified or adverse opinion
Under ISA (UK) 705, if the auditor concludes that misstatements are material, the opinion should be qualified (if material but not pervasive) or adverse (if both material and pervasive). The choice depends on the severity and extent of the misstatement.
ACA Audit and Assurance
Under ISA (UK) 200, what is the overall objective of the auditor in conducting an audit of financial statements?