ACCA AS Audit & Assurance — Questions and Answers
Question 1: The primary objective of an external audit is to:
- Detect all fraud within the organisation
- Express an opinion on whether the financial statements give a true and fair view (Correct answer)
- Prepare the financial statements on behalf of management
- Advise management on improving internal controls
Correct answer: Express an opinion on whether the financial statements give a true and fair view
The external auditor's objective (ISA 200) is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement and to express an opinion accordingly.
Question 2: 'Materiality' in audit is best described as:
- The size of the audit fee relative to audit firm revenue
- Information is material if its omission or misstatement could influence the economic decisions of users (Correct answer)
- The level of professional scepticism applied by the auditor
- The threshold above which transactions are tested 100%
Correct answer: Information is material if its omission or misstatement could influence the economic decisions of users
Materiality (ISA 320) is defined by reference to whether omission or misstatement of information could influence users' economic decisions. It is both quantitative and qualitative.
Question 3: Which of the following is an example of a 'substantive procedure'?
- Observing inventory count procedures
- Testing the controls over the purchase ledger
- Confirming year-end trade receivables balances directly with customers (Correct answer)
- Reviewing the design of the IT system
Correct answer: Confirming year-end trade receivables balances directly with customers
Substantive procedures (ISA 330) include tests of detail (agreeing specific balances or transactions) and analytical procedures, aimed at detecting material misstatements. Circularising debtors is a test of detail.
Question 4: Which of the following would give the auditor the MOST reliable evidence?
- Verbal confirmation from the finance director
- A supplier invoice filed in the client's records
- A bank confirmation letter received directly from the client's bank (Correct answer)
- An internally generated report from the client's system
Correct answer: A bank confirmation letter received directly from the client's bank
Bank confirmation letters sent directly from the bank to the auditor are highly reliable: they are external (not client-generated) and received directly by the auditor.
Question 5: 'Audit risk' is the risk that:
- The client commits fraud during the audit period
- The auditor expresses an inappropriate opinion when the financial statements are materially misstated (Correct answer)
- The audit fee will not be recovered from the client
- The client changes auditor before the audit is complete
Correct answer: The auditor expresses an inappropriate opinion when the financial statements are materially misstated
Audit risk (ISA 200) = the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It comprises inherent, control and detection risk.
Question 6: Which of the following correctly describes 'detection risk'?
- The risk that material misstatements exist in the financial statements
- The risk that internal controls fail to prevent misstatements
- The risk that the auditor's procedures fail to detect existing material misstatements (Correct answer)
- The risk that the entity will commit fraud
Correct answer: The risk that the auditor's procedures fail to detect existing material misstatements
Detection risk is the risk that audit procedures will not detect a material misstatement that actually exists. The auditor controls detection risk by adjusting the nature, timing and extent of procedures.
ACCA AS Audit & Assurance
The primary objective of an external audit is to: