ACCA - Association of Chartered Certified Accountants Audit and Assurance Principles Questions and Answers — Questions and Answers
Question 1: An auditor is reviewing the non-current assets of a manufacturing company. To verify the 'existence' assertion for the machinery, which of the following audit procedures would be the MOST appropriate?
- Reviewing the depreciation calculation for a sample of machines.
- Inspecting the supplier invoices for machines purchased during the year.
- Physically inspecting the machines on the factory floor and agreeing them to the non-current asset register. (Correct answer)
- Enquiring with the production manager about the operational status of the machines.
Correct answer: Physically inspecting the machines on the factory floor and agreeing them to the non-current asset register.
The 'existence' assertion confirms that assets included in the financial statements actually exist. The most direct and reliable way to test this for physical assets like machinery is to physically inspect them and trace them back to the non-current asset register. Reviewing depreciation (valuation), inspecting invoices (rights and obligations, occurrence), and making enquiries (less reliable evidence) are not the primary procedures for testing existence.
Question 2: According to the ACCA's Code of Ethics and Conduct, which fundamental principle requires a professional accountant to be straightforward and honest in all professional and business relationships?
- Objectivity
- Integrity (Correct answer)
- Professional Competence and Due Care
- Confidentiality
Correct answer: Integrity
The principle of Integrity requires members to be straightforward and honest in all professional and business relationships. Objectivity relates to avoiding bias, Professional Competence and Due Care relates to maintaining skills and acting diligently, and Confidentiality relates to not disclosing information.
Question 3: In the context of audit risk, what is 'detection risk'?
- The risk that the entity's internal controls will fail to prevent or detect a material misstatement.
- The susceptibility of an assertion to a misstatement that could be material, before consideration of any related controls.
- The risk that the financial statements are materially misstated prior to the audit.
- The risk that the auditor's procedures will not detect a material misstatement that exists. (Correct answer)
Correct answer: The risk that the auditor's procedures will not detect a material misstatement that exists.
Detection risk is the risk that the audit procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material. It is the one component of audit risk that the auditor can directly control through the nature, timing, and extent of their procedures. The other options define control risk, inherent risk, and the risk of material misstatement, respectively.
Question 4: A junior auditor has been asked to gather evidence regarding the valuation of inventory. Which of the following sources of audit evidence would generally be considered the MOST reliable?
- A verbal confirmation from the warehouse manager regarding the condition of the inventory.
- A schedule of inventory costs prepared by the company's management accountant.
- A direct written confirmation from a third-party storage facility holding some of the company's inventory. (Correct answer)
- Photocopies of supplier invoices for raw material purchases provided by the accounts payable clerk.
Correct answer: A direct written confirmation from a third-party storage facility holding some of the company's inventory.
According to ISA 500 'Audit Evidence', evidence is generally more reliable when it is obtained from independent sources outside the entity. A direct confirmation from a third party is more reliable than evidence generated internally (management schedule, photocopies) or verbal evidence, which is less formal and subject to misunderstanding.
Question 5: During the planning stage of an audit, the auditor uses analytical procedures to identify unusual fluctuations or relationships. Which of the following is a primary purpose of using analytical procedures at this stage?
- To obtain sufficient appropriate audit evidence to support the audit opinion.
- To evaluate the overall presentation of the financial statements.
- To assist in understanding the business and in identifying areas of potential risk. (Correct answer)
- To test the operating effectiveness of internal controls.
Correct answer: To assist in understanding the business and in identifying areas of potential risk.
ISA 315 requires the use of analytical procedures during the planning stage to assist in understanding the business and identifying areas of potential risk of material misstatement. They are used to highlight unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications. They are used as substantive procedures during testing and at the final review stage, but their primary purpose during planning is risk assessment.
Question 6: Which of the following situations creates a 'self-review' threat to an auditor's independence?
- The audit firm is promoting shares in the client company.
- An audit team member has a close family member who is a director at the client.
- The audit firm prepared the financial statements for the client and is now auditing them. (Correct answer)
- The client has threatened to replace the audit firm over a disagreement about an accounting principle.
Correct answer: The audit firm prepared the financial statements for the client and is now auditing them.
A self-review threat occurs when the auditor is in a position of having to re-evaluate their own previous judgments or the work of their own firm. Preparing the financial statements and then auditing them is a classic example of a self-review threat. The other options describe an advocacy threat, a familiarity or self-interest threat, and an intimidation threat, respectively.
ACCA - Association of Chartered Certified Accountants Audit and Assurance Principles Questions and Answers
An auditor is reviewing the non-current assets of a manufacturing company.
To verify the 'existence' assertion for the machinery, which of the following audit procedures would be the MOST appropriate?