ACCA SP Advanced Audit and Assurance (AAA) — Questions and Answers
Question 1: During the audit of a listed company, the audit team discovers that management has recorded a material transaction with a related party at an amount significantly above market value. Under ISA 550, the auditor should FIRST:
- Immediately report the matter to the regulatory authorities
- Evaluate whether the transaction has been properly disclosed and consider the implications for the risk of material misstatement (Correct answer)
- Resign from the engagement as management lacks integrity
- Issue a qualified audit opinion without further investigation
Correct answer: Evaluate whether the transaction has been properly disclosed and consider the implications for the risk of material misstatement
Under ISA 550 Related Parties, the auditor's first step is to evaluate the transaction — understand the business rationale, assess whether it has been properly authorised, recorded, and disclosed, and consider the implications for the risk of material misstatement due to fraud or error. Related party transactions at non-market rates are not automatically problematic but require enhanced scrutiny and disclosure. Jumping to resignation or qualification without investigation would be premature.
Question 2: An auditor is assessing going concern for a manufacturing company. Which of the following indicators would present the MOST significant doubt about going concern?
- The company's revenue has declined by 5% compared to the prior year
- The company's bank has withdrawn its overdraft facility and a major loan covenant has been breached with no waiver obtained (Correct answer)
- Employee turnover has increased by 15% during the year
- The company has changed its accounting policy for depreciation
Correct answer: The company's bank has withdrawn its overdraft facility and a major loan covenant has been breached with no waiver obtained
Withdrawal of banking facilities and covenant breach without a waiver present the most significant going concern threat because they directly affect the company's ability to continue funding operations. Without the overdraft and with a breached covenant, the bank could demand immediate repayment, potentially forcing insolvency. Revenue decline of 5% and staff turnover are concerning but not immediately threatening to survival.
Question 3: Under ISA 240 The Auditor's Responsibilities Relating to Fraud, there is a presumption that revenue recognition involves a risk of fraud. In which situation is the auditor PERMITTED to rebut this presumption?
- When the company has strong internal controls over revenue
- When the revenue streams are simple and predictable, and the auditor has documented the basis for rebuttal (Correct answer)
- When management asserts that no fraud has occurred
- The presumption can never be rebutted under any circumstances
Correct answer: When the revenue streams are simple and predictable, and the auditor has documented the basis for rebuttal
ISA 240 creates a rebuttable presumption that revenue recognition involves a risk of material misstatement due to fraud. The auditor may rebut this presumption in specific circumstances where the revenue streams are simple, straightforward, and predictable (e.g., a single rental income stream). However, the auditor must document the reasons for rebuttal clearly. Management assertions alone are insufficient, and strong controls reduce but do not eliminate fraud risk.
Question 4: An audit firm has been engaged to audit Company X. The audit engagement partner's spouse owns 2% of Company X's shares. Under IESBA Code of Ethics, this represents:
- An acceptable situation provided it is disclosed to those charged with governance
- A self-interest threat that can be reduced to an acceptable level through safeguards
- A breach of independence requirements that cannot be mitigated — the partner must be replaced (Correct answer)
- An advocacy threat that requires a second partner review
Correct answer: A breach of independence requirements that cannot be mitigated — the partner must be replaced
Under the IESBA Code of Ethics and ISA 200, a direct financial interest (including through an immediate family member such as a spouse) in an audit client by an audit team member creates a self-interest threat so severe that no safeguards can reduce it to an acceptable level. The engagement partner must be replaced, or the firm must resign from the engagement. This is a prohibition, not a manageable threat.
Question 5: The auditor of a group is planning the group audit. Under ISA 600 (Revised), which of the following is the group auditor's responsibility regarding component auditors?
- The group auditor has no responsibility for work performed by component auditors
- The group auditor must re-perform all audit procedures carried out by component auditors
- The group auditor must evaluate the competence and independence of component auditors and issue appropriate instructions (Correct answer)
- The group auditor can delegate full responsibility to component auditors for significant components
Correct answer: The group auditor must evaluate the competence and independence of component auditors and issue appropriate instructions
Under ISA 600 (Revised), the group engagement partner retains overall responsibility for the group audit opinion. This includes evaluating the competence, capabilities, and independence of component auditors, providing them with detailed instructions covering materiality, significant risks, and required communications, and evaluating the sufficiency and appropriateness of their work. The group auditor cannot simply delegate or ignore component auditor work.
Question 6: After completing the audit, the auditor identifies a material uncertainty related to going concern that is adequately disclosed in the financial statements. The appropriate audit opinion is:
- A qualified opinion with an emphasis of matter paragraph
- An unmodified opinion with a separate 'Material Uncertainty Related to Going Concern' section (Correct answer)
- An adverse opinion because the company may not survive
- A disclaimer of opinion due to the uncertainty
Correct answer: An unmodified opinion with a separate 'Material Uncertainty Related to Going Concern' section
Under ISA 570 (Revised), when a material uncertainty related to going concern exists and is adequately disclosed in the financial statements, the auditor issues an unmodified opinion but includes a separate section headed 'Material Uncertainty Related to Going Concern'. This is not an emphasis of matter paragraph — it has its own distinct ISA 570 requirements. If the disclosure were inadequate, the opinion would be qualified or adverse.
ACCA SP Advanced Audit and Assurance (AAA)
During the audit of a listed company, the audit team discovers that management has recorded a material transaction with a related party at an amount significantly above market value.
Under ISA 550, the auditor should FIRST: