AAT L4 Audit and Assurance Principles 2

Question 1

An auditor identifies that the directors have prepared the financial statements on a going concern basis. Which of the following would most likely cause the auditor to question this assumption?

Accepted Answer

The company has significant net current liabilities and a loan due for renewal within 6 months

Answer

The company has declared a dividend in the current year

Answer

A key customer accounts for 30% of total revenue

Answer

The company has recently expanded into a new market

Question 2

During an audit of trade receivables, the auditor sends confirmation letters directly to customers. What audit assertion does this procedure primarily address?

Accepted Answer

Existence

Answer

Completeness

Answer

Valuation

Answer

Classification

Question 3

Which of the following best describes the concept of 'audit risk'?

Accepted Answer

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

Answer

The risk that the client's business will fail during the audit engagement

Answer

The risk that the auditor will not be paid for their work

Answer

The risk that management will restrict the auditor's access to information

Question 4

A company has strong internal controls over the purchases cycle. How should this affect the auditor's approach to testing?

Accepted Answer

The auditor may be able to reduce substantive testing by performing and relying on tests of controls

Answer

The auditor should perform more substantive testing to verify the controls are working

Answer

The auditor can rely solely on management representations without further testing

Answer

The auditor must ignore internal controls and perform full substantive procedures

Question 5

What is the primary purpose of an engagement letter in an external audit?

Accepted Answer

To define the terms of the audit engagement and the respective responsibilities of auditor and client

Answer

To confirm the audit fee agreed between the auditor and client

Answer

To notify shareholders that an audit has been commissioned

Answer

To satisfy the requirements of the Companies Act 2006 for listed companies

Question 6

Under ISA 240, which of the following conditions are present in most fraud cases (the 'fraud triangle')?

Accepted Answer

Incentive/pressure, opportunity, and rationalisation

Answer

Motive, means, and method

Answer

Concealment, conversion, and cover-up

Answer

Management override, collusion, and falsification