Assurance Question Bank 2013 PDF
Assurance Question Bank 2013 PDF
ASSURANCE
Professional Stage Knowledge Level
Question Bank
www.icaew.com
Assurance
The Institute of Chartered Accountants in England and Wales Professional Stage
ISBN: 978-0-85760-449-1
Polestar Wheatons
Hennock Road
Marsh Barton
Exeter
EX2 8RP
Title Page
Questions Answers
6. Revenue system 35 1
1 5
7. Purchases system 39 1
1 7
8. Employee costs 43 1
1 9
9. Internal audit 47 1
1 2
1 0. Documentation 15 1 23
1 2. Written representations 63 1 29
1 6. Confidentiality 95 1
1 4
Contents iii
iv Assurance
Question Bank
Your exam will consist of 50 questions with equal marks,
together adding up to 100 marks. You should complete them
all.
The questions are of the following types:
1
2 Assurance: Question Bank
Chapter 1: Concept of and need for
assurance
1 Which THREE of the following are key elements of a general assurance engagement?
A A user
B A subject matter
C Suitable criteria
D An assurance file LO 1a
2 Which THREE of the following describe aspects of the expectations gap with respect to the external
audit?
A Users do not understand the meaning of the audit opinion
B Users are not aware of the limitations of the audit process
C Users do not appreciate that reasonable assurance is a low level of assurance
D Users do not understand what the audit process involves LO 1e
3 Which of the following qualifications is required for individuals working on audits in the UK?
A University degree
B Professional qualification
C Membership of a recognised supervisory body
D Employment by a firm controlled by qualified persons LO 1f
6 Which of the following statements best describes the evidence obtained and the opinion given in a
reasonable assurance engagement?
A Sufficient appropriate evidence and a negative opinion
B Sufficient appropriate evidence and a positive opinion
C A lower level of evidence and a negative opinion
D A lower level of evidence and a positive opinion LO 1h
7 For each of the following statements select whether they are true or false.
A statutory audit gives reasonable assurance that the financial statements give a true and fair view
A True
B False
A negative assurance conclusion gives a limited level of assurance
C True
D False
Reasonable assurance is absolute assurance of the correctness of the subject matter
E True
F False LO 1d
9 For each of the following statements select whether they are true or false in respect of suitable
criteria used in an assurance engagement.
The criteria for all assurance engagements will be the same
A True
B False
Suitable criteria can only be identified for assurance engagements relating to financial statements
C True
D False
Relevant criteria for assurance engagements relating to financial statements are likely to be
accounting standards
E True
F False LO 1d
10 There are two types of assurance engagement: reasonable assurance engagements and limited
assurance engagements. There are also two types of assurance conclusion: positive and negative.
For each type of assurance engagement select the appropriate conclusion given.
Reasonable assurance
A Positive
B Negative
Limited assurance
C Positive
D Negative LO 1d
14 In any assurance engagement there are three parties involved: the responsible party, the
practitioner and the user.
In respect of given subject matter state which party
Prepares the subject matter
A Responsible party
B Practitioner
C User
Gathers evidence on the subject matter
D Responsible party
E Practitioner
F User LO 1c
16 In the context of a statutory audit which THREE of the following are examples of the expectation
gap?
The belief that
A The auditor’s report certifies the financial statements as correct
B The auditor’s principal duty is to detect fraud
C The auditor is employed by the directors
D The auditor checks all transactions LO 1e
17 The level of assurance given by an assurance engagement will depend on the type of engagement.
For each of the following examples select what level of assurance you would expect to be given.
Statutory audit
A Absolute
B Reasonable
Review of financial information
C Reasonable
D Limited
Report on a business plan
E Reasonable
F Limited LO 1d
1 Which TWO of the following are auditors ALWAYS required to do on being invited to accept an
audit engagement?
A Ensure they are professionally qualified to act
B Ensure they have adequate existing resources to carry out the audit
C Obtain references for key personnel within the entity to be audited
D Communicate with the existing auditors to discover any reasons they should not accept
appointment LO 1f
2 Which TWO of the following might indicate that an assurance client could be higher than normal
inherent or control risk?
A Poor recent performance
B Strong internal controls
C Unusual transactions
D The existence of an internal audit department LO 1f
3 Claret & Co, an assurance firm, has the following two clients among its client portfolio. For each
client, select whether inherent risk is high or low.
Tulip Ltd is planning to list on the local stock exchange within the next two years
A High risk
B Low risk
Dhalia Ltd is currently facing financial difficulties and is seeking alternative forms of finance
C High risk
D Low risk LO 1f
4 Which of the following is NOT a benefit of an engagement letter in respect of assurance services?
A Clearly defines the extent of the assurance provider’s responsibilities
B Provides written confirmation of the acceptance of the engagement
C Confirms the scope of the engagement
D Certifies the assurance provider’s opinion LO 1f
6 Auditors issue various documents during the process of obtaining clients. For each of the following,
select the type of document it would be included in.
Clarification of the terms of the engagement
A Tender proposal
B Initial communication
C Letter of engagement
Request for relevant information pertaining to acceptance of the engagement
D Tender proposal
E Initial communication
F Letter of engagement LO 1f
7 Which THREE of the following procedures should be carried out after the audit firm has decided to
accept appointment as auditor?
A Ensure that the outgoing auditors’ removal /resignation has been properly conducted
B Ensure that a resolution has been passed at the general meeting to appoint the new auditors
C Perform checks to ensure that there are no legal or ethical reasons why the new audit firm
cannot act as auditor
D Submit a letter of engagement to the directors LO 1f
9 Which ONE of the following correctly describes the period for which client identification
documents must be kept under money laundering regulations?
A For a minimum of five years and until five years have elapsed since the relationship with the
client has ceased
B For a minimum of seven years and until seven years have elapsed since the relationship with
the client has ceased
C For a minimum of five years and until seven years have elapsed since the relationship with the
client has ceased
D For a minimum of seven years and until five years have elapsed since the relationship with the
client has ceased LO 1f
2 With respect to ISA 315, which THREE of the following procedures shall be used in understanding
the entity and its environment?
A Inquiries of management and others within the entity
B Inquiries of third parties
C Analytical procedures
D Observation and inspection LO 1f
4 Which of the following does setting a preliminary materiality threshold NOT help auditors to
decide?
A What audit staff to assign to the audit
B How many items to examine
C Whether to use sampling
D What level of error is likely to lead to the auditor not being able to give an unqualified opinion
LO 1f
5 Which THREE of the following would normally be included in the overall audit strategy?
A Details of economic factors and industry conditions
B The results of initial analytical procedures
C Confirmation of management’s responsibility for the financial statements
D Identification of specific audit risks LO 1f
7 For each of the following statements select whether they are true or false in respect of the concept
of materiality.
Materiality may depend on the size of the error in the context of its omission or misstatement
A True
B False
Materiality should be considered when planning audit procedures and when evaluating discovered
misstatements
C True
D False
Materiality is always expressed as a proportion of profits
E True
F False LO 1f
8 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples, select the type of risk illustrated.
The organisation is seeking to raise finance for a new venture
A Inherent
B Control
C Detection
The organisation has a number of estimates in its financial statements
D Inherent
E Control
F Detection LO 1f
10 Adam has been given the following draft figures for Imperious Ltd for the year ended 30 June 20X7
to analyse. Materiality has been set at £35,000 and the finance director has told Adam in a
planning meeting that there have been few changes in the year. Budgets were set at 20X6 levels
and there have been no major movements in non-current assets.
20X7 20X6
£ £
For each item identified below, state whether it warrants further testing to analytical procedures or
not.
Cost of sales
A Warrants further testing
B No further testing required
Repairs and renewals
C Warrants further testing
D No further testing required
Advertising
E Warrants further testing
F No further testing required LO 1f
12 Which of the following is normally designed to detect possible material monetary errors in the
figures in financial statements?
A Test of control
B Walk-through test
C Analytical procedure
D Observation of a procedure LO 3f
13 For each of the following statements select whether they are true or false in respect of the concept
of materiality.
Materiality should be calculated at the planning stage of all audits
A True
B False
Once established, the materiality level initially set cannot be revised during the course of the audit
C True
D False
Materiality will influence the audit opinion given
E True
F False LO 1f
14 Audit risk can be split into three components: inherent risk, control risk and detection risk
For each of the following examples, select the type of risk illustrated.
Senior management regularly override the system of controls
A Inherent
B Control
C Detection
Directors’ pay is related to company profitability
D Inherent
E Control
F Detection LO 1f
16 As part of his overall risk assessment an auditor has concluded that detection risk must be low. For
each of the following select the appropriate consequence of this.
Materiality
A Higher
B Lower
Sample sizes
C Bigger
D Smaller LO 1f
17 For each of the following situations select the MOST appropriate approach which should be used
by the assurance firm in the given circumstance.
The audit of a new client, recently started up, with few employees in its accounting department
A Tests of control only
B Substantive procedures only
C A mix of tests of control and substantive procedures
The audit of a long-standing client with a sophisticated IT system and an internal audit department
D Tests of control only
E Substantive procedures only
F A mix of tests of control and substantive procedures LO 3f
18 As part of your analytical procedures on the financial statements of Dreamy Desserts Ltd you have
identified that the gross profit margin has fallen from 27% to 24%.
Which TWO of the following could be a valid explanation for this decrease?
A Unusually high sales at the end of the year resulted in lower levels of closing inventory as
compared to the previous year
B Increased competition resulted in sales prices being cut
C A bank overdraft resulted in a higher interest expense than in previous years
D There was a significant change in the mix of products sold LO 1f/3g
20 For each of the following statements select whether they are true or false in respect of the concept
of materiality.
Materiality depends only on the monetary amount of an item
A True
B False
Materiality may depend on either the nature of an item or its monetary amount
C True
D False
Materiality is a matter of professional judgment
E True
F False LO 1f
21 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples select the type of risk illustrated.
The organisation has few employees in its accounting department
A Inherent
B Control
C Detection
The organisation operates in a fast-moving, high-tech environment
D Inherent
E Control
F Detection LO 1f
23 Deteriora Ltd’s quick ratio has fallen from 1.9:1 to 1.6:1. Which of the following might help to
explain this decline?
A The allowance for receivables has been reduced
B Credit control has been poor
C The entity has purchased a property for cash
D Inventory levels have fallen LO 1f
24 An electrical store and a cake shop have the same mark-up on cost. However, the gross profit
margin of the electrical store is significantly higher than that of the cake shop.
Which of the following is a possible reason for this?
A The cake shop’s revenue is increasing, while that of the electrical shop is decreasing
B The cake shop has a higher level of wastage of inventory than the electrical store
C The electrical shop takes advantage of trade discounts for bulk buying
D The cake shop has a higher turnover of inventory than the electrical store LO 1f
25 Thatch plc’s current ratio this year is 1.33:1 compared with 1.25:1 last year. Which of the following
would be possible explanations of this?
A Thatch paid its payables earlier than usual out of a bank overdraft
B Thatch made an unusually large sale immediately prior to the year end
C Thatch made an unusually large purchase of goods for cash immediately prior to the year end,
and these goods remain in inventory
D Thatch paid its payables earlier than usual out of a positive cash balance LO 1f
1 Which of the following is NOT a test that could be used by assurance providers to provide evidence
relating to a balance in the financial statements?
A Walk-through test
B Test of control
C Test of detail
D Analytical procedure LO 3b
2 Which TWO of the following are valid comments about the quality of assurance evidence?
A Evidence from external sources is more reliable than evidence obtained from the entity’s
records
B Evidence from internal sources is more reliable when related internal controls operate
effectively
C Evidence from internal sources is more reliable than evidence created by the assurance
provider
D Photocopies are more reliable than facsimiles LO 3e
3 Which THREE of the following are assertions used by the auditor about classes of transactions?
A Occurrence
B Existence
C Completeness
D Cut-off
E Rights and obligations LO 3f
6 The level of assurance given by an assurance engagement will depend on the type of engagement.
For each of the following examples, select what level of assurance you would expect to be given.
Statutory audit
A Absolute
B Reasonable
C Limited
Report on prospective financial information
D Absolute
E Reasonable
F Limited
Report on review of interim financial information
G Absolute
H Reasonable
I Limited LO 1d
7 For each of the following situations select the most appropriate approach which should be used by
the assurance firm in the given circumstances.
The audit of a client where controls have been assessed as deficient
A Tests of controls only
B Substantive procedures only
C A mix of tests of controls and substantive procedures
The audit of a client where controls have been assessed as strong
D Tests of controls only
E Substantive procedures only
F A mix of tests of controls and substantive procedures LO 3f
9 Which TWO of the following are assertions used by the auditor about account balances at the
period end?
A Existence
B Accuracy
C Cut-off
D Completeness LO 3f
10 Which TWO of the following are assertions used by the auditor about presentation and disclosure?
A Cut-off
B Allocation
C Completeness
D Accuracy LO 3f
11 For each of the following statements select whether they are true or false in respect of substantive
procedures.
The auditor must carry out substantive procedures on all material items
A True
B False
The auditor only carries out substantive procedures if the results of tests of controls are inconclusive
C True
D False
Substantive procedures include both analytical procedures and tests of details
E True
F False LO 3d
13 An audit report prepared in accordance with ISA 700 (UK & Ireland) The auditor's report on financial
statements expresses an opinion on a number of matters. Some of these matters are required by
the Companies Act 2006 to be reported on by exception only.
Which TWO of the following are reported on by exception only?
A The financial statements have been prepared in accordance with the requirements of the
Companies Act 2006
B Adequate accounting records have been kept
C Directors’ remuneration has been disclosed correctly
D Information in the directors’ report is consistent with the financial statements LO 1f
1 ISA 315 states that an internal control system in an organisation consists of five components: the
control environment, the entity’s risk assessment process, the information system, control activities
and monitoring of controls.
For each of the following examples, select the component which it illustrates.
The process of preparing the financial statements
A Control environment
B Information system
C Control activities
Locking the inventory storeroom
D Control environment
E Information system
F Control activities LO 2d
2 In each of the following three cases, select whether control risk is higher or lower than normal.
The company has an established and well-resourced internal audit function.
A Control risk is higher than normal
B Control risk is lower than normal
The company has a history of reviewing financial performance on a regular basis at board level
C Control risk is higher than normal
D Control risk is lower than normal
Purchase invoices are not authorised prior to payment
E Control risk is higher than normal
F Control risk is lower than normal LO 2b
3 Which THREE of the following statements about audit committees are correct?
A At least 50% of the members of an audit committee must be non-executive directors
B Listed companies are required to have an audit committee
C Audit committees are considered to be good practice for all large companies
D If a company has an internal audit function, the chief internal auditor should sit on the audit
committee
E Audit committees are an important aspect of a company’s control environment LO 2d
5 For each of the following internal controls, which is the principal limitation?
The preparation of a bank reconciliation
A Human error
B Collusion
Segregation of duties in a sales system
C Human error
D Collusion LO 2f
7 For each of the following statements, select whether they are true or false in respect of the
information system in a company.
The information system comprises only the IT system in a company
A True
B False
The information system includes the process of preparing the financial statements, such as the
production of journals
C True
D False LO 2b
9 The following are examples of internal controls which operate at Castle Ltd.
For each example, select the type of control activity which it illustrates.
The financial controller reconciles the receivables ledger to the receivables ledger control account
monthly
A Performance review
B Information processing
C Segregation of duties
The receivables ledger clerk posts invoices to the receivables ledger. The cash book clerk posts cash
receipts to the receivables ledger
D Performance review
E Information processing
F Segregation of duties LO 2e
10 The following are examples of computer controls which operate at Goody plc.
For each example, select the type of computer control which it illustrates.
Storing extra copies of programs and data files off-site
A General
B Application
Programmes to check data fields on input transactions
C General
D Application
Manual checks to ensure that input data was authorised
E General
F Application LO 2e
12 Which THREE of the following would be the best sources of information about a company’s
systems?
A The company’s procedures manual
B The internal audit function’s system notes
C The prior year audit file
D Inquiries made of company staff
E The company’s website LO 2i
13 Most entities make use of IT systems for financial reporting and operational purposes. Controls
operating in an IT environment can be split into general controls and application controls.
Which of the following is an application control?
A Training staff in new IT procedures
B Taking back-up copies of programs
C Maintenance agreements over IT equipment
D Cyclical reviews of all master files LO 2e
14 Which TWO of the following represent inherent limitations of a system of internal controls?
A Lack of controls over the purchases system
B Lack of understanding of the purposes of controls
C Lack of staff to ensure segregation of duties
D The possibility that staff members will collude in fraud LO 2f
17 ISA 315 states that an internal control system in an organisation consists of five components: the
control environment, the entity’s risk assessment process, the information system, control activities
and monitoring of controls.
For each of the following examples select the component which it illustrates.
Training programme for all staff
A Control environment
B Control activity
C Monitoring of controls
Review of actual performance against budget
D Control environment
E Control activity
F Monitoring of controls LO 2d
18 For each of the following statements select whether they are true or false in respect of the
limitations of a system of internal control.
The cost of implementing controls may be more expensive than the cost of any potential risk
arising
A True
B False
The effectiveness of many controls rely on the integrity of those applying them
C True
D False
Internal controls are only applied to material items
E True
F False
Standard controls may not be designed to deal with unusual transactions
G True
H False LO 2f
21 The following are examples of internal controls which operate at Elm plc.
For each example, select the type of control activity which it illustrates.
The financial controller reconciles the payables ledger to the payables ledger control account on a
monthly basis
A Performance review
B Information processing
The payables ledger clerk posts invoices to the payables ledger. The cash book clerk posts cash
receipts to the payables ledger
C Segregation of duties
D Performance review LO 2e
24 Peach plc is a large organisation with a complex accounting and information system. Critical to an
understanding of the system are the reporting lines and relationships between different departments.
In this situation which of the following methods is most likely to be used by the auditor to record
the system of document flow?
A Narrative notes
B Flowcharts
C Questionnaires
D Organisational charts LO 2i
25 In each of the following three cases, select whether control risk is higher or lower than normal.
The payables ledger is not regularly reconciled to the payables ledger control account
A Control risk is higher than normal
B Control risk is lower than normal
Management often override internal controls
C Control risk is higher than normal
D Control risk is lower than normal
Entry to the inventory storeroom is only for authorised personnel
E Control risk is higher than normal
F Control risk is lower than normal LO 2b
27 An effective system of internal control requires segregation of basic functions. Which THREE of the
following functions should ideally be segregated?
A Authorisation of transactions
B Preparation of financial statements
C Custody or handling of assets
D Budgetary control
E Recording of transactions LO 2b
28 An audit committee is a committee with responsibility for audit related matters comprised of which
of the following?
A Executive directors only
B Non-executive directors only
C Non-executive directors and internal auditors
D Non-executive directors and external auditors LO 2d
29 ISA 315 states that an internal control system in an organisation consists of five components: the
control environment, the entity’s risk assessment process, the information system, control activities
and monitoring of controls.
For each of the following examples select the component which it illustrates.
The entity’s organisational structure
A Control environment
B Control activity
C Monitoring of controls
Review by management of monthly bank reconciliations
D Control environment
E Control activity
F Monitoring of controls LO 2d
31 Most entities make use of IT systems for financial reporting and operational purposes. Controls
operating in an IT environment can be split into general controls and application controls. Which
of the following is an application control?
A Use of passwords
B Testing of new systems
C Authorisation of data for input
D Disaster recovery plan LO 2e
32 Which TWO of the following will reduce password effectiveness as a means of restricting access to
a computer system?
A Frequent changes of passwords
B User selection of passwords
C Automatic disconnection after failed attempts to access system
D Disciplinary offence if passwords revealed
E Displaying the password on screen LO 2f
1 Which THREE of the following are risks associated with the sales system?
A Orders may be taken from customers who are not able to pay
B Goods may be despatched but not invoiced
C The full credit period offered might not be taken
D Money might be received at the premises but not banked LO 2c
2 Which TWO of the following controls best mitigate the risk that customers might not be able to
pay?
A Authorisation of credit terms to customers
B Obtaining customers’ signatures on delivery documentation
C Regular preparation of trade receivables statements
D Checking the ageing of the current receivables ledger balance prior to accepting orders LO 2f
3 Which THREE of the following controls best prevent misappropriation of customers’ remittances?
A Segregation of duties between cash handling and recording
B Post opening by two people
C Investigation of differences between till records and cash collected
D Regular banking LO 2f
4 The following describes the processes which make up the sales system in operation at Sheraton and
Co.
For each process, select whether it represents a strength or a deficiency of the system.
Orders are placed by telephone. When a call is received, the person receiving the order checks that
the customer’s credit status supports the order and that the customer’s current balance is below
the maximum level and then immediately inputs the order into the system.
A Strength
B Deficiency
The order automatically generates a message to the distribution centre which despatches the
goods and to the accounts department, which immediately raises an invoice and sends it to the
customer.
C Strength
D Deficiency
Customer queries are dealt with by reception staff.
E Strength
F Deficiency LO 2g/h
6 The internal auditor at Windsor Ltd has identified the following deficiencies within that
organisation’s sales system.
For each deficiency select the most likely consequence which might arise as a result of that
deficiency.
Invoices are matched to orders but not warehouse records
A Customers may not pay promptly
B Invoices may be raised in error
C Orders may be accepted from customers who are unable to pay
Receivables statements are not sent to customers
D Customers may not pay promptly
E Invoices may be raised in error
F Orders may be accepted from customers who are unable to pay LO 2f/h
7 The external auditor at Reading Ltd has identified the following deficiencies within that
organisation’s sales system.
For each deficiency select the most likely consequence which might arise as a result of that
deficiency.
Overdue accounts are not followed up
A Invoiced sales might not be properly recorded
B Credit notes might not be properly recorded
C Debts might be included on the receivables ledger that are not collectable
Invoices are not in numerical sequence
D Invoiced sales might not be properly recorded
E Credit notes might not be properly recorded
F Debts might be included on the receivables ledger that are not collectable LO 2f/h
10 The following describes aspects of the sales system in operation at Barrow plc.
For each process select whether it represents a strength or a deficiency of the system.
Sales invoices are matched to despatch notes and sales orders. The calculations on the invoices are
checked by the accounts clerk.
A Strength
B Deficiency
The receivables ledger clerk posts the sales invoices and cash received to the receivables ledger.
The receivables ledger clerk also reconciles the receivables ledger to the control account on a
monthly basis.
C Strength
D Deficiency
The condition of goods returned is checked and a goods returned note is produced. A copy of this
is sent to the accounts department and a credit note is raised by the chief accountant.
E Strength
F Deficiency LO 2g/h
12 Which TWO of the following are objectives of the sales ordering part of the sales system?
A Sales are only made to credit worthy customers
B Goods are correctly invoiced
C Cut-off is correct
D Orders can be fulfilled LO 2c
13 The following describes the processes which make up the sales system in operation at Raffles and
Co.
For each process select whether it represents a strength or a deficiency of the system.
Orders are placed by telephone. On receipt of a call, following credit checks, the order is
immediately entered onto the system.
A Strength
B Deficiency
The order generates a despatch note which is forwarded to the warehouse and an invoice which is
forwarded to accounts receivable. Goods in inventory are despatched immediately and the
despatch note is amended manually for unavailable goods.
C Strength
D Deficiency
A copy of any despatch notes with incomplete orders is filed in an ‘unfulfilled orders’ file which is
reviewed daily and the backlog filled as soon as inventory is available.
E Strength
F Deficiency LO 2g/h
1 For each of the following examples, select the type of internal control activity which it represents.
Monthly management accounts are compared to budget and differences investigated
A Authorisation
B Performance review
C Information processing
Numerical sequence checks are undertaken on goods received records
D Authorisation
E Performance review
F Information processing LO 2e
2 The auditor of Twickenham Ltd has identified the following deficiencies within that organisation’s
accounting system.
For each deficiency select the most likely consequence which might arise as a result of that
deficiency.
Goods inwards are not checked
A Accepting inferior quality goods
B False invoices could be paid
C Services received are not accurately recorded.
Invoices are not checked to original orders
D Accepting inferior quality goods
E False invoices could be paid
F Services received are not accurately recorded LO 2f/h
4 Redesign Ltd is a large property management company which makes use of the services of many
different contractors for building, design and decorating services.
Which TWO of the following internal controls are most likely to prevent services being used for the
private purposes of employees
A Purchase orders are processed by the buying department following authorisation by the
production director
B Purchase requisitions must be signed by two team members for any given project
C Purchase orders should only be placed with authorised contractors
D Purchase invoices are matched to authorised purchase orders LO 2f
5 The organisational structure at Molyneux Ltd is as follows. The production department is headed
by Jack Frost, whose deputy is Tiny Tim. Jack Frost reports to the managing director, Nicholas
Clause. There are several other departments (sales and marketing, accounting, purchasing, HR and
internal audit).
Which of the following statements reflects the ideal situation with regard to purchase ordering?
A Jack Frost and Tiny Tim should make purchase orders as production needs dictate
B Jack Frost should make purchase orders, although Tiny Tim could make requisitions as
production needs dictate
C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders
should be placed by the purchasing department
D Jack Frost and Tiny Tim should requisition materials as production needs dictate but orders
should be placed by the purchasing department, having been authorised by Nicholas Clause
LO 2g
7 The following are examples of deficiencies in the purchases system of Burns Ltd.
For each example, select the type of internal control activity which would improve the system.
Errors have been made in the calculation of discounts receivable
A Authorisation
B Physical controls
C Information processing
There has been increasing levels of theft from the main distribution centre
D Authorisation
E Physical controls
F Information processing LO 2f
8 Which TWO of the following deficiencies identified in the purchases system of Harrow Ltd could
result in a misstatement of liabilities?
A The buying department does not always use authorised suppliers
B Harrow Ltd does not always take advantage of prompt payment discounts
C Purchase invoices are not matched with goods received notes
D The payables ledger is not reconciled to the payables ledger control account LO 2f/h
2 Tulips Ltd has a number of staff on maternity leave claiming statutory maternity pay.
Which THREE of the following controls would BEST ENSURE that the correct payments are made to
employees?
A The payroll should be checked back to individual employee personnel records
B Payroll totals should be compared to adjusted budgets on a monthly basis
C Total tax deductions should be reconciled with tax returns
D BACS transfer lists should be authorised by the head of personnel LO 2f
3 For each of the following statements, select whether they are true or false in respect of internal
controls over payroll.
Requiring employees to clock in and out of work helps to ensure that they are paid at the correct
rate
A True
B False
Reviewing wages paid against wages budgeted helps to ensure that employees are being paid the
correct amounts
C True
D False
Changes in pay rates should be authorised by senior management
E True
F False LO 2f
5 The following describes the processes in the payroll system at Wembley Ltd.
For each process, select whether it represents a strength or a deficiency of the system.
Employees are given individual security codes to punch into the main door key pad. This key pad
also monitors the hours worked by employees
A Strength
B Deficiency
The payroll is prepared by a payroll clerk from hours worked information on a standard payroll IT
package. The payroll is checked to individual records automatically by the system. The payroll is
approved by the financial controller
C Strength
D Deficiency
Wages are paid by bank transfer, which is authorised by the financial controller.
E Strength
F Deficiency LO 2g/h
6 Workworld Ltd maintains a computerised payroll system. All employees are paid by BACS directly
into their bank account.
Which TWO of the following controls will be most effective in ensuring that payment is made to
the correct employee?
A Authorisation of overtime worked
B A sample of calculations performed by the payroll package are manually reperformed each
month
C The BACS list is reviewed by the chief accountant together with supporting payroll
documentation
D The print out from the bank is agreed to the BACS list and any discrepancies investigated
LO 2f
8 For each of the following statements, select whether they are true or false in respect of internal
controls over payroll.
The payroll should be checked back to individual employee personnel records on a regular basis
A True
B False
Leavers and joiners should be authorised by a senior member of staff
C True
D False
Reperformance of calculations is unnecessary where the payroll system is computerised
E True
F False LO 2f
9 Spoon Ltd is a company that is expanding rapidly and is regularly taking on new employees. The
payroll is processed in-house in the accounts department using a PC. The financial controller is
concerned that fictitious employees could be included on the payroll by an unscrupulous employee
from the accounts department.
Which of the following internal controls is MOST likely to prevent this from happening?
A Payroll standing data periodically printed out and checked on a line-by-line basis to
independently held employee details
B Use of hierarchical passwords over standing data files
C Pre-authorisation of all amendments to payroll standing data by an independent official
D Supervision of the wages payout by an independent official LO 2f
10 Which TWO of the following control procedures will reduce the risk of unauthorised disclosure of
payroll data?
A Exception reporting of high amounts of net pay
B Access controls
C Back-up procedures
D Encryption of data
E Independent review of payroll LO 2f
1 The scope and objectives of the internal audit function vary widely and depend on the size and
structure of the entity and the requirements of its management.
Which TWO of the following functions could internal audit perform and still operate effectively?
A Examination of financial and operating information
B Review of the company’s compliance with laws and regulations
C Authorisation of unusual transactions
D Development of internal control systems LO 2d
2 Which TWO of the following roles could internal audit carry out in respect of risk management and
still operate effectively?
A Monitoring the company’s overall risk strategy
B Designing an internal control system in a production department
C Testing internal controls in the purchasing department
D Implementing internal controls in the sales department LO 2d
3 Which THREE of the following roles could the internal audit function carry out to assist the board in
its management of the company and still operate effectively?
A Carrying out the statutory audit
B Giving expert advice on technical accounting matters
C Liaising with the external auditors
D Auditing board reports not audited by the external auditors LO 2d
6 Hiltson Hotels is a global group of hotels. The parent company, Hiltson Holdings plc employs an
internal audit function which carries out audits and investigations on the individual hotels in the
group.
Which TWO of the following could the internal audit function carry out and still operate effectively?
A Secondment to the accounts department of the Singapore Hiltson to cover the maternity
leave of the financial controller
B Special investigation into the profits of the New York Hiltson where the group directors
suspect a fraud may have been carried out
C Tests of the controls at the Edinburgh Hiltson as part of a routine internal audit cycle
D Identification of risks at the proposed Nairobi Hiltson, which is due to open in nine months’
time
LO 2d
10 To which TWO of the following parties would the internal auditor report?
A Board of directors
B Shareholders
C Audit committee
D External auditors LO 2d
11 Which THREE of the following activities would typically be performed by BOTH the internal and
external auditor?
A Review of compliance with laws and regulations
B Assessment of the effectiveness of internal controls
C Review of the efficiency of operations
D Carrying out tests of details on transactions and balances LO 2d
12 The scope and objectives of the internal audit function vary widely and depend on the size and
structure of the entity and the requirements of its management.
Which THREE of the following functions could internal audit perform and still operate effectively?
A Examination of financial and operational information for management
B Authorisation of transactions in excess of limits set by management
C Review of accounting systems and related controls
D Advising management on cost effective controls for systems and activities
E Routinely preparing bank reconciliations LO 2d
1 Which of the following is NOT a reason that assurance providers record their work?
A To confirm the terms of the engagement
B To assist the assurance team to plan and perform the engagement
C To retain a record of matters of continuing significance to the engagement
D To enable an experienced assurance provider to carry out quality control reviews LO 3a
3 Which TWO of the following are likely to be kept on a permanent audit file?
A Engagement letter
B Planning memorandum
C Review notes
D Previous year’s signed financial statements
E Current year’s draft financial statements LO 1f
6 Many auditors use two types of audit file: a current audit file and a permanent audit file.
For each of the following documents select the file or files which that document is most likely to be
filed in.
Engagement letter
A Current audit file
B Permanent audit file
C Both
Audit plan
D Current audit file
E Permanent audit file
F Both
Manager review notes
G Current audit file
H Permanent audit file
I Both LO 1f
7 Which THREE of the following documents would be held on a current audit file?
A Details of the history of the client’s business
B Communications with experts
C Audit file review notes
D Copies of management accounts
E Lease agreements LO 1f
9 For each of the following select whether or not they are valid reasons for preparing audit working
papers.
To assist the audit team to plan and perform the audit
A Valid
B Not valid
To enable the auditor to charge a higher fee
C Valid
D Not valid
To prove adherence to ISAs
E Valid
F Not valid LO 3a
10 The assurance provider will prepare documentation in relation to the fieldwork carried out on an
assurance engagement.
For each of the following select whether or not they are valid reasons for preparing such
documentation.
To assist in establishing the overall audit strategy for this year’s engagement
A Valid
B Not valid
To assist in this year’s review process
C Valid
D Not valid
To provide a record of evidence gathered to support the conclusions reached
E Valid
F Not valid LO 3a
13 Which of the following statements is correct in respect of the minimum period, as required by the
ICAEW, for which audit working papers must be retained by the auditor?
A Five years from the date of completion of the audit work
B Six years from the date of the auditor’s report
C Six years from the end of the accounting period to which they relate
D Five years from the date of approval of the financial statements by the shareholders LO 1f
14 Which of the following statements is correct in respect of the safe custody of audit documentation?
A Whilst audit documentation is held on the client’s premises it is the responsibility of the client
to ensure its safe custody
B The auditor need only ensure the safe custody of audit documentation for the duration of the
audit
C The auditor must ensure the safe custody of audit documentation for at least six years from
the end of the accounting period to which it relates
D All audit documentation must be destroyed within five years of the end of the accounting
period to which it relates LO 1f
2 In which THREE of the following situations could audit software appropriately be used?
A To check calculations on a selection of invoices
B To extract a sample of invoices over a certain value
C To extract all invoices to specific customers
D To test controls over invoice processing LO 3d
3 According to ISAs 315 and 520 which TWO of the following statements are correct?
A Analytical procedures must be used as risk assessment procedures
B Analytical procedures must be used as substantive procedures
C Analytical procedures must be used during the overall review stage of an audit
D Analytical procedures must be carried out by senior level assurance staff LO 3d
5 Which of the following procedures would be the most appropriate for verifying the interest accrued
on borrowings?
A Confirming the interest rate with the lender
B Vouching the payment of interest on the borrowings
C Testing internal controls over cash payments
D Recalculating the interest accrued on the basis of outstanding amount, interest rate and
period to which it relates LO 3d
8 Which TWO of the following are factors that an assurance provider should take into account when
determining the sample size for a test of details?
A The time available to complete the test
B The skill of the team member assigned to carry out the test
C A decrease in the assurance provider’s assessment of the risk of material misstatement
D An increase in the level of expected misstatement LO 3g
9 Which THREE of the following methods would be most appropriate to use to select a sample of
accounts receivable when the assurance provider is using statistical sampling?
A Random selection
B Systematic selection
C Haphazard selection
D Sequence selection
E Monetary unit selection LO 3f
10 Which TWO of the following misstatements discovered in a sample would not generally be
extrapolated against the total population?
A A misposting between customer accounts
B A misstatement in invoice value
C An invoice omitted in error
D An invoice disputed by a customer
E A timing difference between customer records and client records LO 3g
12 For each of the following statements concerning computer assisted audit techniques select whether
they are true or false.
Computer assisted audit techniques can be used to perform the assurance procedure of
‘reperformance’
A True
B False
Test data can be used to ensure that controls in the client’s system are operating as the assurance
provider expects them to
C True
D False
Audit software makes use of the client’s specialised software to run audit procedures
E True
F False LO 3b
13 In respect of an assurance engagement which of the following is the LEAST persuasive method of
gathering evidence?
A Inspection of a supplier's invoice
B Reperformance of a supplier statement reconciliation obtained from the client
C Reperformance of a depreciation calculation undertaken by the reporting accountant
D Inspection of a sales invoice produced by the client LO 3e
15 When determining a sample size for tests of controls, there are a number of factors which an
auditor should take into account.
For each of the following factors select whether it would cause the sample size to increase,
decrease, or to have negligible effect.
An increase in tolerable misstatement
A Increase
B Decrease
C Negligible effect
An increase in the number of invoices in the population
D Increase
E Decrease
F Negligible effect
A decrease in the auditor’s required confidence level
G Increase
H Decrease
I Negligible effect LO 3g
16 Which TWO of the following statements are correct regarding factors which influence sample sizes
for tests of controls?
A An increase in the number of sampling units within the population will increase the sample
size
B A decrease in the expected misstatement will decrease the sample size
C A decrease in the tolerable misstatement will decrease the sample size
D An increase in the extent to which the risk of material misstatement is reduced by the
operating effectiveness of controls will increase the sample size LO 3g
18 For each of the following pieces of evidence select whether it is more reliable or less reliable than
the piece of evidence it is paired with.
A sales invoice is more reliable/less reliable than a purchase invoice
A More reliable
B Less reliable
An original copy of a lease agreement is more reliable/less reliable than a photocopy
C More reliable
D Less reliable
A bank statement is more reliable/less reliable than a cash book
E More reliable
F Less reliable LO 3e
19 All methods of obtaining evidence have deficiencies. Examples of such deficiencies are listed below.
For each deficiency select the method of obtaining evidence which is most likely to result in that
deficiency.
Limited to the point in time it takes place
A Analytical review
B Observation of a procedure
Limited by underlying accounting system
C Analytical review
D Observation of a procedure
A balance which is overstated may be agreed because it favours the respondent
E Direct confirmation of a receivables balance
F Direct confirmation of a payables balance LO 3c
21 Which TWO of the following circumstances would REDUCE the reliability of the results of analytical
procedures?
A Detailed information is available analysed by department
B Budgeted figures in the past have proved to be highly optimistic
C Reliable industry data is available
D Significant deficiencies in the internal control system have been identified in the past LO 3e
23 The auditor of Frost Ltd has carried out a test on a sample of receivables and has discovered a
higher than expected number of misstatements.
Which THREE of the following steps would be an appropriate response to this?
A Investigate the nature and cause of the misstatements
B Consider the effect of the misstatements on other parts of the audit
C Estimate the probable overall misstatement by extrapolating the results
D Increase the tolerable misstatement LO 3g
25 For each of the procedures below, select whether the auditor will be testing primarily for
overstatement or primarily for understatement.
Communicating with the client’s legal advisers for details about outstanding legal claims
A Primarily for overstatement of provisions
B Primarily for understatement of provisions
Reviewing the aged inventory analysis to identify old/obsolete inventory
C Primarily for overstatement of inventory
D Primarily for understatement of inventory
The auditor calculating for himself the warranty provision and comparing their figure to the
balance stated in the balance sheet
E Primarily for overstatement of warranty provision
F Primarily for understatement of warranty provision LO 3f
26 For each of the following statements select whether they are true or false in respect of test data.
Test data is a type of substantive procedure
A True
B False
Test data can include real data and dummy data
C True
D False
Test data can be used to assist in the calculation of ratios
E True
F False LO 3b
28 For each of the following descriptions select whether they describe monetary unit sampling, block
selection or systematic selection.
Peter is auditing trade accounts receivable. Materiality is £25,000. The sample is selected on the
th
basis of choosing the balances containing each 25,000 £1 on a cumulative basis.
A Monetary unit sampling
B Block selection
C Systematic selection
Paul is checking whether purchase invoices have been authorised for payment. He has selected all
the November purchase invoices as his sample and has reviewed them for an authorisation
signature.
D Monetary unit sampling
E Block selection
F Systematic selection LO 3b
29 In order to gather sufficient, appropriate evidence, the auditor may make use of external
confirmation requests.
For each of the following statements with regards to external confirmation requests select whether
it is true or false.
A positive confirmation request always asks the respondents to reply to the auditor indicating
whether or not they agree with the information provided
A True
B False
A sample of confirmation requests drawn from the client’s list of balances is more appropriate for
receivables balances than for payables balances
C True
D False
A positive confirmation request ordinarily provides more reliable audit evidence than a negative
confirmation request
E True
F False LO 3c
1 According to ISA 580 which THREE of the following is an auditor required to confirm in writing
with management?
A Management’s belief that it has fulfilled its responsibility for the preparation of financial
statements
B All transactions have been reflected in the financial statements
C The fact that management has provided the auditor with all relevant information
D Management’s agreement of the level of materiality used during the audit LO 3h
2 According to ISA 580 which TWO of the following must auditors obtain written representations
about?
A Material matters where other evidence cannot reasonably be expected to exist
B Material matters where other evidence is missing due to an emergency such as a fire
C Management’s belief that it has fulfilled its responsibility for the preparation of the financial
statements
D That the financial statements record and reflect all transactions LO 3h
3 For each of the following statements concerning written representations select whether they are
true or false.
The auditor should evaluate whether the representations appear reliable and are consistent with
other evidence obtained before they are relied on as audit evidence
A True
B False
Written representations are appropriate evidence when evidence the auditors expected to be
available is unavailable
C True
D False
If written representations given do not agree with other evidence, auditors should not trust any
other representations made by management during the course of the audit
E True
F False LO 3h
6 On which TWO of the following matters should an auditor seek written representations?
A Whether there are plans to abandon product lines that will result in obsolete inventory
B Whether plant and equipment held on the client’s premises exists
C The existence (or not) of reconciling items between the cash balance and the bank statement
balance
D Whether there are any undisclosed subsequent events LO 3h
8 For each of the following statements concerning written representation letters select whether they
are true or false.
Written confirmations are required from all client staff who have made oral representations
A True
B False
The matters to be referred to in the written representation letter shall be discussed by the auditor
with senior management
C True
D False
Written representations can be used as a substitute for evidence which would be available to the
auditor by other means
E True
F False LO 3h
1 Which THREE of the following provide evidence to support the rights and obligations assertion in
relation to non-current assets?
A Title deeds
B Purchase invoices
C Vehicle registration documents
D Sales invoices LO 3d
2 Which of the following assertions is the assurance provider LEAST concerned with when testing a
non-current asset balance?
A Existence
B Rights and obligations
C Completeness
D Cut-off LO 3d
3 Which THREE of the following are the more significant risks in relation to an inventory balance in
the financial statements?
A Inventory exists but has not been included in the financial statements
B Inventory has been valued at cost when net realisable value is lower
C Inventory has been valued when it is obsolete and has no value
D Inventory has not been disclosed properly in the financial statements LO 3d
4 Which TWO of the following constitute the BEST quality evidence concerning the net realisable
value of inventory?
A Company’s controls over inventory counting
B Post year-end sales invoices
C Post year-end sales orders
D Post year-end sales price list LO 3e
6 Which TWO of the following procedures are MOST appropriate to confirm the valuation of trade
receivables?
A Review of the receivables ledger
B Direct confirmations with customers
C Review of cash paid after date
D Review of sales invoices LO 3d
7 Which of the following procedures which could be undertaken to confirm the valuation of a client’s
bank balance is the MOST reliable?
A Inspection of the bank reconciliation
B Inspection of the bank statement
C Inspection of the bank letter
D Inspection of the cash book LO 3e
8 In which TWO of the following situations should an auditor carry out a cash count?
A An individual cash float is material
B A client has a large number of cash floats, which are immaterial in total
C A client has poor controls over cash floats, which are immaterial in total
D The auditor suspects that a fraud has been committed in relation to immaterial cash floats
LO 3d
9 Which of the following is the key assertion with which auditors are concerned in relation to
payables?
A Completeness
B Existence
C Accuracy
D Disclosure LO 3d
11 Which TWO of the following are reasons why sales are often verified by testing the internal controls
in place over sales?
A There are usually too many individual transactions to test them individually
B Sales constitute a high volume of similar transactions which are suitable for controls testing
C Controls over sales in a company are often strong
D Because there are so many individual transactions, there is a significant risk that sales are
misstated LO 3b
12 Which THREE of the following relationships/ratios are reasons why analytical procedures can give
strong evidence in relation to the accuracy of purchases?
A Operating margin
B Purchases and payables
C Purchases and inventories
D Gross margin LO 3g
13 The results of substantive tests in relation to non-current assets at Hammersmith plc are set out
below. The materiality threshold set for these tests was £5,000.
For each of the following results select the action which should be taken by the audit senior.
A sample of three assets worth £2,000 in total had been excluded from the non-current asset
register and the financial statements
A Draw conclusion
B Refer to senior colleague
C Extend sample
A building revalued to £100,000 during the year was vouched to an expert valuation carried out by
a firm of chartered surveyors
D Draw conclusion
E Refer to senior colleague
F Extend sample LO 3i
15 The auditor of Barnett plc carried out an external confirmation of receivables at the year end to
confirm the accuracy of total trade receivables in the statement of financial position at that date.
Two of the replies to the confirmations disagreed the balance.
For each of these two disagreements, select whether the disagreement would be considered a
misstatement or would not be considered a misstatement for the purposes of evaluating the
accuracy of total trade receivables in the statement of financial position at the year end.
Watford Ltd disagreed the balance because they had made a payment two days before the year
end. The auditor has confirmed that the cheque cleared the bank two days after the year end
A Misstatement
B Not misstatement
Radlet Ltd disagreed the balance because their records did not contain invoice number SI 00492.
This invoice and associated goods were despatched by Barnett plc on the last day of the year. The
auditor has verified that the despatch note and cut-off with inventory are correct
C Misstatement
D Not misstatement LO 3g
16 Hayley, an audit junior, has carried out the following tests to verify the valuation of inventory in the
financial statements of Cobham plc.
In each case, select whether the test proves the assertion of valuation or not.
Attending the inventory count and carrying out sample counts on a number of items
A Proves valuation
B Does not prove valuation
Comparing cost on a number of inventory items to sales invoices subsequent to the year end
C Proves valuation
D Does not prove valuation LO 3d
18 Kamran, an audit junior, has been asked to test the completeness of certain items in the income
statement. He has carried out the following tests.
For each test carried out select whether that test proves the assertion of completeness or not.
Analytical procedures on revenue figures, budget v actual and actual current year v actual previous
year
A Proves completeness
B Does not prove completeness
Tracing a sample of goods received notes to payables ledger and financial statements
C Proves completeness
D Does not prove completeness
Tracing a sample of entries on the payroll to individual HR records
E Proves completeness
F Does not prove completeness LO 3d
19 Which TWO of the following assertions is the auditor most concerned with when testing property,
plant and equipment?
A Occurrence
B Existence
C Classification
D Rights and obligations
E Accuracy LO 3d
21 Which TWO of the following procedures would provide evidence of rights and obligations of motor
vehicles?
A Vouching a sample of motor vehicles in the asset register to registration documents
B Physical inspection of motor vehicles
C Review of purchase invoices for motor vehicles acquired in the period
D Confirmation that calculations on the non-current asset schedule are correct in respect of
motor vehicles LO 3d
22 For each of the following circumstances in respect of inventory, select which financial statement
assertion would be affected.
Inventory which had been sold by the end of the period has been included in inventory
A Completeness
B Valuation
C Cut-off
Damaged items of inventory have not been written down to net realisable value
D Completeness
E Valuation
F Cut-off LO 3d
23 For each of the following circumstances in respect of inventory, select which financial statement
assertion would be affected.
Inventory items were excluded from the total in the financial statements in error
A Completeness
B Valuation
C Cut-off
Due to the miscalculation of cost, some inventory items have been included at cost when net
realisable value is lower
D Completeness
E Valuation
F Cut-off LO 3d
25 For each of the following statements concerning perpetual inventory counts select whether they
are true or false.
Adequate inventory records must be kept up to date
A True
B False
All inventory lines must be counted at least once per month
C True
D False
Material differences between book inventory and actual inventory must be investigated and
corrected
E True
F False LO 3g
26 Management should compare cost and net realisable value for each item of inventory.
Which THREE of the following circumstances could result in net realisable value being lower than
cost?
A An increase in the cost of raw materials which cannot be passed on to the customer
B An increase in selling price
C Errors in production
D An increase in production overheads
E Trade discounts from suppliers LO 3g
28 The following statements apply to the use of the positive or negative method of direct
confirmation of receivables.
For each statement, select whether it applies to a situation where the positive method should be
used or to a situation where the negative method could be used.
The assessed risk of material misstatement is high
A Positive method
B Negative method
A small number of large balances is involved
C Positive method
D Negative method
A substantial number of misstatements is not expected
E Positive method
F Negative method
There is no reason to believe that respondents will disregard the requests
G Positive method
H Negative method LO 3d
29 Which of the following is the MOST RELIABLE evidence of the valuation of trade receivables?
A A comparison of current year-end total with previous year
B Analysis of after-date receipts
C Reconciliation of receivables ledger and receivables ledger control account
D Reconstruction of receivables balance by tracing individual amounts invoiced to despatch
notes
LO 3e
31 Two types of procedures used in gathering evidence are tests of controls and substantive
procedures.
For each of the following examples select the type of procedure illustrated.
Examining the instructions issued by an organisation for its year-end physical inventory count
A Test of control
B Substantive procedure
Observing an organisation’s despatch procedures
C Test of control
D Substantive procedure
Comparing this year’s sales figures to those of previous years
E Test of control
F Substantive procedure LO 3b
32 The following are examples of tests which an assurance firm might use at the gathering evidence
stage of an assignment.
For each example select the type of procedure which that test illustrates.
Casting the list of year-end receivables
A Confirmation
B Recalculation
C Reperformance
Using CAATs to check the ageing of the year-end list of aged receivables
D Confirmation
E Recalculation
F Reperformance LO 3b
34 Which of the following financial statement assertions will be supported by a sample check on the
numerical sequence of despatch notes and invoices?
A Allocation
B Occurrence
C Completeness
D Valuation LO 3d
35 Which of the following procedures should be undertaken to confirm the existence of cash at bank?
A Inspecting the bank reconciliation statement prepared by the client
B Agreeing the figures on the bank reconciliation to the bank column in the cash book
C Obtaining direct confirmation of the bank balance from the client’s bank
D Reperforming the additions on the bank reconciliation LO 3d
37 The external auditor of Aaron Ltd has set materiality thresholds such that items under £40,000 are
not generally considered material.
For each of the following items in Aaron Ltd’s financial statements select whether the auditor
would test it primarily for overstatement or primarily for understatement, or whether the item
would not be tested at all.
£1,000 due from Harry, a director of Aaron Ltd
A Overstatement
B Understatement
C Not test
Sundry income £35,000
D Overstatement
E Understatement
F Not test LO 3f/g
38 Gamma Ltd has a head office and several branches. The head office operates a continuous
inventory counting system which ensures that all items are counted at least twice a year and
checked against inventory records.
During the interim audit, an examination of the counts undertaken by head office staff shows that
differences between inventory records and the physical count regularly arise. Usually, actual
inventory levels at branches are found to be higher than book inventory.
Which of the following explains this difference?
A Unrecorded write offs of scrapped inventory
B Unrecorded purchase returns
C Unrecorded branch requisitions
D Unrecorded branch returns LO 3g
40 Which of the following describes how an assurance provider would check the existence assertion
for a non-current asset?
A Trace the physical item to the non-current asset register
B Trace the physical item to the financial statements
C Trace an entry in the non-current asset register to the physical item
D Trace an entry in the non-current asset register to the financial statements
E Trace an entry in the financial statements to the physical item LO 3f
1 Which THREE of the following are reasons why the accounting profession needs ethical codes?
A Accountants have access to confidential information
B Assurance providers claim to give an independent view
C The financial community relies on accountants
D The law requires it LO 4a/c/l
2 ICAEW qualified auditors acting in the UK are subject to which TWO of the following?
A IFAC Code of Ethics
B ICAEW Code of Ethics
C FRC’s Ethical Standards for Auditors
D The Code of Ethics set by the Government LO 4d
3 Which THREE of the following are stated fundamental principles of the IFAC Code?
A Integrity
B Objectivity
C Independence
D Confidentiality
E Courtesy LO 4e
7 Which of the following statements best describes ethical guidance in the UK?
A Ethical guidance provides a set of rules which must be followed in all circumstances
B Ethical guidance is a framework containing a combination of rules and principles the
application of which is dependent on the professional judgement of the assurance provider
based on the specific circumstances
C Ethical guidance provides a set of principles which can be applied at the discretion of the
assurance provider
D Ethical guidance is a series of legal requirements LO 4d
9 Which THREE of the following are valid reasons why independence and objectivity are important to
the assurance profession?
A The public’s expectations of accountants
B Public interest in financial information
C Tradition
D Credibility of published financial information LO 4f
1 Which THREE of the following should an auditor consider if there is a threat to independence?
A Withdrawing from the engagement
B Applying specific safeguards
C Making disclosures to the client
D Making disclosures to the ICAEW LO 4g
2 Which THREE of the following should not own a material financial interest in an audit client?
A A member of the audit team
B A minor child of a member of the audit team
C A parent of a member of the audit team
D A spouse of a member of the audit team LO 4f
3 Which THREE of the following threats to independence might arise on the current audit when an
audit team member is involved in employment negotiations with an audit client during the course
of the audit?
A Self-interest
B Self-review
C Intimidation
D Familiarity LO 4m
4 Allisons and Co is a firm of Chartered Accountants. It has a reputation for excellence in the banking
and insurance industry and has been invited to accept engagements by various institutions as
follows.
(i) The audit of Nationally plc, the leading building society in the UK. 40% of staff members of
Allisons and Co who have mortgages have mortgaged their home with Nationally.
(ii) The audit of Cash It Ltd, a large business which banks cheques and cash items for the general
public and also advances loans. A member of the proposed audit team was impressed by the
loan rate offered to the team during the tendering process and took out a loan with Cash It
Ltd to buy a car.
Which, if any, of the above companies present a major threat to the independence of Allisons and
Co, if the engagement were to be accepted?
A Nationally plc and Cash It Ltd
B Cash It Ltd only
C Nationally plc only
D Neither Nationally plc nor Cash It Ltd LO 4f
6 Majors and Co, a firm of Chartered Accountants, offers the following additional services to various
audit clients.
In which THREE of the following situations is an insurmountable self-review threat most likely to
arise?
A Preparing the financial statements for Power Group plc, a listed company, on a regular basis
B Carrying out valuations of various non-current property assets for Tower Investments Ltd, a
property investment company
C Promoting tax structures to Haven Ltd, where there is scope for doubt about the
appropriateness of the accounting treatments involved to achieve the tax benefits
D Assisting Craven plc in defining its corporate strategies and identifying possible sources of
finance for a potential new venture LO 4f
7 In accordance with Ethical Standard 3, in which THREE of the following engagements is there a
significant threat to independence?
A Alan Johnson has been the audit engagement partner of Domino Ltd for eleven years
B Barry Thomson has been the audit engagement partner of Beetle Group plc, a listed
company, for seven years
C Having been the audit engagement partner of Risk Group plc, a listed company, for five years,
Colin Jackson resigned as audit engagement partner three years ago. Following a reshuffle in
the firm, he has just been assigned as a key partner involved in the audit of Risk Group plc
D Don Matthewson has recently been appointed as the audit engagement partner of Scrabble
plc, a listed company. He previously held this position six years ago LO 4f
8 The ethics partner at Juleyson Co, a firm of Chartered Accountants, is trying to resolve an ethical
conflict in respect of two clients of the firm.
Which TWO of the following are appropriate actions for him to take?
A Do nothing because the situation is likely to resolve itself over time
B Refer the matter to the management board of partners because he cannot determine a
solution himself
C Solicit advice from the ICAEW ethics helpline
D Seek the opinion of an ethics partner at a different firm LO 4o
13 Fagin and Co, a large assurance firm, has been asked to carry out recruitment services for its client,
Claret plc, by recruiting senior accounting staff.
Which TWO of the following threats to independence would arise if Fagin and Co agree to provide
such services?
A Self-review
B Management
C Advocacy
D Familiarity LO 4m
14 The following are examples of situations in which an audit firm might be faced with threats to its
independence.
For each example, select the type of threat which that situation BEST illustrates.
The finance director of Fussy Ltd has requested that the audit team for the current year audit be
the same as the team which performed last year’s audit
A Self-review
B Familiarity
C Intimidation
The finance director of Pernickety Ltd has told the audit manager that he is not happy with the
proposed audit opinion and is likely to seek a second opinion
D Self-review
E Familiarity
F Intimidation LO 4m
16 Hermione and Co is a twelve-partner assurance firm which has been asked to consider taking on
the statutory audit of two separate companies. The following potential issues have been identified
prior to acceptance of any such appointments.
For each of the following potential clients select on what basis the engagement could be accepted,
if at all.
Snowman Ltd, which has just grown to the point where a statutory audit is required. Snowman Ltd
is already a client of Hermione and Co, which prepares the financial statements for the company
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Snowball Ltd, which is a competitor of an existing client of Hermione and Co
D Do not accept
E Accept with safeguards
F Accept with no safeguards LO 4g
17 Which THREE of the following are areas in which a self-interest threat might arise?
A Where there is a close business relationship between the auditor and the client
B Where the auditor prepares and audits the financial statements
C Where the auditor has a financial interest in the client
D Where there are a significant amount of overdue fees
E Where the audit firm provides internal audit services and significant reliance is to be placed on
the internal audit work for the purposes of the external audit LO 4m
19 Wright and Co, a firm of auditors, has the following employees who previously worked for current
audit clients.
For the audit of Hastle Ltd and Morgan Ltd for the year ended 31 December 20X7 for which, if
either, could all three members of staff be used on the audit team?
A Both Hastle Ltd and Morgan Ltd
B Hastle Ltd only
C Morgan Ltd only
D Neither Hastle Ltd nor Morgan Ltd LO 4f
20 Edward is an audit trainee working on the audit of Trekker Trailers Ltd. It is the day before the audit
manager is coming out to the client to review the files. Edward has been asked to perform some
additional tests on inventory valuation by his supervisor. These tests have revealed a number of
problems which Edward has highlighted to the supervisor. The supervisor has told Edward that it is
too late to deal with these and has asked him to falsify the working papers.
Which of the following is the most appropriate course of action for Edward to take?
A Falsify the results as instructed
B Inform the audit manager
C Seek legal advice
D Inform the client LO 4o
22 The following are examples of situations in which Panama and Co, an audit firm with thirty similar
medium-sized audit clients, which are non-listed, might need to implement safeguards in order to
protect its independence.
For each situation select the most appropriate safeguard or state that there are no safeguards
which could reduce the risk to an acceptable level.
One of Panama and Co’s clients is a competitor of one of its other clients
A Separate personnel
B Fee threshold not exceeded
C No safeguards possible
Panama and Co has been asked to take on the role of internal auditor at one of its clients and
would be responsible for implementing its own recommendations
D Separate personnel
E Fee threshold not exceeded
F No safeguards possible LO 4n
24 In each of the following cases, select the principal threat that the audit firm is facing.
Polly Nunn, a partner in an audit firm, has just inherited some shares in an audit client
A Self-interest
B Familiarity
Golf World Ltd is so pleased with the way that the audit has been conducted that it has offered the
members of the audit team two free golf lessons each
C Self-interest
D Familiarity
Tobin and Co, an audit firm, has been asked to provide internal audit services to an audit client
E Self-interest
F Self-review LO 4m
25 Jane Stanley is a qualified accountant working for a small catering company. The directors of the
company are looking to expand and have approached a number of potential investors. Jane has
been asked to produce management accounts for the investors to review. The managing director
has specifically told her that they must show a gross profit margin of 30% and he ‘doesn’t care
how she achieves it’. The gross profit margin is normally approximately 20%. There is no internal
complaints procedure.
Which of the following is the most appropriate INITIAL course of action for Jane to take?
A Resign
B Seek legal advice
C Contact ICAEW telephone helpline
D Comply with her employer’s request LO 4o
27 The following are examples of situations in which an audit firm might be faced with threats to its
independence.
For each example select the type of threat which that situation illustrates.
The audit firm has been asked to underwrite its client’s shares in relation to a proposed flotation
A Self-review
B Advocacy
The board of directors does not contain a qualified finance professional and the company has
asked the audit firm to prepare the financial statements
C Self-review
D Advocacy LO 4m
28 Talland and Co is the external auditor of Huntley plc, a retailer. The managing partner has been
called to a meeting with the board of directors of Huntley plc. At that meeting the firm has been
asked if it can provide the following non-audit services.
Huntley plc wish to implement a new sales system. They wish Talland and Co to take on a
consultancy project whereby the firm will evaluate several possible systems, advise on which system
should be selected, and oversee the installation of the new system.
Which of the following sets of threats would arise from the above scenario, if the project was
accepted by Talland and Co?
A Advocacy and management
B Management and familiarity
C Management and self-review
D Advocacy and familiarity LO 4m
30 The following are examples of situations in which Bouldry and Co, an audit firm, might need to
implement safeguards to protect its independence. Bouldry and Co has 75 small, non-listed audit
clients and has been asked to provide additional services to three of these clients.
For each situation select whether the additional services could be accepted with appropriate
safeguards or state that there are no safeguards that could reduce the risk to an appropriate level.
Bouldry and Co has been asked to carry out a valuation service. The valuation is material to the
financial statements but does not involve a significant degree of subjectivity
A Accept with safeguards
B No safeguards possible
Bouldry and Co has been asked to provide accounts preparation assistance
C Accept with safeguards
D No safeguards possible
Bouldry and Co has been asked to design and implement an IT system which will significantly
impact on the accounting system. Historically, Bouldry and Co has placed reliance on the
accounting system as part of the audit.
E Accept with safeguards
F No safeguards possible LO 4g
31 Brown & Co has been invited by Alpha plc, a listed company, and Beta Ltd , a non-listed company,
to provide audit and non-audit services. If accepted, the fees would represent in the case of Alpha
plc 11% and in the case of Beta Ltd 12% of the gross fee income of the firm.
Assuming Brown & Co wishes to take on as many clients as is permitted by Ethical Standards,
which of the following is the most appropriate course of action?
A Accept both Alpha plc and Beta Ltd as clients
B Accept Alpha plc as a client and refuse Beta Ltd
C Accept Beta Ltd as a client and refuse Alpha plc
D Refuse to take on either Alpha plc or Beta Ltd as clients LO 4f
33 Two different audit juniors have been asked to carry out the following tasks. In each case you
should select the action that the audit junior should take.
An audit junior at Oberon and Co, a large assurance firm, has been asked to join the audit team at
a major client to carry out the receivables section of the audit. The junior has not carried out this
section of the audit before but has covered it in his training
A Perform the work
B Refer to training partner
C Contact ICAEW telephone helpline
An audit junior at Lear and Co, a sole practitioner audit firm, has been asked to commence the
audit of a small manufacturing client. The junior has expressed reservation about this but the
practitioner has insisted that he should go out to the client unsupervised at the beginning of the
following week
D Perform the work
E Refer to training partner
F Contact ICAEW telephone helpline LO 4h
35 The following are examples of situations in which an audit firm might be faced with threats to its
independence.
For each example select the principal type of threat which that situation illustrates.
The finance director has a very strong personality and insists on the audit team working in his office
A Familiarity
B Intimidation
C Management
The audit team and the management team at the client have remained unchanged for several
years
D Familiarity
E Intimidation
F Management LO 4m
36 Dudley & Partners is a large assurance firm. They have acted as the external auditors to
Birmingham Ltd, a small owner-managed company, for two years.
The managing director and major shareholder of Birmingham Ltd, Mr Black, has now asked the
firm to represent the company’s interests in a legal case which has been brought against it. Mr
Black has indicated that if the firm refuse to do this they will not be reappointed as external
auditor. He is also making matters difficult for those members of the audit team carrying out the
interim audit.
Which of the following sets of threats arises from the above scenario?
A Intimidation, self-review and management
B Advocacy, self-interest and management
C Intimidation, advocacy and self-interest
D Intimidation, advocacy and management LO 4m
1 Which TWO of the following are the principal reasons why confidentiality is so important to
accountants?
A It is a fundamental principle of all the major ethical codes
B Failure to keep information confidential reflects badly on the accountant
C Accountants need their clients to be comfortable to make full disclosure of company affairs to
them
D It means that accountants can work for competitors LO 4i
2 Which THREE of the following should an accountant take care not to do, in order to safeguard
confidentiality?
A Discuss client matters with third parties
B Discuss client matters with colleagues in public places
C Discuss client matters with colleagues in non-public places
D Leave working papers in the car LO 4j
4 Which THREE of the following are situations where there is a legal duty to disclose confidential
information?
A When a fraud has taken place, it should be reported to the police
B When terrorist activity has taken place, it should be reported to the police
C When regulatory breaches have taken place at a charity, it should be reported to the Charities
Commission
D When money laundering is suspected, it should be reported to the Serious Organised Crime
Agency (SOCA) LO 4k
6 For each of the following situations select whether the assurance provider MAY disclose confidential
information or MUST disclose confidential information.
The assurance provider is being sued for negligence and is trying to establish a defence
A May make disclosure
B Must make disclosure
The assurance provider has discovered a fraud at the client, which the client has agreed should be
referred to the police
C May make disclosure
D Must make disclosure
The assurance provider believes that the client is saving money by breaching environmental clean
up requirements
E May make disclosure
F Must make disclosure LO 4k
7 In which of the following instances would the client’s permission be required before disclosure is
made to a third party?
A The client is involved in tax evasion
B The receivables ledger clerk at a client has committed a theft by teeming and lading
C An employee of a client is involved in terrorist activities
D The client, in order to save costs, has failed to apply for a licence to operate which is required
by law LO 4k
9 In respect of conflicts of interest select whether each of the following statements is true or false.
Where a conflict of interest exists between two audit clients the auditor must cease to act for one
party
A True
B False
If the effects of a conflict of interest can be mitigated by safeguards these should be recorded
C True
D False
Where adequate safeguards are available the parties involved do not need to be informed of the
conflict of interest
E True
F False LO 4n
11 In which of the following situations may confidential information in respect of a client ONLY be
disclosed if the permission of the client has first been granted?
A As a defence in a negligence claim
B In order to avoid giving an incorrect audit report to another client
C Where money laundering is suspected
D Where terrorism is suspected LO 4k
99
100 Assurance: Answer Bank
Chapter 1: Concept of and need for
assurance
1 A,B,C
A key element of an assurance engagement is sufficient appropriate evidence, but is not
generally mandatory that this evidence is recorded in an assurance file. (It is mandatory to
record audit evidence, however.)
2 A,B,D
Reasonable assurance is a high, but not absolute, level of assurance. The other options
available represent various aspects of the expectations gap which is the gap between what the
assurance provider understands he is doing and what the user of the information believes he
is doing.
3 D Employment by a firm controlled by qualified persons. Membership of a recognised
supervisory body cannot be obtained until exams have been passed, but provided that the
person is employed by a qualifying person/firm, work can be carried out on audits.
4 B,C The answer is not option A as the fact that assurance work is carried out by independent
people is a strength of assurance provision. Option D is also incorrect as the use of unqualified
staff increases the detection risk of the auditor as opposed to being an inherent limitation of
the provision of assurance. Work carried out by less qualified staff should always be
supervised, directed and reviewed by more senior personnel.
5 C,E It is the responsible party who will determine the suitable criteria (in response to the
obligations it has) against which the practitioner will test the subject matter and on which the
practitioner will report to the users.
It is the practitioner who will provide the opinion on whether the subject matter complies
with the criteria after the evidence has been gathered and evaluated accordingly. The opinion
prepared will be issued to the user.
6 B Sufficient appropriate audit evidence is gathered and a positive opinion issued in a reasonable
assurance engagement. A lower level of evidence coupled with a negative opinion applies to a
limited assurance engagement.
7 A,C,F
Whereas the statutory audit provides reasonable assurance through a positive assurance
conclusion, in a review engagement, limited assurance is provided with the issue of the
negative assurance conclusion. This can be seen in the wording of the two conclusions. The
positive assurance conclusion includes wording “the financial statements give a true and fair
view”, whereas the negative assurance conclusion includes the wording “nothing has come to
our attention”, emphasising the limited nature of the assignment.
Reasonable assurance is high assurance provided on the truth and fairness of the subject
matter as opposed to absolute assurance of the correctness of the subject matter.
8 A,D,F
The subject matter under examination are the company’s corporate governance policies.
These policies are to be assessed against the UK Corporate Governance Code, which is the
suitable criteria. The responsible party is Blue plc, the party commissioning the report, who
has the responsibility to apply the UK Corporate Governance Code. Jones & Co is the
practitioner, responsible for gathering the appropriate evidence and issuing an appropriate
opinion.
9 B,D,E
Criteria used will depend on the type of engagement conducted. Suitable criteria should be
available for other engagements eg health and safety can be measured against health and
safety legislation.
1 A,B The answer is not option C as it will not be necessary to obtain references when the entity is
already known to the firm. It will not be necessary to contact previous auditors in the case of a
company’s first audit.
2 A,C Poor recent performance may indicate a high risk that the company may misstate its financial
statements in order to show improved recent performance. A company carrying out unusual
transactions would also be a high risk, as each transaction would require a separate
understanding leading to a higher risk of error. Strong internal controls and the existence of
an internal audit department would be low risk indicators.
3 A,C Given its intention to list on the stock exchange, Tulip Ltd may be motivated to show a better
picture of itself than that which exists, hence it is a high risk client. Dhalia Ltd is also a high
risk client given that it is seeking alternative forms of finance. It has the incentive to show itself
as a more healthy company than it actually is in order to attract the finance it requires.
4 D The engagement letter does not contain any certification of the assurance provider’s opinion.
An engagement letter does serve the other purposes listed.
5 B,C,E
Prudent accounting policies would constitute a low risk indicator as directors would appear
not to be aggressive in interpreting accounting policies in order to enhance the performance
portrayed by the financial statements.
A company carrying out unusual transactions would be high risk, as each transaction would
require a separate understanding leading to a higher risk of error.
Having no FD is a high risk indicator – the staff in the function may not be supervised and
they may not have the skills or the knowledge to apply accounting standards and address the
key risks in the systems of the company.
6 C,E It is the letter of engagement that clarifies the terms of the engagement and initial
communication that requests for relevant information pertaining to acceptance of the
engagement. The tender proposal would come before these two stages at the audit tender
process stage.
7 A,B,D
Checks on legal and ethical restrictions should be performed BEFORE the appointment is
accepted. Once the appointment is accepted, legal and professional obligations need to
addressed, options A and B (as per Companies Act 2006) and option D as per ISA 210
Agreeing the Terms of Audit Engagements.
8 B,C,F,G
The engagement letter is essentially the contract between the client and the auditor and
therefore should be sent to all clients. It confirms acceptance of the appointment by the
auditor so must be issued after acceptance but before work is commenced.
9 A Money Laundering Regulations 2007 state that client identification documents must be kept
for a minimum of five years and until five years since the relationship elapses.
10 A,C Arrangements regarding the planning and performance and the basis of the fee calculation
are not essential to be included in the engagement letter, whereas the responsibilities of the
auditor and the form of any reports must be included in the engagement letter.
1 B,C,D
The answer is not option A as to determine the scope of the engagement should have been
done in the engagement letter.
2 A,C,D
The standard states that inquiries of third parties MAY be carried out if useful, but lists options
A, C and D as procedures that SHALL be carried out.
3 A,B,D
The answer is not option C as consideration of whether a balance has been correctly
calculated will require a procedure of recalculation as opposed to analytical procedure.
4 A What audit staff to assign to the audit (this would depend more on the risks associated with
the engagement).
5 A,B,D
Option C is incorrect as confirmation of management’s responsibility for the financial
statements is contained in the letter of engagement.
6 A,C,F
A profit-related scheme means that directors have the incentive to overstate profit and hence
the accounts are susceptible to material fraud/error. Therefore inherent risk is higher than
normal. A cash-based business is more inherently risky than a non-cash-based business, as
cash is susceptible by its nature to theft and omission. Where balances in the financial
statements have straightforward financial accounting requirements, the susceptibility to
material error or misinterpretation is reduced.
7 A,C,F
Option A is correct as the concept of materiality does not exist in a void, but depends on the
context of the omission or misstatement. Option C is correct as materiality acts as a form of
guidance in the amount of work required to be performed, and so when planning audit
procedures. It is also made reference to in evaluating discovered misstatements (both
individual misstatements and in aggregate). Option F is correct as materiality is not a fixed %
of profits or other measure but depends on the audit risks faced for the particular client.
Further, materiality is not only measured quantitatively but also qualitatively.
8 A,D Both the examples increase the susceptibility of the accounts to material fraud and error. The
fact the organisation is seeking to raise finance for a new venture represents a risk at the
company level, whereas the estimates present a risk at the individual account level where
those estimates are found.
9 B,F High staff turnover increases the risk that the internal controls in place will not be effective.
The use of samples in testing, represents a sampling risk: that the sample tested will not
represent the population as a whole. Sampling risk is part of detection risk.
1 0 A,D,E
Warrants further testing – both the balance in the Cost of Sales account and the annual
decrease of 7% are significant and therefore further work is required to explain the movement
in the gross margin.
No further testing – the balance of repairs and renewals and the year on year decrease of 4%
is not significant (immaterial).
Warrants further testing – although an increase of 2% is not significant, the balance in the
advertising account is material and so further testing to analytical procedures is warranted.
1 A A walk-through test does not provide evidence relating to a specific balance on the financial
statements but is used to ensure that the systems operate as the assurance provider believes
that it does.
2 A,B Option C and D are incorrect as evidence from internal sources is not more reliable than
evidence created by the assurance provider (in fact, the reverse is true). Furthermore, the
statement that photocopies are more reliable than facsimiles is not true as the assurance
provider should exercise professional caution with both.
3 A,C,D
Options B and E are incorrect as existence and rights and obligations would be used in respect
of a balance, not a class of transactions.
4 A,B,D
Option C is incorrect as positive assurance will be given on an audit assignment, whereas
negative assurance is given on a review assignment, reflecting the limited procedures carried
out.
5 A,D Directors refusing to cooperate with the auditor constitute an inability to obtain sufficient
appropriate audit evidence – the fact that users discover this has nothing to do with the
expectations gap. Shareholders approving the auditor’s appointment at a general meeting is a
legal obligation of the company.
6 B,F,I
It is only the statutory audit that provides reasonable assurance. The review engagements
provide limited assurance. None of the engagements provides absolute assurance.
7 B,F Option B is correct as where the controls have been assessed as deficient, this means that
reliance can not be put on these controls. Option F is correct as where controls have been
assessed as strong, this means that they can be relied upon. In this way, tests of controls are
carried out coupled with limited substantive procedures.
8 C,E The Companies Act checklist ensures that all classification issues are addressed. Tracing non-
current assets observed back to the non-current asset register ensures that this balance is
recorded completely.
9 A,D Options B and C are incorrect as accuracy and cut-off relate to classes of transactions (ISA
315).
10 C,D Options A and B are incorrect as cut-off relates to classes of transactions and allocation relates
to account balances (ISA 315).
11 A,D,E
Option A is correct as material items must be tested with substantive procedures, although
the extent of these procedures will depend on whether reliance can be placed on the related
internal controls. Option D is correct as whilst results from tests of controls may affect the
extent of substantive procedures they will not eliminate the need for them completely.
1 2 A,D,E
Observing the opening of the post is a test of control as it is the observation of a control
taking place. Calculation of the gross profit margin and comparison with that of the previous
accounting period is an analytical procedure (which is, in turn, a substantive procedure).
Reviewing for authorisation is also testing that a control has been applied (option E).
13 B,C As per Companies Act 2006, 'That adequate accounting records have been kept' and
'Directors' remuneration has been disclosed correctly' are reported on by exception.
1 B,F The process of preparing the financial statements forms part of the information processing
system.
Locking the inventory storeroom is a specific control activity.
None of the above relate to the control environment, which refers to the management style
and philosophy towards controls.
2 B,D,E
Control risk is lower than normal (ie internal controls are stronger) where the company has an
established internal audit function (which strengthens the control environment by monitoring
the adequacy and effectiveness of the controls in place) and where the board has a track
record of performance review, monitoring and investigating deviations from expected
performance. Control risk is higher than normal where purchase invoices are not authorised
(control deficiency).
3 B,C,E
Option A is incorrect as all members of an audit committee must be non-executive directors.
Option D therefore is also incorrect. The chief internal auditor does not sit on the audit
committee, but should ideally report directly to this committee.
4 A,C,D
Option B is not correct as it is the attitude of management and senior staff that will shape the
entity’s control environment and not that of the ordinary staff.
5 A,D For the preparation of reconciliations where calculations are involved, the inherent limitation
is that these reconciliations are susceptible to human error. Even where duties are segregated,
this control can be overridden by the collusion of the parties involved.
6 E Reporting the process to the auditors is part of the external audit process and not part of the
internal risk assessment process.
7 B,C The information system comprises all the information (be it in hardcopy or electronic form)
that flows into the financial statements and does include the whole process of financial
statement preparation.
8 C,F Both are physical controls.
9 B,F Reconciliations are information processing as they are undertaken to check the completeness
and accuracy of information. Having separate clerks recording sales invoices and posting cash
receipts in the sales ledger reduces the risk of fraud and error (is therefore a segregation of
duties control).
10 A,D,F
Option A is a general control as it supports the effective functioning of application controls.
Options D and F are correct as they relate specifically to the processing of individual
applications.
11 B Narrative notes would be the simplest way of recording a straightforward system that was is
not subject to a great amount of change annually. It is, however, the least effective way in
terms of readily identifying the system in operation and the deficiencies of the system.
1 2 A,B,D
Option C is not correct as whilst the prior year audit file will be useful, the system may have
changed in the intervening period. The company’s website is very unlikely to contain details
on the internal control system.
1 A,B,D
Option C is not correct as it is a benefit to the company if its customers do not take the full
credit period and pay sooner. This would be a risk in the purchases system as it would benefit
the company to take the full credit period extended to it by its suppliers.
2 A,D Authorisations of credit terms to customers and checking the ageing of current receivables
ledger balance prior to accepting orders in order to assess the creditworthiness and history of
payments. Options B and C are not correct as they are procedures that take place after the
customer has made the purchase.
3 A,B,D
Option C, investigation of differences between till records and cash collected, is not a
preventative control activity but a detective activity ie it happens after the fact.
4 A,D,F
Option D applies as there is no link between despatch and invoice (goods could be invoiced
without being despatched), and there is no link between order and despatch (orders may not
be fulfilled). Option F is correct as reception staff are unconnected with any of the
departments with whom customers might have a query – ordering, warehouse or accounts.
5 A,C The duties of authorisation, recording and custody of assets should be segregated
6 B,D If invoices are matched to orders but not warehouse records, invoices may be raised in error. If
receivables statements are not sent to customers, customers may not pay promptly.
7 C,D If overdue accounts are not followed up, debts might be included on the receivables ledger
that are not collectable. Where invoices are not in numerical sequence, invoiced sales might
not be properly recorded.
8 A,D If credit notes are valid then the related invoice is cancelled. Goods received are part of the
purchases system. As such, options B and C are not risks associated with the sales system.
9 C Despatch notes are evidence of goods delivered. If there are sales invoices for each of these all
sales will be invoiced. Options A and B are incorrect as they relate to the completeness of sales
orders and ensure that all orders are subsequently despatched respectively. Option D is also
incorrect as requiring customers to sign for goods confirms delivery only.
1 0 A,D,E
In process 2 there is insufficient segregation of duties. The same individual should not be
responsible for processing invoices, posting cash and performing the control account
reconciliation.
11 B,F If despatch notes are not pre-numbered they may be lost and therefore no invoice raised. If
customers do not evidence receipt of goods disputes may arise leading to slow payment.
12 A,D Correct invoicing is an objective of the invoicing stage of the sales system. Cut-off affects the
recording stage of the sales cycle.
1 B,F Analysis of actual performance against budget is performance review. Checking numerical
sequences helps ensure completeness of records.
2 A,E Option B is incorrect as does not relate to the goods inwards stage of the purchase system.
Option C is also incorrect as the question refers to goods and not services. The checking of
invoices to orders will reduce the risk of accepting invoices for goods or services which were
not ordered.
3 B,C,E
Deficiency – there is no authorisation of payment orders.
Strength – company only recognises liability for services received.
Strength – payments authorised.
4 A,B The answer is not C as inappropriate orders could still be made with authorised suppliers. The
answer is not D as once inappropriate orders have been authorised, matching the order with
the invoice will not prevent that act having taken place.
5 C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders
should be placed (and by implication authorised) by the purchasing department. The
managing director would not be involved in authorising normal purchasing transactions in a
company with a purchasing department. Someone other than the production department
leaders should authorise purchases.
6 A As it is company policy to record goods only if accepted then a comparison of invoices with
goods received records would identify if the goods had not been accepted - as there is no
goods received record, the goods must have been faulty (or rejected for some other reason).
This would then prevent the invoice from being processed.
7 C,E Checking arithmetical accuracy is an information processing control. Physical security
measures should reduce risk of theft.
8 C,D Where goods received notes are not matched to purchase invoices, goods may have been
received and not invoiced or where invoices not matched to goods received notes invoices
could be posted without having received goods leading to a misstatement of liabilities.
Control account reconciliations help to identify posting errors. Options A and B are control
deficiencies that do not result directly in the misstatement of liabilities.
9 B,D Purchase of goods from unauthorised suppliers is likely to lead to inferior goods being
purchased. By having access to the payables master file, purchase ledger clerks are in a
position to create fictitious suppliers and so then enable payments to them.
1 B It is the temporary staff's work schedules that document the hours worked. As such they
require control to ensure that it is only the hours authorised that are subsequently paid.
2 A,B,D
Option C is not correct as it does not relate directly to the employees' payments but to their
tax deductions.
3 B,C,E
With regards to option B, clocking in and out of work ensures correct recording of the hours
clocked in and out, but has no bearing on the rate of pay.
4 A,C Both cases lead to the possibility that employees are paid the wrong amounts.
5 A,C,E
All three processes represent strengths. Process 1 involves physical security as a control.
Process 2 has elements of performance review and authorisation. Process 3 is also a strength
as an authorisation control features.
6 C,D Options A and B are not correct as authorisation of overtime ensures that the correct number
of hours are paid for and reperformance of payroll calculations ensures the accuracy of the
deductions etc.
7 B,C Unauthorised amendments could result in the creation of bogus employees or overpayment
of existing employees. Personnel records contain details of pay rates. If these are not kept up
to date standing data in the payroll system may also be invalid. Options A and D would not
lead to misstatement in the financial statements.
8 A,C,F
Process 3 is false (option F) as whilst the risk of errors are reduced in a computerised payroll
system, a sample of calculations should still be checked. This may also bring to light errors
with standing data and input.
9 B In order to prevent this from happening, the key is that fictitious employees never make it
onto the payroll. The financial controller is concerned that an employee from the accounts
department, who has the right to access the payroll system, might be so unscrupulous as to
add a fictitious employee and gain access to the wages.
Payroll standing data periodically printed out and checked on a line-by-line basis to
independently held employee details – this will detect fictitious employees added but will
not prevent fictitious employees from being added.
Use of hierarchical passwords over standing data files – this will allow the company to
restrict access to standing data files to a responsible official, yet still allow other
employees to process the wages. This means that an unscrupulous employee cannot
access the part of the system where new employees would be added and hence will
prevent the fraud. This is therefore the correct answer.
Pre-authorisation of all amendments to payroll standing data by an independent official –
an unscrupulous employee will not ask for authorisation – he will simply add the fictitious
details if the system allows him to do this.
Supervision of the wages payout by an independent official – again, this might detect
dummy employees but would be unlikely to prevent the fraud.
10 B,D Access controls and encryption of data will reduce the risk of unauthorised disclosure.
Exception reporting and an independent review of the payroll, would help identify
unauthorised changes to payroll information. Back-up procedures would help in the
protection of company data.
1 A,B Authorising unusual transactions and developing internal control systems are part of the
accounting function in an entity. In order for the internal audit function to operate objectively
and independently, it should not be involved in these activities.
2 A,C Options B and D are not correct as they are too operational and would compromise internal
audit’s monitoring role.
3 B,C,D
Option A is not correct as it is the external auditors who have the legal duty to carry out the
statutory audit. It is, however, usually encouraged that there is some co-operation between
the internal and external auditors where this is possible.
4 B,C,E
Having an internal audit function is not a requirement of the UK Corporate Governance Code
but the need for directors to review the need for one annually is. The other statements are
both true.
5 B, D, F
All of the statements are false. Because independence is a concern, internal audit report to the
board of directors or the audit committee. The UK Corporate Governance Code does not
require listed companies to have an internal audit function per se, but requires companies to
consider the need for one annually, in order to maintain an adequate system of internal
controls. Internal audit uses both testing of internal controls and substantive testing, as
appropriate to the task in hand.
6 B,C Secondment to the financial controller role and being involved in the identification of risks
should not be carried out by the internal auditor. This is because these roles are operational
and would compromise the ability of internal audit to provide a monitoring role. The risk
assessment should be undertaken by the risk assessment committee or whomever is
responsible for risk assessment.
7 B,D External auditors are responsible for carrying out the statutory audit. Internal auditors are
responsible for the monitoring of internal controls. External auditors, as part of their external
audit, will not monitor internal controls but must at least ascertain the controls in place and
document them. They may then choose to test them for purposes of reliance.
8 D Expressing an opinion on the truth and fairness of the financial statements is done by the
external auditor only.
9 B An operational audit is just one type of work carried out by the internal auditor. Other audit
work might include, for example, investigation into a suspected fraud. Therefore the term
does not apply to all internal audit work.
10 A,C Options B and D are incorrect as external auditors report to the shareholders and, although
internal auditors will normally provide information to the external auditors, they do not
formally report to them.
11 A,B,D
The external auditor may identify efficiency issues during the course of the statutory audit but
audit work is not specifically planned with this objective.
1 2 A,C,D
Internal audit should not have operational responsibilities so should not authorise transactions
or routinely prepare bank reconciliations.
1 A Confirming the terms of the engagement is done in the engagement letter and does not
constitute a reason for assurance providers to record their work.
2 A,C,D
The answer is not option B as the details relating to the planning of the work will be included
in the planning memorandum. The answer is not option E as the initials of the person
supervising the work are not necessary, but the reviewer would initial the working paper. The
supervisor and the reviewer might be the same person, but not necessarily.
3 A,D Options B, C and E will be kept on the current year audit file.
4 A,C Option B is incorrect as the ICAEW requires all firms should keep all audit working papers for
at least six years from the end of the accounting period to which they relate, so more than the
current and previous year will be kept.
Option D is incorrect as working papers belong to the assurance provider so this decision does
not belong to the client.
5 A,D,E
The second statement is not valid as documenting fieldwork is a professional and not a legal
requirement. The other two statements are valid.
6 B,D,G
The engagement letter will be held on the permanent audit file. The audit plan and manager
review notes will be on the current file only.
7 B,C,D
Details of the history of the client’s business and lease agreements would be held on the
permanent audit file.
8 A,C,F
Working papers belong to the auditor and should be stored securely by the auditor in locked
premises. Although ISA 230 requires documentation to be kept for a minimum of five years
from the date of the auditor’s report, the ICAEW requires Registered Auditors to keep all audit
working papers required by auditing standards for a period of at least six years from the end
of the accounting period to which they relate.
9 A,D,E
The second statement is not valid as there is no direct correlation between the number of
working papers produced and the audit fee charged. The other two statements are valid.
1 0 B,C,E
Not valid – fieldwork documentation does not assist in establishing the audit strategy.
Valid – fieldwork documentation assists in an effective review process.
Valid – the fieldwork documentation provides a record of evidence gathered.
11 B,D,E
The permanent audit file contains documents of ongoing relevance, whereas the current audit
file contains documents and working papers that relate directly to the audit of the current
year end.
1 2 A,B,D
Option C is not correct as computerised audit processes cannot replace the exercise of
judgement by the auditor.
1 B,D Inspection of assets does not confirm rights and obligations as the asset might be possessed
wrongfully or leased and inspection will not show that. Observation gives only weak evidence
of the matter being observed and only at the moment the matter was being observed, not
the next time it is done, unobserved.
2 A,B,C
Option D is not correct as test data, as opposed to audit software, is used to test controls over
processing.
3 A,C Whilst analytical procedures must be used at the risk assessment and overall review stages,
they need not be used as substantive procedures as tests of details and other procedures may
be more appropriate. Although it may be advisable for analytical procedures to be carried out
by senior level assurance staff, this is not a requirement of ISA 520.
4 A,B,C
Option D is not correct as the assurance provider may use information that has been internally
generated at the entity, provided he is satisfied that information has been properly prepared.
5 D Recalculating the interest accrued on the basis of outstanding amount, interest rate and
period to which it relates would be the most appropriate for verification of the interest
accrued on borrowings. Confirming the interest rate with the lender would not verify the total
interest accrued balance (as the interest rate is only one component of the calculation) nor
would vouching the interest payment (as interest paid is not the same as interest accrued).
Testing the internal controls over cash payments would not lead to direct verification of the
interest accrued.
6 A,D When testing for overstatement (ie seeking to discover errors), the assurance provider will test
items from the accounting records to the supporting documents. When testing for
understatement (ie seeking to discover omissions), the assurance provider will select items
from outside the accounting records and trace to the records.
7 B,D Testing 100% of items in a population and testing all items with a certain characteristic is not
sampling, as in the former case the whole population is tested, and in the latter case the
‘sample’ is not representative of the whole population.
8 C,D The time available to complete the test and the skill of the team member assigned to carry out
the test will not affect the number of items to be tested, whereas risk assessment and
expected misstatement will.
9 A,B,E
Sequence sampling would more commonly be used in testing controls. Haphazard selection
should not be used when the assurance provider is using statistical sampling.
10 A, E A misposting between customer accounts and a timing difference between customer records
and client records are errors which would not generally be extrapolated against the total value
of the population.
11 C,D,H
Documents and other pieces of evidence are inspected. Processes are observed. External
confirmations involve seeking evidence from a third party.
1 2 A,C,F
Audit software makes use of the assurance provider’s own specialised software. It can extract
and analyse information from the client’s system. Test data is used to test controls by
inputting data which should activate a control and checking that it does so.
1 A,B,C
Option D is not correct as the level of materiality used during the audit is the responsibility of
the auditors.
2 C,D Auditors may only obtain written representations to support other audit evidence (ISA 580
paragraph 13).
Where evidence is missing due to a fire, this is not a matter to obtain a written representation
on but is an inability to obtain sufficient appropriate audit evidence.
3 A,D,F
Statement 2 is false as this is an inability to obtain sufficient appropriate audit evidence.
Statement 3 is also false because if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the
matter remains unresolved, the auditor shall reconsider the assessment of management.
4 A,D,F
Specific written representations may include confirmation from management that accounting
policies selected are appropriate, but this is not compulsory.
Auditors may only obtain written representations to support other audit evidence (ISA 580
paragraph 13).
5 A,C The other two options would not be valid circumstances in which to seek written
representations. If information normally expected to be available is unavailable, this would
indicate an inability to obtain sufficient appropriate audit evidence. The fact that an
alternative audit procedure is time-consuming is not a reason to seek a written representation
– a written representation cannot act as a substitute for other evidence which is expected to
exist.
6 A,D The auditor should be able to obtain sufficient alternative evidence regarding the existence of
plant and equipment and reconciling items on the cash account.
7 B,C,E
Written representation letters are required on an annual basis so that representations are valid
for each specific audit. They should be dated before (although not much before) the auditor’s
report as they form part of the audit evidence on which the auditor is relying to reach his
opinion. The written representation letter must include a list of all uncorrected misstatements
as per ISA 450. It shall also include a statement that the directors believe the total of
uncorrected misstatements to be immaterial to the financial statements as a whole.
8 B,C,F
It is usually only of senior management that auditors request written representations as they
are responsible for matters of judgment, cooperating with the auditors etc.
Written representations cannot be used as a substitute for other evidence that is expected to
be available.
9 A,C Acknowledgement that management has fulfilled its responsibility for the preparation of the
financial statements and acknowledgement by management of its belief that the aggregate of
uncorrected misstatements are immaterial to the financial statements are the two purposes of
the written representation letter from the list provided.
Where other evidence is available on a matter, the written representation letter does not serve
to provide evidence. Management’s confirmation of the scope of the work to be carried out is
included in an engagement letter.
1 A,B,C
The rights and obligations assertion means that the entity holds or controls the rights to
assets. Although vehicle registration documents show registered keeper, not owner, the
keeper is likely to have control of the asset. Both title deeds and purchase invoices give
evidence of ownership (which gives control). Sales invoices give evidence of no longer having
ownership of something and do not therefore support the rights and obligations assertion.
2 D Cut-off is a financial statement assertion that affects classes of transactions, not account
balances.
3 A,B,C
Inventory has not been disclosed properly in the financial statements constitutes the lowest
risk, as the disclosure requirements in relation to inventory are not onerous. In contrast,
inventory is often easy to conceal or omit from records or count wrongly, and, as it usually
consists of a large number of items, valuation can be tricky also.
4 B,C Post year-end sales invoices and orders. The controls over counting relate to existence, not
valuation. A post year-end sales price list gives evidence of management intention in relation
to inventory, but not evidence of the price that customers are genuinely prepared to pay (in
the way that invoices and orders do).
5 B The fact that a positive confirmation requires the customer to reply to confirm or deny the
balance (or to reply giving the balance) is the reason why this method is generally preferred in
preference to a negative confirmation. This is because a negative confirmation only requires a
reply if the balance is not agreed – thereby giving poorer quality evidence as if there is no
reply the auditor cannot be sure that the customer has not just ignored the letter (or whether
he has even received it). The answer is not option A as negative confirmations are also carried
out in the auditor’s name. Option C describes a negative confirmation and so is not correct.
Option D does not apply to any type of confirmation.
6 B,C Direct confirmations with customers and review of cash paid after date are most appropriate
as these provide independent confirmation of the year-end trade receivables balance, whereas
the receivables ledger and sales invoices are part of the client’s own records.
7 C Inspection of the bank letter gives the most reliable evidence as this is received by the auditor
directly from the bank. Bank statements have been sent via the client, so there is scope for
them to have been tampered with in some way. Bank reconciliations and the cash book are
client-generated documents and are, therefore, less reliable.
8 A,D The auditor should count an individual cash float which is material because he should test all
material items. He should also count immaterial cash floats where he suspects that a fraud has
been committed as although the individual floats are immaterial, the overall impact of such a
fraud could be material to the financial statements if repeated over time.
9 A Completeness (ie understatement), as liabilities are generally tested for understatement, as
they are more likely to be understated than overstated. Existence (overstatement) is a higher
risk assertion for assets, as opposed to liabilities. Disclosure is generally a less risky assertion in
any case. Accuracy applies to transactions and not account balances.
1 0 B,C,D
Although a payables circularisation does provide third party evidence, it is unnecessary on
those grounds alone, because supplier statements provide third party evidence as well.
Therefore a payables circularisation will only be needed where there is some problem, such as
those described in options B, C and D.
1 A,B,C
There is no legal requirement for ethical codes.
2 B,C ICAEW qualified auditors acting in the UK are subject to the ICAEW Code and the FRC Ethical
Standards for Auditors.
3 A,B,D
Independence and Courtesy (options C and E) are not fundamental principles of the IFAC
Code.
4 C As per the ICAEW Code of Ethics, the Code applies to its members, employees of member
firms and ICAEW students.
5 B,C,E
The first statement is false as following prescriptive rules of ethical guidance may become a
mechanical process without due consideration given to the ethical principles of each case. The
other statements are true.
6 A,B,D
The IAASB issues ISAs, but not ethical guidance (which is issued by IFAC, through the IESBA).
7 B Although there are some specific ‘rules’, the majority of ethical guidance is in the form of
principles, the spirit of which should be followed by the assurance provider.
8 C,E,I,L
Both the IFAC Code of Ethics and the FRC Ethical Standards for Auditors identify the following
five threats: self-interest, self-review, advocacy, familiarity and intimidation. The FRC Ethical
Standards for Auditors also identify the management threat in addition.
9 A,B,D
Tradition (option C) is not a valid reason why objectivity and independence matter.
10 B,D,F
A code based on principles does not contain specific rules for auditor compliance.
A rules-based code does not require auditor adherence to a set of principles.
The ICAEW uses a principles-based approach.
1 A,B,C
Making disclosures to the ICAEW (option D) is no substitute to the other options A, B, C.
2 A,B,D
Option C is not correct here as a parent of a member of an audit team may own a material
financial interest in an audit client – provided they are not a dependant, which would not
normally be assumed to be the case.
3 A,C,D
Option B does not apply as given the staff member does not yet work for the audit client,
there is no risk of self-review at this stage.
4 B Cash It Ltd is a threat as it is implied that an audit team member took advantage of the loan
rate mentioned in the audit tendering process.
Nationally plc is not a threat as it is acceptable for staff to have mortgages on commercial
terms with an audit client who is a mortgage provider, especially if it is the leading building
society.
5 A For non-listed companies, there is a presumption of dependence when annual fee income
from all services to the client will regularly exceed 15% of gross practice income.
6 A,B,C
Option D is not correct as it is assistance that is provided as opposed to management or
operational decisions being taken.
7 A,B,C
There is no significant threat to the independence of the audit engagement of Scrabble plc, as
the partner had previously rotated off the client six years ago and is allowed to return to the
same position after five years.
8 B,C Doing nothing is not an option available to the ethics partner. It is best to seek to resolve this
matter internally by discussing it with the management board of partners whilst at the same
time, soliciting advice from the ICAEW to ensure that an acceptable resolution is reached.
Seeking the opinion of another ethics partner would probably not be deemed appropriate as
the specifics of the case are probably confidential and the ICAEW would be the authority in
this area as to the appropriate course of action to be taken.
9 A,D Prior to seeking legal advice or even resigning (options B and C), Julia should initially try to
resolve this issue internally by reporting concerns to the audit committee (which will exist in a
listed company) and by obtaining advice from the human resources department at KiwiCorp
plc (as to the official internal mechanisms that she can use to make her complaint).
1 0 A,C,E
All three cases are examples of the stated threats to auditor independence.
11 A,D Loesdon Ltd: Self-interest and intimidation threats arise, therefore select self-interest
(intimidation is not available as an option). Litten Ltd: Self-interest and intimidation threats
arise, therefore select self-interest (intimidation is not available as an option). Management
and self-review threats would only arise if the advisory work was accepted.
12 B,E Othello Ltd: Accept with safeguards (as there are self-interest and self-review threats. There
may also be a management threat with regards to the advice provided, so care must be taken
not to take management decisions). Desdemona Ltd: Accept with safeguards (despite the
time lag, the finance director may have too good a knowledge of the firm’s procedures).
1 A,C Options B and D are not the principal reasons for the importance of confidentiality.
2 A,B,D
Option C does not apply as accountants may discuss client matters with colleagues in non-
public places.
3 A,C,D
Option B is not correct as it is not acceptable to disclose confidential information in a bid to
secure further audit evidence.
4 B,C,D
Where a fraud has been identified, this is usually reported to the client unless the fraud has
been carried out by senior management/directors, in which case, great care should be taken
in the steps taken.
5 C,D In the first case, report to the firm’s MRLO as the case is suspicious. In the second case, make
no external report as there is no public or legal duty to disclose an internal control deficiency.
6 A,C,F
In the first case the assurance provider may make disclosure. In case 2, he may make
disclosure if the client does not. In the final case, the auditor has a duty to make disclosure as
this constitutes money laundering.
7 B The other options do not apply. Terrorist activities should be reported to the police. Tax
evasion should be reported to the Serious Organised Crime Agency (SOCA). Where
compliance with the law is required, non-compliance should also be reported.
8 D The money laundering reporting officer will then decide on the appropriate course of action
9 B,C,F
If the audit firm believes that the conflict of interest can be managed through safeguards the
firm can continue to act for both parties (option B). The clients involved however, should be
informed of the situation (option F).
10 A,C Encouraging others to buy shares in a company on the basis of information obtained during
the course of the audit is known as insider dealing and is a criminal offence. Where audit
evidence obtained in the audit of one client affects the audit of another client, procedures
must be performed so that the same evidence is obtained from another source.
11 B In order to avoid giving an incorrect audit report to another client is the only option where
permission must first be granted (otherwise the assurance provider will be breaking his duty of
confidentiality to that client). For the other options, client permission is not required (and
indeed to seek this could be regarded as ‘tipping off’ the client) but disclosure is necessary by
law or the auditor is protected by the court (eg in a negligence claim).
12 D Report the matter to a designated officer within your firm without the client’s permission.
Discussing or mentioning the matter with the client would only serve to tip him off about the
transactions identified.
Your ratings, comments and suggestions would be appreciated on the following areas of
this Question Bank: