Assurance ICAEW Question Bank

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The Institute of Chartered Accountants in England and Wales
Assurance
Question Bank
For exams in 2022
icaew.com

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Assurance
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-5097-3896-0
Previous ISBN: 978-1-5097-3363-7
e-ISBN: 978-1-5097-3993-6
First edition 2007
Fifteenth edition 2021
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mechanical including photocopying, recording, scanning or otherwise, without the
prior written permission of the publisher.
The content of this publication is intended to prepare students for the ICAEW
examinations, and should not be used as professional advice.
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v3.0
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© ICAEW 2021

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Contents
The following questions are exam-standard. Unless told otherwise, these questions are the style,
content and format that you can expect in your exam.
Title Page
Question Answer
1 Concept of and need for assurance 1 111
2 Process of assurance: obtaining an engagement 5 115
3 Process of assurance: planning the assignment 9 119
4 Process of assurance: evidence and reporting 17 125
5 Introduction to internal control 23 129
6 Revenue system 35 137
7 Purchases system 39 141
8 Employee costs 45 145
9 Internal audit 51 149
10 Documentation 55 153
11 Evidence and sampling 59 157
12 Written representations 69 165
13 Substantive procedures – key financial statement figures 73 167
14 Codes of professional ethics 85 175
15 Integrity, objectivity and independence 89 179
16 Confidentiality 103 187
Appendix: Mock Exam guidance notes 193
ICAEW 2022 Contents iii

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Exam
This exam will consist of 50 questions with equal marks, adding up to 100 marks.
The questions are of the following types:
• Multiple choice – select 1 from 4 options A, B, C or D (see Chapter 1 Q3)
• Multi-part multiple choice – select 1 from 2 or 3 options, for two or more question parts
• Multiple response – select 2 or more responses from 4 or more options (see Chapter 1 Q1)
In this Question Bank you will select only one option per question unless told otherwise.
The exam is 1.5 hours long and at least 55 marks are required to pass this exam.
Our website has the latest information, guidance and exclusive resources to help you prepare for this
exam. Find everything you need, from exam webinars, sample exams, errata sheets and the syllabus
to examiner- and tutor-written articles at icaew.com/examresources if you are studying the ACA and
icaew.com/cfabstudents if you are studying ICAEW CFAB.
iv Assurance ICAEW 2022

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Professional skills
Professional skills are essential to accountancy and your development of them is embedded
throughout the ACA qualification. The level of competency in each of the professional skills areas
required to pass each module exam increases as ACA trainees progress upwards through each Level
of the ACA qualification.
The professional skills embedded throughout this Question Bank provide the opportunity to develop
the knowledge and professional skills required to successfully pass the exam for this module.
During your question practice, remain mindful that you should be demonstrating each of the four
professional skills within your answers. You are advised to familiarise yourself with the full ACA
professional skills development grids which can be found at icaew.com/examresources.
The following advice will help you demonstrate each of the professional skills when completing your
answers to questions in this Question Bank.
Questions in the Assurance module are rapid fire, plus they can be complex and test the syllabus in a
non-sequential order, so each one requires a good skillset to answer correctly. Below are the key
skills required in the Assurance exam that you will need to master. In creating this, try to be as
module specific as possible given the style/format of the module exam and how students are
expected to demonstrate professional skills in this subject.
Professional skills focus: Assimilating and using information
The Assurance exam required you to attempt 50 questions in 90 minutes, meaning you have 108
seconds for each question. Being disciplined, reading both the scenario and the requirement
carefully and keeping track of time will mean that you work effectively within time constraints which
should offer you the best chance of passing.
Professional skills focus: Structuring problems and solutions
Each scenario will be different, so you need to practise a wide variety of questions in order to be able
to identify and apply relevant technical knowledge and skills to analyse a specific problem. Some
questions might require you to select appropriate courses of action using an ethical framework, so
your knowledge of the chapters on the fundamental ethical principles must be complete.
Professional skills focus: Applying judgement
You should get used to analysing your performance in the questions you attempt in order to ensure
you understand why the correct answer is indeed correct. This will help you to identify
inconsistencies and contradictory information the next time you attempt questions from the same
area so that you are prepared for the exam.
Professional skills focus: Concluding, recommending and communicating
In order to be successful in the Assurance exam, you have to be able to apply technical knowledge to
support reasoning and conclusions – this will only happen if you learn the terms.
ICAEW 2022 Introduction v

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vi Assurance ICAEW 2022

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Question Bank

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viii Assurance ICAEW 2022

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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 1d
3 Which two of the following are limitations of the provision of assurance?

A Assurance work is carried out by people independent of the entity
B Sampling is used in assurance work
C Client systems have inherent limitations
D Unqualified staff may be used on assurance engagements
LO 1a
4 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:
Requirements
determines the suitable criteria?
A User
B Practitioner
C Responsible party
provides an opinion on whether the subject matter complies with the criteria?
D User
E Practitioner
F Responsible party
LO 1c
5 Which one of the following statements best describes the evidence obtained and the opinion given
in a reasonable assurance engagement?
A Sufficient appropriate evidence and a negatively worded opinion
B Sufficient appropriate evidence and a positively worded opinion
C A lower level of evidence and a negatively worded opinion
D A lower level of evidence and a positively worded opinion
LO 1a/h
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6 For each of the following statements, select whether they are true or false.
Requirements
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 1a
7 Jones LLP is the external auditor of Blue plc, a listed company. The directors of Blue plc have
requested that Jones LLP carry out a review engagement assessing the effectiveness of its corporate
governance policies against the UK Corporate Governance Code.
For the above review engagement, select which part of the engagement description constitutes the
subject matter, which describes the suitable criteria and which party is the responsible party.
Requirements
The subject matter
A Blue plc’s corporate governance policies
B The UK Corporate Governance Code
The suitable criteria
C Blue plc’s corporate governance policies
D The UK Corporate Governance Code
The responsible party
E Jones LLP
F The directors of Blue plc
LO 1a/c
8 For each of the following statements relating to the provisions of the Companies Act 2006, select
whether they are true or false.
Requirements
An individual or firm is eligible for appointment as statutory auditor if the individual or firm is a
member of a recognised supervisory body and is eligible for appointment under the rules of that
body.
A True
B False
A person may not act as a statutory auditor of a company if that person is an officer or employee of
the company.
C True
D False
LO 1a
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9 Which one of the following best describes the concept of assurance?

Assurance refers to:
A an assurance firm’s high level of satisfaction as to the reliability of an assertion being made by
one party for the use of another party
B an assurance firm’s satisfaction as to the reliability of an assertion being made by one party for
the use of another party
C a user’s satisfaction as to the reliability of an assertion being made by another party
D an assurance firm’s limited level of satisfaction as to the reliability of an assertion being made by
one party for the use of another party
LO 1a
10 Which three of the following are benefits of an assurance report on financial information?
An assurance report:
A enhances the credibility of the information being reported on
B reduces the risk of management bias in the information being reported on
C attests to the correctness of the information being reported on
D draws the attention of the user to deficiencies in the information being reported on
LO 1b
11 In any assurance engagement there are three parties involved: the responsible party, the practitioner
and the user.
For each of the following select which party:
Requirements
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
12 The following is an extract from an independent accountant’s unmodified report on a profit forecast:
‘Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for
the forecast.’
Requirement
Which one of the following best describes the type of assurance provided by this statement?
A Positive assurance expressed negatively
B Negative assurance expressed positively
C High level of assurance expressed negatively
D Limited level of assurance expressed negatively
LO 1a

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13 In the context of a statutory audit which three of the following are commonly cited examples of
misunderstandings that contribute to 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 1d
14 The level of assurance provided by an assurance engagement will depend on the type of
engagement.
For each of the following examples, select the level of assurance which would be given.
Requirements
Statutory audit
A Absolute
B Reasonable
Review of financial information
C Reasonable
D Limited
Report on profit and cash flow forecasts
E Reasonable
F Limited
LO 1a
15 The Companies Act 2006 requires all companies to be audited, but allows small companies an
exemption from this requirement where they meet certain criteria.
Requirements
Small Ltd has an annual turnover of £10 million, total assets of £5.1 million, and 101 employees.
Assuming no special circumstances exist, is Small Ltd required to have an audit in the UK?
A Yes
B No
Tiny Ltd has an annual turnover of £15 million, total assets of £5.2 million, and 99 employees.
Assuming no special circumstances exist, is Tiny Ltd required to have an audit in the UK?
C Yes
D No
Little Ltd has an annual turnover of £5 million, total assets of £4.9 million, and 45 employees.
Assuming no special circumstances exist, is Little Ltd required to have an audit in the UK?
E Yes
F No
LO 1a

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Chapter 2: Process of assurance: obtaining

an engagement
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 predecessor auditors to discover any reasons they should not accept
appointment
LO 1e
2 Which two of the following might indicate that an assurance client could have 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 LLP, an assurance firm, has the following two clients among its client portfolio.
For each client, select whether inherent risk is high or low.
Requirements
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 three of the following are benefits 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 1e
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5 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 1e
6 For each of the following statements, select whether they are true or false in respect of the audit
engagement letter.
Requirements
The engagement letter should be sent before acceptance of appointment.
A True
B False
The engagement letter should be sent after the appointment of the auditor but before the
commencement of the audit.
C True
D False
The engagement letter should be sent after the commencement of the audit but before the signing
of the auditor’s report.
E True
F False
An engagement letter should be sent to all new clients.
G True
H False
LO 1e
7 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 3a

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8 Which two of the following must be included in the engagement letter?

A The responsibilities of the auditor
B Arrangements regarding the planning and performance of the audit
C The form of any reports
D Basis on which fees are computed
LO 1e
9 Which three of the following are purposes of a letter of engagement?

A Setting out the form of any report to be issued
B Providing constructive suggestions to management concerning improvements in internal control
C Documenting and confirming acceptance of the appointment
D Narrowing the expectations gap
E Providing evidence on matters where other evidence is not expected to exist
LO 1e
10 Which one of the following best describes professional scepticism?

The assurance provider should:
A not believe anything that management tells him
B not believe anything that management tells him, without obtaining supporting evidence
C apply a questioning mind to the information and evidence he obtains
D always assume the worst outcome in cases of uncertainty
LO 1i
11 Which two of the following must be included in the engagement letter?

A The scope of the audit
B The reporting framework that is applicable for the financial statements being prepared
C Details of client identification procedures to be performed in relation to the Money Laundering
Regulations
D A statement that, in accordance with the Companies Act 2006, the auditor’s liability cannot be
restricted
LO 1e

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Chapter 3: Process of assurance: planning

the assignment
1 Which three of the following are objectives of audit planning?
A To determine the scope of the engagement
B To ensure appropriate attention is devoted to the important areas of the audit
C To identify potential problems and resolve them on a timely basis
D To assign work to members of the audit team
LO 1f
2 With respect to ISA (UK) 315 (Revised), Identifying and Assessing the Risks of Material Misstatement,
which three of the following procedures must be used in understanding the entity and its
environment?
A Inquiries of management and other appropriate individuals within the entity
B Inquiries of third parties
C Analytical procedures
D Observation and inspection
LO 1f
3 Which three of the following constitute analytical procedures?

A Consideration of comparable information for prior periods
B Consideration of relationships between elements of financial information that are expected to
conform to a predicted pattern
C Consideration of whether a balance has been calculated correctly
D Consideration of similar industry information
LO 1f
4 Which three of the following are auditors helped to decide by setting a preliminary materiality
threshold?
A What audit staff to assign to the audit
B How many items to examine
C Whether to use sampling
D What level of misstatement is likely to lead to the auditor not being able to give an unmodified
opinion
LO 1g
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
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6 In each of the following cases, select whether inherent risk is higher or lower than normal.
Requirements
The company operates a profit-related pay scheme.
A Inherent risk higher than normal
B Inherent risk lower than normal
The business of the company is cash-based.
C Inherent risk higher than normal
D Inherent risk lower than normal
Financial statements contain balances with straightforward financial accounting requirements.
E Inherent risk higher than normal
F Inherent risk lower than normal
LO 1f
7 For each of the following statements about materiality, select whether they are true or false.
Requirements
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 1g
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.
Requirements
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

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Requirements
The organisation has a high turnover of staff in the accounts department.
A Inherent
B Control
C Detection
The auditor will be using samples in testing.
D Inherent
E Control
F Detection
LO 1f
10 Which two of the following would be used as part of the risk assessment to understand the entity
and its environment in accordance with ISA (UK) 315 (Revised), Identifying and Assessing the Risks of
Material Misstatement?
A Industry, regulatory and other external factors
B How inherent risk factors make assertions susceptible to misstatement
C The results of tests of details
D The results of a review of events after the date of the financial statements
LO 1f
11 For each of the following statements, select whether they are true or false in respect of the concept
of materiality.
Requirements
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 1g

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Requirements
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
13 Which three of the following would increase inherent risk?

A Sample sizes have been calculated incorrectly by the auditor and are too small
B A significant number of balances are based on estimates
C The financial statements include complex transactions
D Audit staff are inexperienced
E The company is seeking to raise finance
LO 1f
14 As part of their overall risk assessment an auditor has concluded that detection risk must be set low.
For each of the following, select the appropriate consequence of this.
Requirements
Materiality
A Higher
B Lower
Sample sizes
C Bigger
D Smaller
LO 1f

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15 For each of the following situations, select the most appropriate approach which should be used by
the assurance firm.
Requirements
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 1f
16 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%.
Requirement
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
17 In each of the following cases, select whether inherent risk is higher or lower than normal.
Requirements
The company has recently listed on the local stock exchange with high profit expectations from
analysts.
B Inherent risk lower than normal
Inventory is the largest balance on the statement of financial position.
D Inherent risk lower than normal
The company operates in a slow-moving, stable industry.
E Inherent risk higher than normal
LO 1f

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18 For each of the following statements, select whether they are true or false in respect of the concept
of materiality.
Requirements
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 judgement.
E True
F False
LO 1g
Requirements
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
20 Which two of the following are true of the auditor’s objectives in relation to fraud, in line with ISA
(UK) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements?
A The auditor performs the audit with the aim of deterring fraud.
B The auditor must identify and assess the risks of material misstatement due to fraud.
C The auditor must obtain evidence regarding the risks of material misstatement due to fraud.
D The auditor must only obtain evidence regarding the risks of material misstatement due to error.
21 Deteriora Ltd’s quick ratio has fallen from 1.9:1 to 1.6:1.

Requirement
Which one 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

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22 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.
Requirement
Which one 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
23 Thatch plc’s current ratio this year is 1.33:1 compared with 1.25:1 last year.
Requirement
Which two 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 before the year end
C Thatch made an unusually large purchase of goods for cash immediately before 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
24 Which one of the following statements correctly describes the principal purpose of an external audit
of a limited company?
A To help in the preparation of the company’s financial statements
B To prevent fraud within the company
C To examine and express an opinion on the company’s financial statements
D To help the directors in improving the company’s financial reporting process
LO 1b/j
25 Which one of the following best describes the principal difference between fraud and error?
A Fraud may result in the financial statements being material misstated
B Fraud is an intentional act whereas error is unintentional
C A misstatement can be material whether it is caused by fraud or by error
D Fraud may be the result of negligence whereas error is unintentional
LO 1j
26 Which two of the following are true in respect of related party transactions?
A Related party transactions tend to be low-risk to the auditor
B Disclosure of related party transactions is unlikely to be material to the financial statements
C Related party transactions must be completely disclosed in the financial statements
D There may be a significant control risk in relation to related party transactions
LO 1f

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27 Rasvi LLP has been informed by its client, Wilson Ltd, that it has discovered that a payroll fraud was in
operation during the previous financial year, a year in respect of which Rasvi LLP gave a ‘clean’
auditor’s opinion.
Wilson Ltd says that Rasvi LLP was responsible for preventing the fraud. A review of the previous
year’s audit working papers shows that Rasvi LLP failed to perform any procedures at all in relation to
the payroll.
For each of the following statements, select whether the statement is true or false.
Requirements
Rasvi LLP was responsible for preventing the fraud
A True
B False
Rasvi LLP failed to discharge its responsibilities as auditor
C True
D False
LO 1c/j

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Chapter 4: Process of assurance: evidence

and reporting
1 Which three of the following are procedures that could be used by assurance providers to provide
evidence relating to a balance in the financial statements?
A Walk-through procedure
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 scanned documents.
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 3d/f
4 Which three of the following statements are valid?

A Positive (reasonable) assurance will be given on a statutory audit assignment.
B Positive (reasonable) assurance requires more rigorous work to be undertaken than negative
assurance does.
C Positive (reasonable) assurance will be given on a review assignment.
D Negative assurance is assurance given in the absence of any indications to the contrary.
LO 1a
5 Which two of the following describe manifestations of the expectations gap?

A Users blaming the auditors for a fraud discovered in a company subsequent to an audit
B Users discovering that the directors refuse to cooperate in providing the auditor with the
evidence he requests
C Shareholders approving the appointment of the auditor at an annual general meeting
D Users relying on the audited financial statements as a fair valuation of the company
LO 1d
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6 The level of assurance given by an assurance engagement will depend on the type of engagement.
For each of the following examples, select the level of assurance you would expect to be given.
Requirements
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 1a
7 For each of the following situations, select the most appropriate approach which should be used by
the assurance firm in the given circumstances.
Requirements
The audit of a client where controls have been assessed as deficient
A Tests of controls 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
8 The following are types of test that might be carried out by an assurance provider.
For each example, select the financial statement assertion that is being tested.
Requirements
Review of the financial statements using a Companies Act checklist
A Existence
B Completeness
C Classification
Tracing non-current assets which have been observed in use back to the non-current asset register
D Existence
E Completeness
F Classification
LO 3d/f

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9 Which three of the following are assertions used by the auditor about account balances at the period
end?
A Existence
B Accuracy, valuation and allocation
C Cut-off
D Completeness
LO 3d/f
10 For each of the following statements, select whether they are true or false in respect of substantive
procedures.
Requirements
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
11 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.
Requirements
Observation of opening the post
A Test of control
B Substantive procedure
Calculation of the gross profit margin and comparison with that of the previous accounting period
C Test of control
D Substantive procedure
Reviewing invoices paid for evidence of authorisation
E Test of control
F Substantive procedure
LO 3b

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procedures.
Requirements
Observation of inventory counting at the year end
A Test of control
Calculation of the quick ratio and comparison with that of the previous accounting period
C Test of control
Inquiring into the operation of the purchases transaction cycle
E Test of control
LO 3b
13 Smith plc is required to apply ISA (UK) 701, Communicating Key Audit Matters in the Independent
Auditor’s Report.
Requirement
Which two of the following could be key audit matters?
A Areas of high audit risk
B Areas in relation to which the auditor expresses a separate opinion
C Areas of significant auditor judgement
D Significant transactions or events
LO 1h
14 Which two of the following describe manifestations of the expectations gap?

A Potential shareholders using the statement of financial position as a fair valuation of the entity
B Users discovering that the audit firm relies on the audited entity for its fee
C Users believing that the audit firm must not sell other services to the audited entity
D Users believing that the amounts in the financial statements are stated precisely
LO 1d
15 Which two of the following would be included in an assurance report?

A Statement of directors’ responsibilities
B Identification of the criteria
C Auditor’s opinion
D Title
LO 1h

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16 The following are items that might be included in an auditor’s report.

For each item, select whether it is reported on explicitly, or only by exception.
Requirements
Whether the financial statements are in agreement with the accounting records and returns
A Explicit
B By exception
Whether the financial statements give a true and fair view of the state of the company’s affairs at the
end of the financial year
C Explicit
D By exception
Whether details of directors’ emoluments and other benefits have been correctly disclosed in the
financial statements
E Explicit
F By exception
LO 1h
Requirements
A statutory audit provides reasonable assurance that the financial statements give a true and fair view
A True
B False
An assurance report which expresses an unmodified conclusion is designed to enhance the
confidence of the intended users other than the responsible party in the information being reported
upon
C True
D False

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Chapter 5: Introduction to internal control

1 ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement states that a system of
internal control in an organisation consists of five components: the control environment, the entity’s
risk assessment process, the entity’s process to monitor the system of internal control, the
information system and communication, and control activities.
For each of the following examples, select the component which it illustrates.
Requirements
The process of preparing the financial statements
A Control environment
B Information system and communication
C Control activities
Locking the inventory storeroom
D Control environment
E Information system and communication
F Control activities
LO 2d
2 In each of the following three cases, select whether control risk is higher or lower than normal.
Requirements
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 before 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 2b
ICAEW 2022 5: Introduction to internal control 23

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4 According to ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement, which three
of the following are aspects of an entity’s control environment?
A The attitude of the directors to internal controls
B The attitude of staff to internal controls
C The awareness of internal control issues in the company
D The actions of senior management in relation to internal controls
LO 2d
5 Which one of the following is not part of an entity’s risk assessment process?
A Identify relevant business risks
B Estimate the impact of risks
C Assess the likelihood of occurrence
D Decide upon actions to manage the risks
E Report the process to the auditors
LO 2b
6 For each of the following statements about the information system in a company, select whether they
are true or false.
Requirements
The information system comprises only the IT system of 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
7 The following are examples of internal controls which operate at Badweather plc.
For each example, select the type of control activity which it illustrates.
Requirements
The financial controller counts petty cash on a monthly basis.
A Authorisation and approval
B Verification
C Physical or logical control
There are two keys to the locked finance department safe: one held by the finance director and the
other by the managing director.
D Authorisation and approval
E Verification
F Physical or logical control
LO 2e

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8 The following are examples of internal controls which operate at Castle Ltd.
Requirements
The financial controller compares the results of petty cash counts with the accounting records.
A Physical or logical controls
B Reconciliations
C Segregation of duties
The receivables ledger clerk posts invoices to the receivables ledger. The cash clerk posts cash
receipts to the receivables ledger.
D Physical or logical controls
E Reconciliations
F Segregation of duties
LO 2e
9 The following are examples of computer controls which operate at Goody plc.
For each example, select the type of computer control which it illustrates.
Requirements
Storing extra copies of programs and data files off-site
A General IT
B Information processing
Programmes to check data fields on input transactions
C General IT
D Information processing
Manual checks to ensure that input data were authorised
E General IT
F Information processing
LO 2e
10 Which one of the following would be the simplest way of recording a straightforward system not
subject to a great deal of change annually?
A Flowchart
B Narrative notes
C Questionnaire
D Family tree
LO 2i
11 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

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12 Most entities make use of IT systems for financial reporting and operational purposes. Controls
operating in an IT environment can be split into general IT controls and information processing
controls.
Requirement
Which one of the following is an information processing 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
13 Which two of the following represent inherent limitations of a system of internal control?
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
14 Which two of the following are authorisation control activities?

A A bank reconciliation signed by the finance director
B A cheque payment run approved by the finance director
C A review of the sales ledger clerk by the finance director
D A trial balance compiled by the finance director
LO 2e
15 With regards to systems of internal control in small entities, select whether each of the following
statements is true or false.
Requirements
Smaller companies are more likely to be successful in the implementation of segregation of duties
controls.
A True
B False
Management override is more likely to take place in smaller companies.
C True
D False
LO 2f

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16 ISA (UK) 315 (Revised) states that an internal control system in an organisation consists of five
components: (i) Control environment; (ii) The entity’s risk assessment process; (iii) The entity’s
process to monitor the system of internal control; (iv) The information system and communication;
and (v) Control activities.
For each of the following examples, select the component which it illustrates.
Requirements
Training programme for all staff
B Control activities
C The entity’s process to monitor the system of internal control
Review of actual performance against budget
E Control activities
F The entity’s process to monitor the system of internal control
LO 2d
17 For each of the following statements, select whether they are true or false in respect of the limitations
of any system of internal control.
Requirements
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

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18 For each of the following statements, select whether they are true or false in respect of business risk.
Requirements
Business risk is the risk inherent to the company in its operations.
A True
B False
Business risk is of no relevance to the auditor. The auditor is only concerned with audit risk.
C True
D False
Management is responsible for identifying and controlling business risks.
E True
F False
LO 2b
19 The following are examples of internal controls which operate at Elm plc.
Requirements
The financial controller signs an expense report after reviewing whether the expenses seem
reasonable and within policy.
A Verification
B Authorisation and approval
The payables ledger clerk posts invoices to the payables ledger. The cash clerk posts cash payments
to the payables ledger.
D Verification
LO 2e
20 The following are examples of computer controls which operate in the payroll system at Dobson Ltd.
Requirements
Password protection limiting access to data
A General IT
Range checks on payroll processing
C General IT
Manual checks to ensure that timesheets are authorised before details are processed
E General IT
LO 2e

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21 Which three of the following are general IT controls?

A Disaster recovery procedures
B Back-up copies of programs stored at an alternative safe location
C Procedures for resubmission of rejected data
D Staff training in the use of new/revised programs
LO 2e
22 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.
Requirement
In this situation which one 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
23 Which two of the following are reasons why organisations need to have effective systems of internal
control?
To help the organisation in:
A minimising business risks
B maximising its profitability
C managing its assets and liabilities
D cutting down the time needed for the audit
E complying with laws and regulations
LO 2a
24 An effective system of internal control requires segregation of basic functions.

Requirement
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

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25 An audit committee is a committee with responsibility for audit-related matters.

Requirement
Which one of the following could be members of an effective audit committee?
A Executive directors only
B Non-executive directors only
C Non-executive directors and internal auditors
D Non-executive directors and external auditors
LO 2b
26 ISA (UK) 315 (Revised), Identifying and Assessing the Risks of Material states that a system of internal
control in an organisation consists of five components: (i) Control environment; (ii) The entity’s risk
assessment process; (iii) The entity’s process to monitor the system of internal control; (iv) The
information system and communication; and (v) Control activities.
For each of the following examples, select which component is illustrated.
Requirements
The entity’s organisational structure
Review by management of monthly bank reconciliations
LO 2d
27 The following are examples of internal controls which operate at Fairweather plc.
In each example select which control activity is illustrated.
Requirements
The financial accountant signs the bank reconciliation, which was prepared by a member of his staff.
B Verification
The finance director compares monthly expenditure on consumables to budgeted expenditure.
C Authorisation and approval
D Verification
LO 2e

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28 Most entities make use of IT systems for financial reporting and operational purposes. Controls
operating in an IT environment can be split into general IT controls and information processing
controls.
Requirement
Which one of the following is an information processing control?
A Use of passwords
B Testing of new systems
C Authorisation of data for input
D Disaster recovery plan
LO 2e
29 Which two of the following reduce password effectiveness?

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
30 ISA (UK) 315 (Revised) Identifying and Assessing the Risks of Material Misstatement states that a
system of internal control in an organisation consists of five components: (i) Control environment; (ii)
The entity’s risk assessment process; (iii) The entity’s process to monitor the system of internal
control; (iv) The information system and communication; and (v) Control activities.
For each of the following examples, select which component is illustrated.
Requirements
The entity’s internal audit function
The audit committee
LO 2d

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31 For each of the following internal controls, which is the principal limitation?
Requirements
The preparation of an accounts payable reconciliation
A Human error
B Collusion
Authorisation of new starters in a wages system in which duties are segregated
C Human error
D Collusion
LO 2f
32 For each of the following statements about audit committees, select whether the statement is true or
false.
Requirements
Audit committees are responsible for recommending the appointment of the external auditor
A True
B False
One of the roles of the audit committee is to review the integrity of formal announcements relating
to the company’s performance
C True
D False
LO 2b
33 Which two of the following are controls over input completeness?

A Document counts
B Manual check to ensure input was by authorised personnel
C Screen warning to prevent logout before processing is complete
D Programmed matching of input to an expected input control file
LO 2e
34 For each of the following internal controls, select whether a preventive or a detective control is being
described.
Requirements
Segregation of duties between raising and authorisation of purchase orders
A Preventive
B Detective
Monthly reconciliation of payables ledger with supplier statements
C Preventive
D Detective
Restricting users to read-only access of key folders on internal network
E Preventive
F Detective
LO 2e

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35 The following are examples of computer controls which operate at Mesa plc.
Requirements
Approval of new applications by a sample of users and by management
A General IT
Virus checks on software on employees’ computers
C General IT
A check that all data entered in a field contains the correct number of digits
E General IT
LO 2e

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Chapter 6: Revenue system

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 before to accepting orders
LO 2f
3 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.
Requirements
Orders are placed by telephone. When a call is received, the person receiving the order checks the
customer’s credit status and that the customer’s current balance is below the maximum level, checks
that the item is in inventory, 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
4 Select whether each of the following statements is true or false.

In the sales system, the following duties should be segregated:
Requirements
Recording sales and access to remittances from customers
A True
B False
Credit control and invoicing
C True
D False
LO 2b
ICAEW 2022 6: Revenue system 35

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5 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.
Requirements
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/g
6 Which two of the following are risks associated with the sales system?
B Invoices may be cancelled by valid credit notes
C Goods may be received but not invoiced
D Sales might be recorded in the wrong customer accounts
LO 2c
7 Bourne Ltd operates a number of control procedures in its sales system.

Requirement
Assuming that all controls are operating effectively, which one of the following control procedures is
most likely to ensure that customers are invoiced for goods despatched?
A Use of pre-printed sequentially numbered sales order documentation
B Matching of sales orders with despatch records
C Matching of despatch records with sales invoices
D Requiring customers to sign for goods received
LO 2f
8 The following deficiencies have been identified in two separate sales systems. For each deficiency,
select the most likely consequence which might arise as a result of that deficiency.
Requirements
Despatch documentation is not sequentially pre-numbered.
A Sales may be made to customers who cannot pay
B Invoices may not be raised for all goods despatched
C Customers may not pay promptly
Customers are not required to evidence receipt of goods.
D Sales may be made to customers who cannot pay
E Invoices may not be raised for all goods despatched
F Customers may not pay promptly
LO 2f/g

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9 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
10 The following describes processes which make up the sales system at Raffles Ltd.
Requirements
Orders are placed by telephone. On receipt of a call, following credit checks and checks of the
inventory level, the order is immediately entered onto the system.
A Strength
B Deficiency
The order generates a despatch record which is sent to the warehouse, and an invoice which is sent
to accounts receivable. Goods in inventory are despatched immediately and the despatch record is
amended manually for unavailable goods.
C Strength
D Deficiency
A copy of any despatch records with incomplete orders is placed in an ‘unfulfilled orders’ file. This file
is reviewed daily and the order filled as soon as inventory is available.
E Strength
F Deficiency
LO 2g
11 Which one of the following is a control objective relating to the sales system?
A Credit notes are only issued for valid reasons.
B Sales invoices are checked to goods despatched records by accounts staff.
C Customer accounts are scrutinised to see if credit limits have been observed.
D Orders are made only to authorised suppliers.
LO 2e
12 Which one of the following controls would provide the most positive assurance regarding the
completeness of the sales figure recorded in the financial statements of a manufacturing company?
A Segregation of duties between the preparation of goods despatched records and the
preparation of the sales invoices
B The issue of pre-numbered sales invoices for every sales transaction and internal checking for
completion of processing
C The use of a pre-numbered goods despatched record for every sales transaction and internal
checking for completeness of processing
D Authorisation of all sales invoices by the sales manager before processing
LO 2g

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13 Which one of the following populations should the auditor start from when testing for the
completeness of reported sales of a manufacturing company?
A Sales receipts
B Sales invoices
C Goods despatch records
D Receipts from customers
LO 2d/f
14 Which one of the following is a control objective relating to the revenue system?
A Credit notes are only issued for valid reasons
B Sales invoices are checked to Goods Despatched Notes by accounts staff
C Customer accounts are scrutinised to determine whether credit limits have been observed
D Orders are made only from authorised suppliers
LO 2e
15 Which one of the following controls would provide the most assurance regarding the completeness
of the revenue figure in the financial statements of a manufacturing company?
A Segregation of duties between the preparation of goods despatched notes and the preparation
of the sales invoices
B The issue of pre-numbered sales invoices for every sales transaction and internal checking for
completion of processing
C The use of a pre-numbered goods despatched note for every sales transaction and internal
D Authorisation of all sales invoices by the sales manager prior to processing
LO 2g
16 Which two of the following are risks directly associated with recording in the revenue system?
A Sales are included in the wrong customer accounts
B Goods are recorded incorrectly
C Goods may be despatched but not invoiced for
D Credit notes might not be properly recorded
LO 2c

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Chapter 7: Purchases system

1 For each of the following examples, select the type of control activity which it represents.
Requirements
Monthly management accounts are compared to budget and differences investigated.
B Reconciliations
C Verifications
Numerical sequence checks are undertaken on goods received records.
D Authorisation and approval
E Reconciliations
F Physical or logical
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.
Requirements
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/g
3 The following describes processes which make up the purchases system at Hawthorns and Co. For
each process, select whether it represents a strength or a deficiency of the system.
Requirements
Orders are placed by department heads, usually by telephone, when they determine a service is
required.
A Strength
B Deficiency
Invoices for services are checked against the service provider’s proof of delivery of service, which is
requested from every service provider.
C Strength
D Deficiency
Payments are made by direct transfer. The direct transfer list is authorised by the financial controller,
who checks the payments to supporting documents, such as the invoice or service agreement.
E Strength
F Deficiency
LO 2g
ICAEW 2022 7: Purchases system 39

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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.
Requirement
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, human resources and internal audit).
Requirement
Which one 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, having been authorised by the purchasing
director.
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
6 Grey Ltd has recently discovered that it has been paying invoices in respect of goods which had
been returned as faulty before acceptance. It is company policy to record goods only if they have
been accepted.
Requirement
Which one of the following controls would have prevented this from occurring?
A Matching of purchase invoices with goods received records
B Matching of purchase invoices with orders
C Comparison of supplier statements with payables ledger accounts
D Date stamping purchase invoices on receipt
LO 2f

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7 The following are examples of deficiencies in the purchases system of Burns Ltd.
For each example, select the type of control activity which would improve the system.
Requirements
Purchases have been made from suppliers not included on the approved list.
B Physical or logical controls
There has been increasing levels of theft from the main distribution centre.
C Authorisation and approval
D Physical controls
LO 2f
8 The auditor has identified the following deficiencies within Rainer Ltd’s accounting system.
For each deficiency, select the most likely consequence which might arise as a result of that
deficiency.
Requirements
Purchase of goods from unauthorised suppliers
A Payment to fictitious suppliers
B Purchase of inferior goods
C Prompt payment discounts not obtained
Purchase ledger clerks permitted to amend standing data on the payables master file
D Payment to fictitious suppliers
E Purchase of inferior goods
F Prompt payment discounts not obtained
LO 2f/g
9 Which three of the following are control activities relating to the purchases system?
A All orders are authorised by a senior staff member
B Blank order forms are kept in a secure location with restricted access
C All goods and services received are accurately recorded
D Order forms are sequentially pre-numbered
LO 2g

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10 The following describes processes in the purchases system at Woggle Ltd. For each process, select
whether it represents a strength or a deficiency of the system.
Requirements
New inventory is ordered over the telephone by the company buyer, who initiates orders herself and
maintains a record of telephone orders.
A Strength
B Deficiency
When goods are subsequently received, the buyer has sole responsibility for checking the quantity
of goods received to the record of telephone orders.
C Strength
D Deficiency
Invoices from suppliers are sent to the buyer for authorisation, before being forwarded to the
Accounts Department for entry into the accounting records and subsequent payment.
E Strength
F Deficiency
LO 2g
11 Deficiencies have been identified in the following areas of Pogo Ltd’s purchases system. For each
deficiency, select the risk which is most likely to arise.
Requirements
A lack of segregation of duties in relation to the ordering process
A Unauthorised purchases may be made for personal use
B The company may not take advantage of the full period of credit extended
Records of goods received are not kept.
C Goods may be misappropriated for private use
D Goods and services might not be obtained on the most advantageous terms
The payment listing produced by the accounting system is only read by the payments clerk.
E Invoices may not be recorded resulting in non-payment
F Invoices are paid at the wrong time
LO 2f
12 Deficiencies have been identified in the following areas of Loot Ltd’s purchases system. For each
deficiency, select the risk which arises most immediately.
Requirements
Comparisons are not made of goods received notes with purchase orders
B Entries to the payables ledger are not made to the correct accounts
Supplier terms are not regularly monitored
C Goods and services may be obtained from unauthorised suppliers
D Goods and services may not be obtained on the most advantageous terms
Pre-numbered goods received notes are not used to record the arrival and acceptance of goods.
E Goods and services received may not be accurately recorded
F Goods and services received may not result in liabilities being recorded correctly
LO 2f

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13 The following are descriptions of processes in the purchases system at Pontipines plc.
Requirements
Blank order forms are readily available from a tray in the finance department
A Strength
B Deficiency
Buyers have a free choice of suppliers, in order to obtain the best terms
C Strength
D Deficiency
Order forms are prepared only when a pre-numbered purchase requisition has been received
E Strength
F Deficiency
LO 2g
14 Which two of the following describe control activities in the purchases system of Wottinger Ltd?
A A purchase ledger clerk checks all supplier invoices against the order and the goods received
record
B All orders for goods and services are properly authorised and duly processed
C All goods and services received are accurately recorded
D All purchase order forms are sequentially pre-numbered
LO 2g

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Chapter 8: Employee costs

1 Hire Company Ltd uses a lot of temporary employees.
Requirement
Which one of the following controls would best ensure that employees are only paid for work they
have performed?
A Temporary staff records should be maintained for each member of temporary staff.
B Temporary staff should complete work schedules, authorised by their supervisor.
C Temporary staff pay should be authorised by the human resources manager.
D Temporary staff should be paid by direct transfers to their bank accounts.
LO 2f
2 Tulips Ltd has a number of staff on maternity leave claiming statutory maternity pay.
Requirement
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.
Requirements
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
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4 Stamford plc employs a number of trainee staff, at six monthly intervals. All trainees must complete a
probationary period of six months before progressing to the next level of traineeship. The
accountant providing assurance on the efficiency of the operation of controls has identified the
following deficiencies within Stamford Ltd’s payroll system.
For each deficiency, select the most likely consequence which might arise as a result of that
deficiency.
Requirements
Employees are not given a personnel file until they have completed their six month probationary
period.
A Employees may be paid the wrong amounts
B The computerised payroll may contain miscalculations
Many employees work overtime but there is no system for authorising the levels of overtime claimed.
C Employees may be paid the wrong amounts
D The computerised payroll may contain miscalculations
LO 2f/g
5 The following describes the processes in the payroll system at Wembley Ltd.
Requirements
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 sample of which are checked against data from
headcounts during the day.
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
6 Workworld Ltd has a computerised payroll system. All employees are paid by BACS directly into their
bank account.
Requirement
Which two of the following controls will be most effective at 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

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7 Which two of the following features in the payroll system of Tyne plc could result in the employee
costs figure in the financial statements being misstated?
A Rates of pay are negotiated at a local level, there is no central control
B The payroll clerk can amend standing data on the payroll system without authorisation of a
senior member of staff
C Personnel records are not kept up to date
D The payroll department receives confirmation of new employees in writing
LO 2g
8 For each of the following statements about internal controls over payroll, select whether they are true
or false.
Requirements
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
worried that fictitious employees could be included on the payroll by a dishonest employee from the
accounts department.
Requirement
Which one of the following internal controls is most likely to prevent fictitious employees from being
added to the payroll?
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

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11 Deficiencies have been identified in the following areas of a company’s wages system.
For each deficiency, select the risk which is most likely to arise.
Requirements
Details of wages are not regularly checked to the personnel file.
A Pay might not be recorded correctly in the general ledger
B The company may pay employees who have left
Regular reconciliations of the payroll to timesheets are not performed.
C Pay might not be recorded correctly in the general ledger
D The various elements of pay might not be calculated correctly
Regular reconciliations of the wages and salaries control account are not performed.
E Payments might be made incorrectly
F The various elements of pay might not be calculated correctly
LO 2f
12 For each of the following statements about internal controls over payroll, select whether each is true
or false.
Requirements
The payroll master file should contain details of the employee’s cumulative statutory deductions to
date.
A True
B False
Reviewing changes to statutory deductions helps to ensure that changes to the calculation of gross
pay are processed correctly.
C True
D False
Reviewing wages paid against budgets and timesheets helps to ensure that employees are only paid
for the work that they have done.
E True
F False
LO 2f
13 Which two of the following control activities will reduce the risk that the different elements of pay
might not be recorded correctly in the payroll?
A One for one checking of payroll details back to independently maintained personnel records
B Segregation of duties throughout the payroll department
C Reconciliation of total pay and deductions between one pay day and the next
LO 2f

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14 Deficiencies have been identified in the following areas of a company’s wages system.
For each deficiency, select the risk which is most likely to arise.
Requirements
No central records are kept of changes in personnel and pay rates.
A Pay might not be recorded correctly in the general ledger
There are no procedures for dealing with non-routine matters.
D The company may pay employees who have left
There is no segregation of duties between the preparation and the authorisation of the payroll.
E Pay might not be recorded correctly in the general ledger
F The company may pay employees who have left
LO 2f

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Chapter 9: Internal audit

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.
Requirement
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 2h
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 2h
3 Which three of the following roles could the internal audit function take on to help 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 2h
4 Internal audit helps in achieving corporate objectives.

For each of the following statements, select whether or not they are true or false.
Requirements
Having an internal audit function is a requirement of the UK Corporate Governance Code.
A True
B False
Internal audit can be seen as an internal control in a company.
C True
D False
Internal auditors should not get involved in operational matters.
E True
F False
LO 2h
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5 For each of the following statements, concerning internal audit, select whether they are true or false.
Requirements
Internal audit can never be independent of those on whom they are reporting, because they are
employees of the company.
A True
B False
The UK Corporate Governance Code requires all listed companies in the UK to have an internal audit
function.
C True
D False
Internal audit focuses on the efficiency and effectiveness of a company’s operations by testing its
internal controls. They do not carry out substantive testing.
E True
F False
LO 2h
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.
Requirement
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 2h
7 Many of the procedures undertaken by the internal auditor are very similar to those performed by
the external auditor.
Requirement
Which three of the following may be performed by the internal auditor if he is to operate effectively?
A Monitoring of internal controls
B Making recommendations regarding improvements to controls
C Examining and testing financial information
D Expressing an opinion on the truth and fairness of the financial statements
LO 2h
8 Which one of the following best describes the term ‘operational audit’?
A Any audit performed by the internal auditor
B An audit of the operational processes of the organisation
C An audit performed by the operations director
D A statutory audit

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LO 2h
9 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 2h
10 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 2h
11 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.
Requirement
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 2h
12 There are many similarities between the internal auditor and the external auditor. However, there are
some crucial differences that are important to note.
Requirement
Which two of the following usually only relate to the internal auditor?
A They provide an opinion on the financial statements
B Their work is focused on the operations of the entire business
C The role can be carried out by employees of the entity
D They are appointed by the shareholders of an entity
LO 2h

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Chapter 10: Documentation

1 Which three of the following are reasons why assurance providers record their work?
A To confirm the terms of the engagement
B To help 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
2 Which three of the following should working papers show?

A The name of the client
B The date the work was planned
C The date the work was carried out
D The date the work was reviewed
E The initials of the person supervising the work
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 3a
4 Many auditors use two types of audit file: a current audit file and a permanent audit file.
For each of the following documents, select whether it is most likely to be included in the current
audit file, permanent audit file or in both.
Requirements
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 3a
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5 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 3a
Requirements
Working papers should be stored in locked premises.
A True
B False
An auditor can destroy the audit plan relating to Jacobs Ltd for the year ended 30 June 20X3 in
20Y0.
C True
D False
Working papers belong to the client and may be stored at their premises.
E True
F False
LO 3a
7 For each of the following, select whether or not they are valid reasons for preparing audit working
papers.
Requirements
To help 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

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8 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 the preparation of such
documentation.
Requirements
To help in establishing this year’s overall audit strategy
A Valid
B Not valid
To help 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
9 Which three of the following are advantages of automated working papers?

A They may result in substantial time-savings
B The risk of errors is reduced
C The auditor does not need to apply judgement in assessing the results
D They will be easier to review
LO 3a
10 Which one of the following statements is correct in respect of the minimum period, as required by
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 3a
11 Which one of the following statements is correct in respect of the safe custody of audit
documentation?
A While 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 3a

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12 The auditor may choose to include a number of items within their working papers.
For each of the following statements, select whether they are true or false.
Requirements
Auditors may include a summary of all significant matters arising during the audit and how they were
addressed.
A True
B False
In cases where significant judgement is required, the auditor can choose to delay the preparation of
working papers in order to allow for suitable reflection.
C True
D False
Audit working papers will record matters of continuing significance to future audits.
E True
F False
LO 3a

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Chapter 11: Evidence and sampling

1 Which two of the following statements are correct?
A Inspection of assets confirms rights and obligations
B Inspection of a purchase invoice confirms the cost of inventory
C Observation gives strong ongoing evidence of the matter being observed
D Inquiry of third parties gives better evidence than inquiries of entity insiders
LO 3d
2 In which three of the following situations could audit software appropriately be used?
A When checking calculations on a selection of invoices
B When extracting a sample of invoices over a certain value
C When extracting all invoices to specific customers
D When testing controls over invoice processing
LO 3d
3 Which three of the following statements are correct?

When using analytical procedures, assurance providers should:
A consider whether the information they might require will be available.
B consider the knowledge gained during previous assurance engagements.
C consider the source of the information and whether it is reliable.
D not use information that has been internally generated at the entity.
LO 3e
4 Which one 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 to the interest paid
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
5 Which two of the following statements are correct?

A When testing for overstatement, the assurance provider will test items from the accounting
records to the supporting documents.
B When testing for understatement, the assurance provider will test items from the accounting
C When testing for overstatement, the assurance provider will select items from outside the
accounting records and trace to the records.
D When testing for understatement, the assurance provider will select items from outside the
LO 3f
ICAEW 2022 11: Evidence and sampling 59

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6 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
7 The assurance provider is using statistical sampling.

Requirement
Which three of the following methods would be most appropriate to use to select a sample of
accounts receivable?
A Random selection
B Systematic selection
C Haphazard selection
D Sequence selection
E Monetary unit selection
LO 3d
8 Assurance providers obtain evidence using procedures set out in ISA (UK) 500.
For each of the following tests, select the type of procedure which is being used.
Requirements
The assurance provider writes to a sample of customers asking them to inform him of the balance
they owe the company at the year end.
A Inspection
B Observation
C Confirmation
The assurance provider looks at a share certificate to confirm that the company has an investment in
Company A.
D Inspection
E Observation
F Confirmation
The assurance provider attends the inventory count and ensures that it is being carried out in
accordance with the issued instructions.
G Inspection
H Observation
I Confirmation
LO 3f

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9 For each of the following statements concerning computer–assisted audit techniques (CAATs), select
whether they are true or false.
Requirements
CAATs 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
10 In respect of an assurance engagement, which one of the following is the least persuasive method of
gathering evidence?
A Inspection of a supplier’s invoice
B Reperformance of a client’s supplier statement reconciliation
C Reperformance of a depreciation calculation
D Inspection of a sales invoice
LO 3e
11 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.
Requirements
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

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12 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 decrease the sample size.
LO 3g
13 For each of the following statements, select whether they are true or false in respect of procedures to
obtain evidence.
Requirements
Physical examination of property, plant and equipment confirms ownership.
A True
B False
Recalculation is a strong form of evidence as it is created by the assurance provider.
C True
D False
Inquiry is always an unreliable means of obtaining evidence.
E True
F False
LO 3d
14 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.
Requirements
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 the cash at bank nominal ledger account.
E More reliable
F Less reliable
LO 3e

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15 All methods of obtaining evidence have deficiencies. Examples of these are listed below.
For each deficiency, select the method of obtaining evidence which is most likely to result in that
deficiency.
Requirements
Limited to the point in time it takes place
A Performing analytical procedures
B Observation of a procedure
Limited by the underlying accounting system
C Performing analytical procedures
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
16 In accordance with ISA (UK) 315, (Revised) Identifying and Assessing the Risks of Material
Misstatement and ISA (UK) 520, Analytical Procedures, select whether analytical procedures are
compulsory or optional in each of the following circumstances.
Requirements
At the risk assessment stage of the audit
A Compulsory
B Optional
As a substantive procedure
C Compulsory
D Optional
At the overall review stage of the audit
E Compulsory
F Optional
LO 3d
17 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 are available
D Significant deficiencies in the internal control system have been identified in the past
LO 3e

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18 Which two of the following procedures describe tests for understatement?

A Selecting a sample of despatch records and tracing these to a matching sales invoice and entry
in the sales account
B Selecting a sample of sales invoices and tracing these to a matching despatch record
C Selecting a sample of items of plant physically verified by the assurance provider and tracing
these to an entry in the asset register
D Selecting a sample of items of plant from the asset register and physically verifying their
existence
LO 3f
19 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.
Requirement
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
20 When determining a sample size for tests of details 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 or to
decrease.
Requirements
An increase in the auditor’s assessment of the risk of material misstatement
A Increase
B Decrease
An increase in the use of analytical procedures to test the same assertion
C Increase
D Decrease
An increase in the level of misstatements that the auditor expects to find when testing the assertion
E Increase
F Decrease
LO 3g

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21 For each of the following statements, select whether they are true or false in respect of test data.
Requirements
Test data are 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 help in the calculation of ratios.
E True
F False
LO 3b
22 Which one of the following is the definition of an anomaly?

A A misstatement or deviation that is demonstrably not representative of misstatements or
deviations in a population
B The misstatement that the auditor expects to be present in the population
C Control deviations, when performing tests of control, or misstatements, when performing
substantive procedures
D The maximum misstatement in the population that the auditor would be willing to accept
LO 3g
23 For each of the following descriptions, select whether they describe monetary unit sampling, block
selection or systematic selection.
Requirements
Peter is auditing trade accounts receivable. Materiality is £25,000. The sample is selected on the
basis of choosing the balances containing each 25,000th £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 3d

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24 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.
Requirements
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
25 Which one of the following procedures would provide the most reliable source of evidence where a
company receives an invoice after the year end which relates to a period that straddles the year end?
A Confirming the purchase amount to a supplier statement at the year end
B Vouching the payment of the invoice
C Testing internal controls over accruals
D Recalculating the portion of the invoice amount which relates to the reporting period
LO 3d
26 For each of the procedures below, select the option which best describes the auditor’s test when
performing the procedure.
Requirements
Reviewing post year-end invoices for amounts which relate to the reporting period
A Testing primarily for existence of accruals
B Testing primarily for completeness of accruals
Reviewing the payments made to suppliers after the year end
C Not a relevant procedure for payables
D Testing primarily for completeness of payables
The auditor calculating for herself the amount accrued where an invoice straddles the year end
E Testing primarily for cut-off of accruals
F Testing primarily for completeness of accruals
LO 3f

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27 For each of the following statements about audit data analytics, select whether it is true or false.
Requirements
Data analytics allows auditors to investigate complex data using simple visualisation techniques.
A True
B False
Significant time must be always spent tailoring data analytics procedures to the individual audit client
to achieve good results.
C True
D False
Data analytics allows auditors to test large quantities of transactions very quickly.
E True
F False
LO 3b
28 Assurance providers obtain evidence using procedures, as set out in ISA (UK) 500, Audit Evidence.
For each of the following statements about specific audit procedures, select whether they are true or
false.
Requirements
When attempting to verify controls over petty cash, inquiry is likely to be strong evidence when
assessing the risk of fraud from poor segregation of duties.
A True
B False
Recalculation of a depreciation expense by the auditor using the client’s stated estimation
techniques is regarded as strong audit evidence.
C True
D False
Observing an employee of the client re-performing a particular control is usually sufficient to
determine that it is operating satisfactorily.
E True
F False
LO 3c
29 Which one of the following is not an example of a specific area where audit data analytics may now
be used?
A Comparing entity data to externally obtained data
B Three-way matching between sales orders, goods despatched records and invoices
C Extracting samples of transactions for further examination
D Re-performing calculations relevant to the financial statements
LO 3b

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30 ISA (UK) 450, Evaluation of Misstatements Identified During the Audit requires the auditor to evaluate
the effect of any uncorrected misstatements on the financial statements. This includes determining
whether any uncorrected misstatements are material.
Requirement
Which three of the following factors will the auditor use to determine whether uncorrected
misstatements are material?
A The materiality level for the financial statements as a whole
B The size of the misstatement
C The circumstances of the occurrence of the misstatement
D The nature of the misstatement
LO 3g

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Chapter 12: Written representations

1 According to ISA (UK) 580, Written Representations 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 (UK) 580, Written Representations 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.
Requirements
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
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4 Auditors seek written representations from management to support oral representations that have
been made during the course of the audit.
For each of the following in relation to a statutory audit, select whether a written representation is
required or not required.
Requirements
The directors have fulfilled their responsibility for the preparation of the financial statements.
A Required
B Not required
The accounting policies selected and applied by management are appropriate.
C Required
D Not required
A material item, subject to management judgement, for which no other evidence could reasonably
be expected to exist.
E Required
F Not required
LO 3h
5 Written representations may be sought as audit evidence.

Requirement
Which two of the following are valid circumstances in which written representations may be
required?
A To support other evidence about the suitability of accounting policies
B Where information which would normally be expected to be available is unavailable
C To support inspection of a board minute introducing the directors’ intention to sell a material
investment
D When the alternative audit procedure would be too time consuming
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 in the accounts and the
bank statement balance
D Whether there are any undisclosed subsequent events
LO 3h

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7 For each of the following statements concerning written representation letters, select whether they
are true or false.
Requirements
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
8 Which two of the following are purposes of a written representation letter?

A Acknowledgement that management has fulfilled its responsibility for the preparation of the
B Provision of evidence in respect of material items where other evidence is available
C Acknowledgement by management of its belief that the aggregate of uncorrected
misstatements are immaterial to the financial statements
D Confirmation by management of the scope of the work to be carried out by the assurance firm
E Provision of details of proposed modifications to the auditor’s report
LO 3h
9 Which one of the following ISAs (UK) is not normally referred to in a standard written representation
letter from management?
A ISA (UK) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
B ISA (UK) 300, Planning an Audit of Financial Statements
C ISA (UK) 550, Related Parties
D ISA (UK) 560, Subsequent Events
LO 3h

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Chapter 13: Substantive procedures – key

financial statement figures
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 one 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 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
4 Which one of the following is the reason why the positive method of confirming receivables balances
with customers is generally preferred?
A It is carried out in the auditor’s name
B It requires the customer to reply giving or confirming or disagreeing with the balance
C It only requires the customer to reply if he disagrees with the balance
D It requires replies to be sent to the client
LO 3e
5 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
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6 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
7 Which one of the following is the key assertion with which auditors are concerned in relation to
payables?
A Completeness
B Existence
C Accuracy
D Classification
LO 3d
8 Which three of the following are reasons why the auditors might seek direct confirmation of balances
due from suppliers?
A To obtain third party evidence
B The auditors suspect that the client is deliberately understating payables
C The internal controls relating to purchases are weak
D Supplier statements are unavailable
LO 3d
9 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
10 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

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11 The results of substantive tests on trade payables at Fulham Ltd are set out below. The materiality
threshold set for these tests was £17,000. For each of the following results, select the action which
should be taken by the audit senior.
Requirements
Three goods inwards records dated before the year end relating to goods worth £16,000 were
traced to purchase invoices which have been included in the subsequent year and not provided for
this year.
A Draw conclusion
B Refer to senior colleague
C Extend sample
In a sample of 20 supplier statement reconciliations, statements were unavailable for 10 suppliers.
Statements were available for seven of these 10 suppliers in the previous year.
D Draw conclusion
E Refer to senior colleague
F Extend sample
LO 3i
12 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 with the balance. For each of these two disagreements,
select whether the disagreement would 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.
Requirements
Watford Ltd disagreed with 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 with 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 record and cut-off with inventory are correct.
C Misstatement
D Not misstatement
LO 3g
13 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.
Requirements
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

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14 Lisa has obtained a list of items which make up the cash and cash equivalents balance (£3,556) in the
financial statements of Baker Ltd. Materiality has been set at £4,000.
For each item, select whether or not Lisa should test the item.
Requirements
Current account balance (overdrawn) £5,600
A Test
B Not test
Petty cash float £750
C Test
D Not test
Special directors’ cash account £1,294
E Test
F Not test
LO 3g
15 Which two of the following assertions is the auditor most concerned with when testing property,
plant and equipment?
A Occurrence
B Existence
C Rights and obligations
D Cut-off
LO 3d
16 The auditor of Mondays Ltd is performing a test to ensure that there are no omissions from the non-
current asset register.
Requirement
In respect of which one of the following assertions will this procedure provide audit evidence?
A Cut-off
C Completeness
D Existence
E Classification
LO 3d
17 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

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18 For each of the following circumstances in respect of inventory, select which financial statement
assertion would be affected.
Requirements
Inventory which had been sold by the end of the period has been included in inventory.
A Completeness
C Cut-off
Damaged items of inventory have not been written down to net realisable value.
D Completeness
E Accuracy, valuation and allocation
F Cut-off
LO 3d
19 For each of the following circumstances in respect of inventory, select which financial statement
assertion would be affected.
Requirements
Inventory items were excluded from the total in the financial statements in error.
A Completeness
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
F Cut-off
LO 3d
20 The following describes a number of features of the inventory count instructions of Sydney Ltd.
For each feature, select whether it represents a strength or a deficiency.
Requirements
The inventory count is performed by warehouse staff and supervised by the warehouse manager.
A Strength
B Deficiency
Inventory sheets are completed in pencil.
C Strength
D Deficiency
There are two teams of counters, one counting and one checking.
E Strength
F Deficiency
LO 2g

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21 For each of the following statements concerning perpetual inventory counts, select whether they are
true or false.
Requirements
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
22 Management should compare cost and net realisable value for each item of inventory.
Requirement
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
23 Direct confirmation of trade receivables provides evidence in respect of which two of the following
assertions?
A Existence
D Completeness
E Occurrence
LO 3d
24 Which one 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 Checking a sample of customers on the customer list against the receivables ledger accounts
D Reconstruction of receivables balance by tracing individual amounts invoiced to despatch
records
LO 3e

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procedures.
Requirements
Examining the instructions issued for a year-end physical inventory count
A Test of control
Observing despatch procedures
C Test of control
Comparing this year’s sales figures to those of previous years
E Test of control
LO 3b
26 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 that test illustrates.
Requirements
Adding the list of year-end receivables
A Confirmation
B Recalculation
C Reperformance
Using computer–assisted audit techniques (CAATs) to check the ageing of the year-end list of aged
receivables
D Confirmation
E Recalculation
F Reperformance
LO 3b

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27 In order to gather sufficient, appropriate evidence, the auditor may make use of external
confirmation requests.
For each of the following statements, select true or false.
Requirements
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 usually provides more reliable audit evidence than a negative
confirmation request.
E True
F False
LO 3c
28 Which one of the following financial statement assertions will be supported by a sample check on
the numerical sequence of despatch records and invoices?
A Cut-off
B Occurrence
C Completeness
D Accuracy, valuation and allocation
LO 3d
29 Which one 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 cash at bank nominal ledger account
C Obtaining direct confirmation of the bank balance from the client’s bank
D Reperforming the additions on the bank reconciliation
LO 3d

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30 The auditor of Raindrop Ltd carried out a direct confirmation 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
circularisation disagreed with the balance.
For each of these two disagreements, select whether the disagreement would be considered a
misstatement for the purpose of evaluating the accuracy of total trade receivables.
Requirements
Jones LLP disagreed with the balance because their records indicated that the amount had been
paid a few days before the year end. The auditor’s enquiries revealed that the cheque was cleared
shortly after the year end.
A Misstatement
B Not a misstatement
Sunny plc disagreed with the balance because its records indicated that it had paid the balance two
weeks before the year end. The auditor’s enquiries revealed that the amount had been received and
credited to another customer’s account before the year end.
C Misstatement
D Not a misstatement
LO 3g
31 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
usually test it for overstatement or for understatement, or whether the item would not be tested at all.
Requirements
£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
32 Gamma Ltd has a head office and several branches. The head office operates a continuous inventory
counting system. The system 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 showed that
differences between inventory records and the physical count frequently arise. Usually, actual
inventory levels at branches are found to be higher than book inventory.
Requirement
Which one 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

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33 The results of substantive audit tests at Errata plc are set out below. The materiality threshold set for
these tests was £1,000.
For each of the following results, select the action which should be taken by the audit senior.
Requirements
No misstatements found
A Draw conclusion
B Refer to senior colleague
C Extend sample
An arithmetical misstatement of £5,000 found
D Draw conclusion
F Extend sample
A misstatement of £10 found, sanctioned by the finance director
G Draw conclusion
H Refer to senior colleague
I Extend sample
LO 3i
34 Which one 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 3d
35 Which two of the following statements identify an appropriate source of information for audit work
directed towards the stated risk associated with tangible non-current assets?
A Purchase invoices for assets purchased within the year may contain evidence in relation to the
risk of omission of assets owned by the company.
B Physical inspection of the assets themselves by the auditor may generate evidence in relation to
the risk of the company not actually owning the assets.
C Valuations carried out by third party valuers may contain evidence in relation to the risk of the
assets being incorrectly presented in the financial statements.
D Sales invoices for assets sold within the year may contain evidence in relation to the risk of the
company not actually owning the assets.
LO 3d

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36 Assurance providers obtain evidence using procedures, as set out in ISA (UK) 500, Audit Evidence.
For each of the following statements, select whether they are most likely to be true or false.
Requirements
A major risk of misstatement of the receivables balance in the financial statements is of debts not
being complete.
A True
B False
The principal risk of misstatement of long-term liabilities in the financial statements is of non-existent
liabilities being declared.
C True
D False
A major risk of misstatement of the inventory balance in the financial statements is of inventory being
included in the financial statements at full value when it is obsolete or damaged.
E True
F False
LO 3f
37 At which two of the following business locations should auditors be particularly alert to the risk of
money laundering?
A Car wash
B Manufacturer of upholstery
C Surveyors’ offices
D Pawn shop
LO 3f
38 For each of the following statements concerning the audit of inventory, select whether they are true
or false
Requirement
When determining the cost of inventory, the costs of bringing the inventory to its present location
and condition should be included
A True
B False
Requirement
The use of inventory count sheets which include inventory quantities based on the inventory records
as at the close of business the previous day is a deficiency in internal control
C True
D False

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Chapter 14: Codes of professional ethics

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
2 ICAEW qualified auditors acting in the UK are subject to which two of the following?
A IESBA Code of Ethics
B ICAEW Code of Ethics
C FRC’s Ethical Standard
D The Code of Ethics set by the Government
LO 4a
3 Which three of the following are stated fundamental principles of the IESBA Code?
A Integrity
B Objectivity
C Independence
D Confidentiality
E Courtesy
LO 4d
4 For each of the following statements concerning professional ethics, select whether they are true or
false.
Requirements
Prescriptive rules of ethical guidance are beneficial because they place the onus on the accountant
to actively consider independence in every given situation.
A True
B False
A framework of ethical guidance allows principles to be applied to different situations, and is
therefore effective in a situation that is changing rapidly.
C True
D False
A framework of ethical guidance prevents accountants interpreting legalistic requirements narrowly,
in order to circumvent ethical requirements.
E True
F False
LO 4b
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5 Which three of the following bodies issue ethical guidance?

A ICAEW
B IESBA
C IAASB
D FRC
LO 4a
6 Which one 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 4a/b
7 For each of the following threats, select whether they are identified by the IESBA Code only, the
FRC’s Ethical Standard only or both the IESBA Code and the FRC’s Ethical Standard.
Requirements
Self-interest threat
A IESBA Code only
B FRC’s Ethical Standard only
C Both
Management threat
D IESBA Code only
E FRC’s Ethical Standard only
F Both
Familiarity threat
G IESBA Code only
H FRC’s Ethical Standard only
I Both
Self-review threat
J IESBA Code only
K FRC’s Ethical Standard only
L Both
LO 4k

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8 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 4e
9 There are two main approaches to a code of professional ethics: a rules-based ethical code and a
principles-based code.
Indicate whether the following statements are true or false.
Requirements
A principles-based code requires a professional accountant to comply with a set of specific rules.
A True
B False
A rules-based code requires a professional accountant to identify, evaluate and address threats to
compliance with fundamental ethical principles.
C True
D False
ICAEW uses a rules-based approach.
E True
F False
LO 4b
10 The ICAEW Code of Ethics provides guidance for members regarding their independence.
For each of the following statements, select whether they are most likely to be true or false.
Requirements
If guidance is principles-based then it does not contain rules prohibiting certain activities
A True
B False
If guidance is based on general principles then it does not allow for particular or unique situations.
C True
D False
Principles-based guidance may permit multiple correct responses in a given situation.
E True
F False
LO 4b

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11 The FRC’s Ethical Standard gives examples of threats in its six classificatory categories.
For each threat below, select the category into which they would most likely be placed.
Requirements
Auditing financial statements prepared by the firm
A Familiarity threat
B Self-review threat
An audit team member having family at the client
C Familiarity threat
D Self-review threat
Making a loan to an audit client
E Familiarity threat
F Self-interest threat
LO 4k

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Chapter 15: Integrity, objectivity and

independence
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 ICAEW
LO 4f
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 4k
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 4k
4 Allisons LLP 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.
(1) The audit of Nationally plc, the leading building society in the UK. 40% of staff members of
Allisons LLP who have mortgages have mortgaged their home with Nationally.
(2) 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.
Requirement
Which, if any, of the above companies present a major threat to the independence of Allisons LLP, 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 4e
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5 Which one of the following is correct in relation to the presumption of dependence for a non-listed
client?
A There is a presumption of dependence when annual fee income from all services to the client
will regularly exceed 15% of gross practice income.
B There is a presumption of dependence when annual fee income from all services to the client
C There is a presumption of dependence when annual assurance fee income from all services to
the client will regularly exceed 15% of gross practice income.
D There is a presumption of dependence when annual assurance fee income from all services to
the client will regularly exceed 5% of gross practice income.
LO 4k
6 Majors LLP, a firm of chartered accountants, offers the following additional services to various audit
clients.
Requirement
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 Helping Craven plc in defining its corporate strategies and identifying possible sources of
finance for a potential new venture
LO 4k
7 In accordance with FRC’s Ethical Standard, 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 11 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 4k

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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.
Requirement
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 4f
9 Julia is a member of ICAEW who works in industry at KiwiCorp plc, a listed company. The company is
experiencing difficulty meeting the expectations of the market, and Julia has been told by the board
of directors that the company must meet its optimistic profit targets at the year end, regardless of
what accounting is required to achieve this.
Requirement
Which two of the following are the most appropriate initial courses of action for Julia to take in these
circumstances?
A Report her concerns to the audit committee
B Resign
C Take legal advice
D Obtain advice from the human resources department at KiwiCorp plc
LO 4f
10 There are various general threats to independence recognised by ethical codes.

For the following two examples, select the type of threat which might arise in that situation.
Requirements
The audit senior assigned to the audit of Loesdon Ltd has recently become engaged to the finance
director’s daughter.
A Self-interest
B Management
C Advocacy
The finance director of Litten Ltd has recently informed the audit engagement partner that Litten Ltd
will be seeking a stock exchange listing. The finance director has implied that Litten Ltd will want to
use the firm for significant amounts of advisory work in relation to the listing, but joked at the same
time that ‘clean bills of health’ would be crucial from now on.
D Self-interest
E Management
F Self-review
LO 4k

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11 Estelle LLP is a 10-partner assurance firm which has been asked to consider taking on the audit of the
financial statements of two separate companies. The following potential issues have been identified
before acceptance of any such appointments.
For each of the following clients, select the basis on which the engagement could be accepted, if at
all.
Requirements
Othello Ltd, which will also require you to provide routine tax compliance work and advice
A Do not accept
B Accept with safeguards
C Accept with no safeguards
Desdemona Ltd, the finance director of which worked at Estelle LLP two years ago, but who does not
know any of the members of the proposed audit team personally
D Do not accept
E Accept with safeguards
F Accept with no safeguards
LO 4k/l
12 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.
Requirements
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 4k

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13 The following are examples of situations in which Carnation LLP, an audit firm with 50 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 in accordance with Ethical Standards, or
state that there are no safeguards that could reduce the risk to an appropriate level.
Requirements
Carnation LLP has been invited to accept the audit of a major listed company. The fee income from
this engagement would represent 5% of the gross fee income of the firm.
A Separate personnel
B Discuss the issues with the audit committee
C No safeguards possible
Carnation LLP has been invited to accept the audit of a major competitor of an existing client and has
obtained consent from both to act.
D Separate personnel
E Discuss the issues with the audit committee
F No safeguards possible
LO 4k/l
14 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
LO 4k
15 Monty LLP, an audit firm, has a number of medium-sized audit clients which are non-listed. It has a
current gross practice income of £500,000.
For each of the following prospective clients taken separately, select whether there are safeguards
which could reduce any risk to independence to an acceptable level in accordance with Ethical
Standards.
Requirements
Marty Ltd has insisted that the audit fee be based on 5% of reported profit after tax.
A Safeguards possible
B No safeguards possible
Fee income in respect of Andrews Ltd is expected to be £95,000.
C Safeguards possible
D No safeguards possible
Fee income in respect of Borne Ltd is expected to be £65,000.
E Safeguards possible
LO 4l

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16 Wright LLP, a firm of auditors, has the following employees who previously worked for current audit
clients.
Name Previous employer Position held Date of resignation
Sam Brown Hastle Ltd Finance director 31 January 20X6
James Hastle Ltd Office junior 30 June 20X7

Sanderson
Sally Jones Morgan Ltd Chief accountant 1 June 20X4
Requirement
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 if the engagement is to be
conducted in accordance with Ethical Standards?
A Both Hastle Ltd and Morgan Ltd
B Hastle Ltd only
C Morgan Ltd only
D Neither Hastle Ltd nor Morgan Ltd
LO 4k
17 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.
Requirement
Which one 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 4m

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18 Morgan LLP, an audit firm, has a number of prospective clients: Masons Ltd, Burton Ltd and
Dewburry Ltd.
For each of these following prospective clients, select whether the holding of the stated financial
interest should result in the firm declining the engagement or the individual being excluded from the
audit team in accordance with Ethical Standards. (Assume that the interests are not disposed of.)
Requirements
Bill Brown, a partner in Morgan LLP, owns 10% of the shares in Masons Ltd.
A Firm must decline
B Individual excluded
Sam Larson’s wife owns 5% of the shares in Burton Ltd. Sam Larson is an audit manager at Morgan
LLP.
C Firm must decline
D Individual excluded
Jane Smith’s husband owns 15% of the shares in Dewburry Ltd. Jane Smith is a partner in Morgan
LLP.
E Firm must decline
F Individual excluded
LO 4k
19 Panama LLP is an audit firm with 30 similar, non-listed, medium-sized audit clients. The following are
examples of situations in which Panama LLP 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 in accordance with the FRC’s Ethical Standard.
Requirements
One of Panama LLP’s clients is a competitor of one of its other clients.
B Fee threshold not exceeded
C No safeguards possible
Panama LLP 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.
E Fee threshold not exceeded
LO 4k/l

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20 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.
Requirement
Which one of the following is the most appropriate initial course of action for Jane to take?
A Resign
B Seek legal advice
C Contact the ICAEW telephone helpline
D Comply with her employer’s request
LO 4m
21 Richard Richardson LLP is a multi-national audit firm responsible for the audit of a high street bank,
Barkers Bank.
For each example below of loans provided to members of the audit team by Barkers Bank, select
whether the loan gives rise to a threat to Richard Richardson LLP’s independence in accordance with
ethical standards.
Requirements
The audit junior’s student loan
A Threat
B No threat
The audit partner’s mortgage, negotiated on normal commercial terms
C Threat
D No threat
The audit manager has recently taken out a car loan. He is being charged an interest rate of 2%
below the standard rate applied to this product
E Threat
F No threat
LO 4k
22 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.
Requirements
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 4k

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23 Talland LLP is the external auditor of Huntley Ltd, a retailer. The managing partner has been called to
a meeting with the board of directors of Huntley Ltd. At that meeting the firm has been asked if it can
provide the following non-audit services.
Huntley Ltd would like to implement a new sales system. They have asked Talland LLP 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.
Requirement
Which one of the following sets of threats would arise from the above scenario?
A Advocacy and management
B Management and familiarity
C Management and self-review
D Advocacy and familiarity
LO 4k
24 Hammers LLP is a firm of chartered accountants. It has been invited to accept engagements by
various institutions as follows.
(1) Advisers to New Generation Insurance and Co, a small group of insurers seeking to buy out the
home insurance business of Insurance Plus, a major UK insurer. The partner in charge of the
advice team has made certain guarantees to New Generation Insurance and Co’s bank in respect
of one of the members of New Generation Insurance and Co, whom he knows personally.
Hammers LLP has been promised the audit of New Generation Insurance and Co if the buy out is
successful.
(2) A review of banking procedures at NatEast plc, a major high street bank. Hammers LLP has a
modest business loan from NatEast plc.
Requirement
Which, if any, of the above companies presents a major threat to the independence of Hammers LLP,
if the engagement were to be accepted?
A New Generation Insurance and Co and NatEast plc
B NatEast plc only
C New Generation Insurance and Co only
D Neither New Generation Insurance and Co nor NatEast plc
LO 4f/k

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25 The following are examples of situations in which Bouldry LLP, an audit firm, might need to
implement safeguards to protect its independence. Bouldry LLP 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, in accordance with Ethical Standards, or state that there are no safeguards that could
reduce the risk to an appropriate level.
Requirements
Bouldry LLP 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
Bouldry LLP has been asked to provide accounts preparation assistance.
C Accept with safeguards
Bouldry LLP has been asked to design and implement an IT system which will significantly impact on
the accounting system. Historically, Bouldry LLP has placed reliance on the accounting system as part
of the audit.
LO 4k/l
26 Brown LLP 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 for Alpha plc would represent 11% of the
firm’s gross fee income, and the fees for Beta Ltd would represent 12%.
Requirement
Assuming Brown LLP would like to take on as many clients as is permitted by ethical standards, which
one 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/k

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27 Helena LLP is an eight-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.
For each of the following potential clients, select on what basis the engagement could be accepted
or state that the engagement should not be accepted, in accordance with the FRC’s Ethical Standard.
Requirements
Titania plc, a listed company, will also require Helena LLP to prepare the financial statements.
A Do not accept
Puck Ltd, whose finance director is the brother of one of the partners at the assurance firm.
D Do not accept
LO 4k/l
28 Two different audit juniors have been asked to carry out the following tasks.
For each of the tasks you should select the action that the audit junior should take.
Requirements
An audit junior at Oberon LLP, 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
An audit junior at Lear LLP, 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 the ICAEW telephone helpline
LO 4g

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29 David, a recently qualified ICAEW Chartered Accountant, is the newly-appointed financial controller
of Hartpury Ltd. Hartpury Ltd is a relatively small company, which is likely to be taken over in the near
future.
As one of his first assignments, David has been asked to prepare the financial statements for the year
ended 31 December 20X6. David has now been called into the last part of a board meeting where
the directors have given him a profit target which must be met in those financial statements. They
have stressed that this profit target must be met, even if it means that accounting standards are not
followed.
Requirement
Which two of the following describe possible appropriate courses of action which David could
consider taking?
A Report his concerns to the audit committee
B Resign his post
C Report his concerns to the finance director
D Take legal advice
E Use Hartpury Ltd’s formal dispute resolution process to resolve the issue
LO 4f
30 The following are examples of situations in which an audit firm might be faced with a threat to its
independence.
For each example, select the main type of threat that situation illustrates.
Requirements
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 4k
31 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.
Requirement
Which one 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 4k

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32 Callinicos LLP is a 12-partner assurance firm which has been asked to consider taking on the audit of
the financial statements of two separate companies. The following potential issues have been
identified before acceptance of any such appointments.
For each of the following clients, select the basis on which the engagement could be accepted, if at
all.
Requirements
Luxemburg Ltd, which will also require Callinicos LLP to provide a valuation service in relation to
some immaterial financial assets
A Do not accept
Cliff plc, a listed company which will also require you to provide routine bookkeeping work
D Do not accept
LO 4k/l
33 You are a trainee in the audit department of Termite LLP. You have been working in the department
for 18 months and have experience of completing audit testing under supervision, but are yet to
work independently.
Several months ago, you had worked on the audit of Cioran Ltd. You have just received a call from
the audit manager, asking you to address a review point in relation to some accruals testing that you
did. The manager said that the audit report is to be signed tomorrow, and that you need to resolve
the point immediately. You are finding it difficult to understand what was wrong with your testing,
and do not know how to resolve the review point.
Requirement
Which of the following is the most appropriate course of action for you to take?
A Perform the work
C Contact ICAEW
You have also been assigned to the upcoming audit of Schopenhauer Ltd, in which you are to be
allocated the non-current assets section of the audit. You have not carried out this section of the
audit before, but you have covered it in his training.
Requirement
Which of the following is the most appropriate course of action for you to take?
D Perform the work
E Refer to training partner
F Contact ICAEW
LO 4g

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Chapter 16: Confidentiality

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 4h
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 4h
3 In which three of the following situations is it appropriate to disclose confidential information?

A When the client has granted permission
B In order to obtain audit evidence about an amount in the financial statements
C When there is a public duty to make disclosure
D When there is a legal duty to make disclosure
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 National Crime Agency
(NCA)
LO 4j
ICAEW 2022 16: Confidentiality 103

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5 Emma is faced with the following situations as part of her work.

For each situation, select the action Emma should take.
Requirements
As part of her routine assurance work on revenue at Dodgy Ltd, Emma discovers that the company
accepts cash payments for sales that are never recorded in the accounting records.
A Make no external report
B Report to the police
C Report to the firm’s money laundering nominated officer
As part of her routine payables testing at Risky Ltd, Emma discovers that controls are deficient and
some payments have been made to suppliers twice in error.
D Make no external report
E Report to the police
F Report to the firm’s money laundering nominated officer
LO 4j
6 For each of the following situations, select whether the assurance provider may disclose confidential
information or must disclose confidential information.
Requirements
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 4j
7 If an assurance provider suspects that money laundering is taking place, to which one of the
following should the details be reported in the first instance?
A The police
B The Department of Trade and Industry
C The board of directors
D The firm’s money laundering nominated officer
LO 4j

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8 In respect of conflicts of interest, select whether each of the following statements is true or false.
Requirements
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 4h/k
9 Which two of the following would be an appropriate use of confidential information?

A On a change of employment, using experience gained in a previous position
B Encouraging others to buy shares in a company on the basis of information obtained during the
course of the audit
C Providing a prospective auditor with information required by him in order for him to decide
whether or not to accept the appointment
D Using information obtained on the audit of one client to influence the audit opinion given in
respect of another client
LO 4h/j
10 In which one 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 auditor’s report to another client
C Where money laundering is suspected
D Where terrorism is suspected
LO 4h/j
11 During the course of an assurance engagement, a member of the assurance team from Endeavour
LLP discovers that the owner of the business regularly collects cash received from customers and
does not include any details relating to the transaction in the accounting records of the business.
Requirement
Which one of the following is the most appropriate action for him to take in respect of this matter?
A Discuss the matter with the client and advise him of the legal position
B Report the matter to the manager of the assurance engagement so that she can discuss it with
the client
C Obtain the client’s permission to report the matter to a designated officer within your firm
D Report the matter to a designated officer within your firm without the client’s permission
LO 4h/j

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12 Lilac Ltd is currently in a dispute with the tax authorities, and ask asked Lilly LLP to represent it. Lilly
LLP is concerned that doing so may breach its duty of confidentiality.
Requirement
Which of the following statements best reflects the auditor’s duty of confidentiality?
A Auditors must never, under any circumstances, disclose any matters of which they become aware
during the course of the audit to third parties, without the permission of the client.
B Auditors may disclose any matters in relation to criminal activities to the police or taxation
authorities, if requested to do so by the police or a tax inspector.
C Auditors may disclose matters to third parties without their client’s consent if it is in the public
interest, and they must do so if there is a statutory duty to do so.
D Auditors may only disclose matters to third parties without their client’s consent if the public
interest or national security is involved.
LO 4h/j
13 You are an audit manager in Leaf LLP, a large audit firm which specialises in the audit of insurance
companies. The firm currently audits Caterpillar Ltd, a car insurer, but Caterpillar’s main competitor,
Snail Ltd, has approached the audit firm to act as auditors. Caterpillar is concerned that if Leaf LLP
audits both companies then confidential information could pass across to Snail.
Requirement
Which two of the following actions should Leaf LLP take regarding the potential confidentiality issue?
A Inform the audit committees of both Caterpillar and Snail of the potential conflict of interest and
obtain their consent to act for both parties
B Use separate audit teams for each audit with a common independent review partner to
determine whether confidentiality has been maintained
C Draw up confidentiality agreements to be signed by the board of directors of Caterpillar and
Snail
D Prevent unauthorised physical access to the information relating to both company audits
LO 4h/l

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14 For each of the following statements about data protection, select whether the statement is true or
false.
Requirements
The UK GDPR obliges auditors to secure any data held on an audit client company
A True
B False
Upon returning home from working at an audit client’s site, you discover that you have misplaced a
memory stick that contained personal data on individuals working at the audit client. This is a breach
of the UK GDPR
C True
D False
The auditor has the primary responsibility for reporting any breaches of the UK GDPR by audit clients
to the Information Commissioner’s Office
E True
F False
LO 4h/i

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Answer Bank

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Chapter 1: Concept of and need for assurance

1 Correct answer(s):
A A user
B A subject matter
C Suitable criteria
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.)
A Users do not understand the meaning of the audit opinion
B Users are not aware of the limitations of the audit process
D Users do not understand what the audit process involves
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.
B Sampling is used in assurance work
C Client systems have inherent limitations
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.
C Responsible party
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.
Correct answer(s):
E Practitioner
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.
B Sufficient appropriate evidence and a positively worded opinion
Sufficient appropriate audit evidence is gathered and a positively worded opinion issued in a
reasonable assurance engagement. A lower level of evidence coupled with a negatively worded
opinion applies to a limited assurance engagement.
A True

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The statutory audit provides reasonable assurance through a positively worded assurance conclusion
whereas in a non-statutory assurance engagement such as a review engagement, limited assurance
is provided with the issue of the negatively worded assurance conclusion. This can be seen in the
wording of the two conclusions. The positively worded assurance conclusion includes wording ‘the
financial statements give a true and fair view’, whereas the negatively worded assurance conclusion
includes the wording ‘nothing has come to our attention’, emphasising the limited nature of the
assignment.
Correct answer(s):
C True
A negatively worded assurance conclusion includes the wording ‘nothing has come to our attention’,
which emphasises the limited nature of the assignment.
Correct answer(s):
F False
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.
A Blue plc’s corporate governance policies
The subject matter under examination are the company’s corporate governance policies.
Correct answer(s):
D The UK Corporate Governance Code
These policies are to be assessed against the UK Corporate Governance Code, which is the suitable
criteria.
Correct answer(s):
F The directors of Blue plc
The responsible party is Blue plc, the party commissioning the report, who has the responsibility to
apply the UK Corporate Governance Code. Jones LLP is the practitioner, responsible for gathering
the appropriate evidence and issuing an appropriate opinion
A True
The Companies Act 2006 states that a statutory auditor must be a member of a recognised
supervisory body.
Correct answer(s):
C True
The Companies Act 2006 states that an officer or employee of the client is ineligible as auditor.
B an assurance firm’s satisfaction as to the reliability of an assertion being made by one party for
the use of another party
Assurance refers to an assurance firm’s satisfaction as to the reliability of an assertion being made by
one party for the use of another party. This assurance is then expressed in an assurance report with a
negative or positive conclusion given as appropriate to that particular engagement. SAMPLE EXAM
A enhances the credibility of the information being reported on
B reduces the risk of management bias in the information being reported on

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D draws the attention of the user to deficiencies in the information being reported on
An assurance report does not ‘attest(s) to the correctness of the information being reported upon’.
Even a reasonable assurance engagement (which gives more assurance than a limited assurance
engagement) does not provide a guarantee that the information being reported on is correct.
Assurance can never be absolute as this statement implies. SAMPLE EXAM
A Responsible party
It is the responsible party that prepares the subject matter and the practitioner who is responsible for
gathering evidence. The user is the party who receives the final report. SAMPLE EXAM
Correct answer(s):
E Practitioner
It is the responsible party that prepares the subject matter and the practitioner who is responsible for
gathering evidence. The user is the party who receives the final report. SAMPLE EXAM
D Limited level of assurance expressed negatively
There are two types of conclusion which can be given: a conclusion expressed in positive terms and
a conclusion expressed in negative terms. A conclusion expressed in negative terms is indicated by
the phrase ‘nothing has come to our attention’ which indicates the restricted work carried out and
hence the fact that the assurance is limited, as opposed to reasonable. Hence this type of assurance
is limited level of assurance expressed negatively. SAMPLE EXAM
A The auditor’s report certifies the financial statements as correct
B The auditor’s principal duty is to detect fraud
D The auditor checks all transactions
The expectation gap is the gap between what users of financial statements believe the auditor does
and what the auditor actually does. The following three are common manifestations of the
expectation gap:
• The auditor’s report certifies the financial statements as correct
• The auditor’s principal duty is to detect fraud
• The auditor checks all transactions
The belief that the auditor is employed by the directors is a common misconception but not a
manifestation of the expectation gap. (The company employs the auditor, who is appointed by the
shareholders in a general meeting.) SAMPLE EXAM
B Reasonable
A statutory audit provides reasonable assurance, which reflects the comprehensiveness of the audit
procedures carried out. No assurance engagement, not even a statutory audit, can give absolute
assurance. SAMPLE EXAM
Correct answer(s):
D Limited
A review of financial information gives limited assurance, which is a lower level of assurance than a
statutory audit. Its conclusion would be worded negatively. SAMPLE EXAM
Correct answer(s):
F Limited

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A report on profit and cash flow forecasts gives limited assurance. Forecasts are by nature about
uncertain future events, and so cannot be made with enough certainty to give a ‘reasonable’ level of
assurance. SAMPLE EXAM
B No
Small Ltd meets the requirements of a small company in relation to turnover and total assets (it has
no more than £5.1 million total assets), which is the two out of three required for the company to be
exempted from having an audit even though it has more than 50 employees.
Correct answer(s):
C Yes
Tiny Ltd does not meet any of the requirements to be a small company, and must have an audit.
Correct answer(s):
F No
Little Ltd meets all three of the requirements, and is therefore exempted from having an audit.

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Chapter 2: Process of assurance: obtaining

an engagement
A Ensure they are professionally qualified to act
B Ensure they have adequate existing resources to carry out the audit
The answer is not to obtain references, as it will not be necessary to obtain references when the entity
is already known to the firm. Furthermore, it will not be necessary to contact previous auditors in the
case of a company’s first audit.
A Poor recent performance
C Unusual transactions
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.
A High risk
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.
Correct answer(s):
C High risk
Dhalia Ltd is 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.
There is also a risk of misstatement if the financial statements do not properly reflect any going
concern problems which the company may have.
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
The engagement letter does not contain any certification of the assurance provider’s opinion. An
engagement letter does serve the other purposes listed.
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
D Submit a letter of engagement to the directors
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 (UK) 210, Agreeing the Terms of Audit
Engagements.

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B False
Correct answer(s):
C True
Correct answer(s):
F False
Correct answer(s):
G True
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.
A For a minimum of five years and until five years have elapsed since the relationship with the
client has ceased
The Money Laundering Regulations state that client identification documents must be kept for a
minimum of five years and until five years since the relationship elapses.
A The responsibilities of the auditor
C The form of any reports
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.
A Setting out the form of any report to be issued
C Documenting and confirming acceptance of the appointment
D Narrowing the expectations gap
The following are not purposes of an engagement letter:
• Providing constructive suggestions to management concerning improvements to internal control
• Providing evidence on matters where other evidence is not expected to exist (eg, on
management plans for the future of the entity) – this is the purpose of a written representation
SAMPLE EXAM
C apply a questioning mind to the information and evidence he obtains
Apply a questioning mind to the information and evidence he obtains would indicate professional
scepticism. The alternative options offered are all a step too far. SAMPLE EXAM
A The scope of the audit
B The reporting framework that is applicable for the financial statements being prepared

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Verifying the client’s identity would be performed before the engagement letter is prepared and
signed.
The Companies Act 2006 does not stop auditors from making agreements with clients to restrict their
liability, so it would be incorrect to state this is in the engagement letter.

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Chapter 3: Process of assurance: planning

the assignment
B To ensure appropriate attention is devoted to the important areas of the audit
C To identify potential problems and resolve them on a timely basis
D To assign work to members of the audit team
To determine the scope of the engagement should have been done in the engagement letter and is
therefore not an objective of audit planning.
A Inquiries of management and other appropriate individuals within the entity
C Analytical procedures
D Observation and inspection
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.
A Consideration of comparable information for prior periods
B Consideration of relationships between elements of financial information that are expected to
conform to a predicted pattern
D Consideration of similar industry information
The answer is not consideration of whether a balance has been correctly calculated, as this will
require a procedure of recalculation as opposed to an analytical procedure.
B How many items to examine
C Whether to use sampling
D What level of misstatement is likely to lead to the auditor not being able to give an unmodified
opinion
What audit staff to assign to the audit would depend more on the risks associated with the
engagement than the level of materiality.
A Details of economic factors and industry conditions
B The results of initial analytical procedures
D Identification of specific audit risks
Confirmation of management’s responsibility for the financial statements is incorrect as confirmation
of management’s responsibility for the financial statements is contained in the letter of engagement.
Correct answer(s):

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Correct answer(s):
A profit-related scheme means that directors have the incentive to overstate profit and hence the
financial statements 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.
A True
This is true, as the concept of materiality does not exist in a void, but depends on the context of the
omission or misstatement.
Correct answer(s):
C True
This is true, 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).
Correct answer(s):
F False
This is false, as materiality is not a fixed percentage 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.
A Inherent
This scenario increases the susceptibility of the financial statements to material fraud and error, and
the fact the organisation is seeking to raise finance for a new venture represents a risk at the
company level.
Correct answer(s):
D Inherent
This scenario increases the susceptibility of the financial statements to material fraud and error, the
estimates present a risk at the individual account level where those estimates are found.
B Control
High staff turnover increases the risk that the internal controls in place will not be effective.
Correct answer(s):
F Detection
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.
A Industry, regulatory and other external factors
B How inherent risk factors make assertions susceptible to misstatement

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The results of test of details, and of a review of events after the date of the financial statements, are
incorrect as tests of details and review of events after the date of the financial statements are
normally performed after the initial planning stage of the audit.
A True
This is true, as materiality needs to be calculated at the audit planning stage to provide a guide as to
the extent of audit procedures required.
Correct answer(s):
D False
This is false, as materiality can be revised during the course of the audit, as the assessment of audit
risk changes.
Correct answer(s):
E True
The materiality level set will have an impact on the audit opinion as the existence of material
uncorrected errors and misstatements will lead to a modified audit opinion.
B Control
The existence of management override increases control risk as controls may be ignored leading to
an increased risk of material fraud or error.
Correct answer(s):
D Inherent
Profit related pay may motivate the directors to distort the financial information, so constituting an
inherent risk.
B A significant number of balances are based on estimates
C The financial statements include complex transactions
E The company is seeking to raise finance
Two options here are incorrect: sample sizes and inexperienced audit staff will affect detection risk,
not inherent risk.
B Lower
Correct answer(s):
C Bigger
If detection risk is required to be low this means that the auditor must have a higher expectation of
identifying errors and misstatements. Materiality is lower as the financial statements are more
sensitive and sample sizes are increased so that more work is performed.
Substantive procedures only – a new client with few employees implies a lack of segregation of
duties and hence high control risk. Therefore, reliance should not be placed on the system of internal
control. Audit evidence should be gathered using substantive procedures.

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Correct answer(s):
F A mix of tests of control and substantive procedures
A mix of tests of control and substantive procedures may be used for the audit of a long-standing
client with a sophisticated IT system and an internal audit department as it will be possible to rely on
internal controls and then perform reduced substantive procedures. Note that some substantive
procedures must always be performed due to the inherent limitations of any system of internal
control.
B Increased competition resulted in sales prices being cut
D There was a significant change in the mix of products sold
If sales prices are cut but costs remain the same gross profit margins will fall. If the company sells a
greater proportion of goods with a lower margin than in previous years the overall margin will be
reduced. Increased levels of sales (and therefore lower closing inventory) will not affect gross profit
margins provided selling prices are maintained. Interest expense is not deducted in arriving at gross
profit, therefore it can have no effect on gross profit margins.
With a recent listing on the stock exchange and high profit expectations, inherent risk is higher than
normal as the financial statements are more susceptible to material fraud and error.
Correct answer(s):
Inventory is by its nature more inherently risky as it is susceptible to theft, omission and misstatement.
Correct answer(s):
The fact that the company operates in a slow-moving, stable industry, decreases the susceptibility of
the financial statements to material fraud and error.
B False
Materiality can be both quantitative and qualitative. SAMPLE EXAM
Correct answer(s):
C True
Materiality may depend on either the nature of an item or its monetary amount. SAMPLE EXAM
Correct answer(s):
E True
Materiality is determined by the external auditor and he will use his professional judgement in
setting a level of materiality which best addresses the audit risk. SAMPLE EXAM
B Control
Few employees indicates limited segregation of duties, which is a control deficiency. SAMPLE EXAM
Correct answer(s):
D Inherent

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A fast-moving, high-tech environment presents inherent risks both at the company level but also at
individual account levels (eg, inventory). SAMPLE EXAM
B The auditor must identify and assess the risks of material misstatement due to fraud.
C The auditor must obtain evidence regarding the risks of material misstatement due to fraud.
Although deterrence of fraud may be a consequence of the audit, the auditor does not perform the
audit with this aim. Their aim is to obtain evidence regarding the truth and fairness of the financial
statements.
The auditor is responsible for assessing the risks of material misstatement, which includes the risk of
misstatements resulting from fraud, and for obtaining evidence in relation to this risk.
C The entity has purchased a property for cash
If the entity has purchased a property for cash, this would reduce current assets without any
corresponding reduction in current liabilities.
B The cake shop has a higher level of wastage of inventory than the electrical store.
If the cake shop has a higher level of wastage of inventory than the electrical shop, then the cost of
wasted inventory will be treated as an expense in cost of sales. This will reduce its cost of sales
independently of the mark-up applied. Cost of sales will therefore be high in relation to revenue, so
the cake shop’s gross margin will be lower.
B Thatch made an unusually large sale immediately before the year end
D Thatch paid its payables earlier than usual out of a positive cash balance
An unusually large sale would increase receivables and the current ratio.
If payables are paid out of a positive cash balance then this will reduce both cash (assets) and
payables by the same absolute amount. However, since the current ratio is positive (assets are
greater than liabilities), the ratio will increase.
C To examine and express an opinion on the company’s financial statements
It is management’s responsibility to prevent fraud within a company. There are auditor independence
issues with regard to external auditors being involved in the preparation of financial statements and
in helping management to improve reporting processes. It should therefore be apparent that the
correct option is to examine and express an opinion on the company’s financial statements.
B Fraud is an intentional act whereas error is unintentional
It is true that fraud may result in a material misstatement, but this is also true of error so it is incorrect
to say that the difference is that fraud may result in material misstatements. It is also true that a
misstatement can be material whether it is caused by fraud or by error, but this does not help us to
distinguish between them. Fraud is an intentional act, and is not merely the result of negligence.
Fraud is an intentional act but error is not.

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C Related party transactions must be completely disclosed in the financial statements
D There may be a significant control risk in relation to related party transactions
Related party transactions tend to be a high-risk area, not a low-risk area. Misstatements of disclosure
may well be material, especially if they relate to eg, directors’ remuneration, so it is wrong to say that
they are unlikely to be material. Related party transactions are material by nature. It is correct to say
that disclosure of related party transactions should be complete. It is also correct to say there may be
a significant control risk in relation to these transactions, because it is commonly the case that
management has not put in place reliable internal controls to identify related party transactions.
B False
Correct answer(s):
C True
The prevention of fraud is the responsibility of management, not the auditor. However, the auditor is
responsible for obtaining evidence to address the risks of material misstatement, which it failed to do
in relation to payroll.

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Chapter 4: Process of assurance: evidence

and reporting
B Test of control
C Test of detail
D Analytical procedure
A walk-through procedure does not provide evidence relating to a specific balance on the financial
statements, but is used instead to ensure that the systems operate as the assurance provider believes
that they do.
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.
Evidence from internal sources is not more reliable than evidence created by the assurance provider
(in fact, the reverse is true). The statement that photocopies are more reliable than facsimiles is not
true as the assurance provider should exercise professional caution with both.
A Occurrence
C Completeness
D Cut-off
Existence and rights and obligations would be used in respect of an account balance at the period
end, not a class of transactions.
A Positive (reasonable) assurance will be given on a statutory audit assignment.
B Positive (reasonable) assurance requires more rigorous work to be undertaken than negative
assurance does.
D Negative assurance is assurance given in the absence of any indications to the contrary.
Positive (or reasonable) assurance will be given on an audit assignment, whereas negative (or limited)
assurance is given on a review assignment, reflecting the limited procedures carried out.
A Users blaming the auditors for a fraud discovered in a company subsequent to an audit
D Users relying on the audited financial statements as a fair valuation of the company
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.

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B Reasonable
The statutory audit that provides reasonable assurance. No engagement can provide absolute
assurance.
Correct answer(s):
F Limited
A report on prospective financial information is forward looking and so can only provide limited
assurance. No engagement can provide absolute assurance.
Correct answer(s):
I Limited
A report on the review of interim financial information is usually limited to procedures such as
analytical procedures (and enquiry of management), and so provides limited assurance. No
engagement can provide absolute assurance.
A substantive approach is required, as where the controls have been assessed as deficient, this
means that reliance cannot be put on these controls.
Correct answer(s):
F A mix of tests of controls and substantive procedures
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 reduced substantive procedures.
C Classification
The Companies Act checklist ensures that all classification issues are addressed.
Correct answer(s):
E Completeness
Tracing non-current assets observed back to the non-current asset register ensures that this balance
is recorded completely.
A Existence
D Completeness
Cut-off is incorrect, because it relates to classes of transactions (ISA (UK) 315: para. A190).
A True
This is true, 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.
Correct answer(s):
D False

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This is false, as while results from tests of controls may affect the extent of substantive procedures
they will not eliminate the need for them completely.
Correct answer(s):
E True
A Test of control
Observing the opening of the post is a test of control as it is the observation of a control taking place.
Correct answer(s):
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).
Correct answer(s):
E Test of control
Reviewing for authorisation is also testing that a control has been applied.
A Test of control
Observing inventory counting is a test of control as it is the observation of a control taking place (ie,
the year-end inventory count).
Correct answer(s):
Calculation of the quick ratio and comparison with that of the previous accounting period is an
analytical procedure (which is, in turn, a substantive procedure).
Correct answer(s):
E Test of control
Inquiring into the systems used to process purchases is a test of control.
A Areas of high audit risk
C Areas of significant auditor judgement
Key audit matters are the matters that are of most significance to the audit.
The auditor does not express a separate opinion on any of the key audit matters, rather; the auditor
expresses a single opinion on the financial statements as a whole, and then communicates the key
audit matters that relate to that opinion.
A Potential shareholders using the statement of financial position as a fair valuation of the entity
D Users believing that the amounts in the financial statements are stated precisely
The statement of financial position is based on a mixture of fair values and amounts stated at
historical cost; this would not usually represent a suitable basis for valuing a business.
The amounts in the financial statements are not stated precisely – rather, they are prepared using the
concept of materiality.
It is standard practice for the audit firm to be paid by the audited entity. Ethical standards do not
consider this to impair the auditor’s independence.

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Auditors are allowed to sell other services to the audited entity, provided that this does not create an
unacceptable threat to the auditor’s independence.
B Identification of the criteria
D Title
A statement of directors’ responsibilities and an auditor’s opinion are included within an auditor’s
report, not an assurance report.
B By exception
Whether the financial statements are in agreement with the accounting records and returns is
reported only by exception (an implied opinion only).
Correct answer(s):
C Explicit
Whether the financial statements give a true and fair view of the state of the company’s affairs at the
end of the financial year is an explicit opinion, relating to the statement of financial position.
Correct answer(s):
F By exception
Whether details of directors’ emoluments and other benefits have been correctly disclosed in the
financial statements is reported only by exception (an implied opinion only).
A True
The statutory audit is an assurance engagement that is required by statute (ie, by law), in which the
auditor is required to report on whether the financial statements give a true and fair view. This is a
reasonable level of assurance – not absolute, but more than limited.
Correct answer(s):
C True
The ‘responsible party’ is the party which prepared the information (eg, the financial records) on
which the report is made. An assurance report is made for someone other than the party which
prepared the information – a third party. This cannot be the responsible party.

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Chapter 5: Introduction to internal control

B Information system and communication
Correct answer(s):
F Control activities
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.
B Control risk is lower than normal
Correct answer(s):
D Control risk is lower than normal
Correct answer(s):
E Control risk is higher than normal
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
reviewing performance, monitoring and investigating deviations from expected performance.
Control risk is higher than normal where purchase invoices are not authorised (control deficiency).
B Listed companies are required to have an audit committee
C Audit committees are considered to be good practice for all large companies
E Audit committees are an important aspect of a company’s control environment
The first option is incorrect as all members of an audit committee must be non-executive directors.
The fourth option therefore is also incorrect. The chief internal auditor does not sit on the audit
committee, but should ideally report directly to this committee.
A The attitude of the directors to internal controls
C The awareness of internal control issues in the company
D The actions of senior management in relation to internal controls
The second option 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.
E Report the process to the auditors
Reporting the process to the auditors is part of the external audit process and not part of the internal
risk assessment process.

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B False
Correct answer(s):
C True
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.
C Physical or logical control
Correct answer(s):
F Physical or logical control
Both are physical controls which are categorised under the control type of physical or logical
controls.
B Reconciliations
Comparing balances from petty cash counts to accounting records is a reconciliation, because it
involves the comparison of two data elements.
Correct answer(s):
F Segregation of duties
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).
A General IT
Storing extra copies of programs and data files off-site is a general control as it supports the effective
functioning of information processing controls
Correct answer(s):
Checking data fields on input transactions relate specifically to the processing of individual IT
applications, and are not part of the IT environment
Correct answer(s):
Manual checks to ensure that input data were authorised relate specifically to the processing of
individual IT applications, not the IT environment as a whole
B Narrative notes
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.
A The company’s procedures manual
B The internal audit function’s system notes

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D Inquiries made of company staff

The third option is not correct as while the prior year audit file will be useful, the system may have
changed in the intervening period. Furthermore, the company’s website is very unlikely to contain
details on the system of internal control. SAMPLE EXAM
D Cyclical reviews of all master files
Cyclical reviews of the master files are an information processing control. The remainder of the
options available are general controls.
B Lack of understanding of the purposes of controls
D The possibility that staff members will collude in fraud
A A bank reconciliation signed by the finance director
B A cheque payment run approved by the finance director
Appraising the sales ledger constitutes a verification control and compiling the trial balance is a
reconciliation control activities.
B False
Small companies are less likely to be successful in the implementation of segregation of duties
controls due to the limited number of employees available to segregate specific tasks within the
various cycles.
Correct answer(s):
C True
Given the limited number of staff in small companies and the dominance of management, controls
are more likely to be overridden in smaller companies than larger ones.
Training programme for all staff is part of the control environment.
Correct answer(s):
Review of actual performance versus budget is a control activity.
A True
Correct answer(s):
C True
Correct answer(s):
F False
Internal controls should be applied equally to all transactions, whether material or not.

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Correct answer(s):
G True
A True
Correct answer(s):
D False
Business risk is of relevance to the auditor as business risks may impact on the financial statements.
Correct answer(s):
E True
Management is responsible for identifying and controlling business risks although the auditor will
assess business risk as part of the audit.
B Authorisation and approval
This is an example of an authorisation and approval control. A verification control would compare
two or more items with each other or compare an item with a policy, and will likely involve a follow-
up action when the two items do not match or the item is not consistent with policy.
Correct answer(s):
Having separate clerks recording purchase invoices and posting cash payments in the payables
ledger reduces the risk of fraud and error (so this is therefore a segregation of duties control).
A General IT
Correct answer(s):
Correct answer(s):
Password protection constitutes a general IT control. The remaining controls are information
processing controls.
A Disaster recovery procedures
B Back-up copies of programs stored at an alternative safe location
D Staff training in the use of new/revised programs
Procedures for resubmission of rejected data are an information processing control.
B Flowcharts
Narrative notes are more suitable for smaller businesses. Questionnaires do not show relationships
and reporting lines as clearly. Although the organisational chart would show the structure of the
organisation and general reporting lines, it would not document the system in operation.

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A minimising business risks
E complying with laws and regulations
Minimising business risks and complying with laws and regulations are the primary reasons why
organisations need effective systems of internal control. The others may result from that effective
system of internal control. SAMPLE EXAM
A Authorisation of transactions
C Custody or handling of assets
E Recording of transactions
Authorisation of transactions, custody or handling of assets and recording of transactions are the
three functions which should ideally be separated such that no-one person can initiate the
transaction, record that transaction in the accounting records and have custody of assets which arise
from that transaction. For fraud to take place, with such segregation of duties, there would have to be
significant collusion. Preparing financial statements is a function which follows from the recording of
transactions and effective budgetary control can only take place once there is confidence on the
integrity of data coming from effective systems of internal control. SAMPLE EXAM
B Non-executive directors only
An audit committee is made up of non-executive directors only. SAMPLE EXAM
Correct answer(s):
The entity’s organisational structure is part of the entity’s control environment. The entity’s process to
monitor the system of internal control involves a review of the effectiveness of controls and whether
they need improving – hence a review by management of monthly bank reconciliations is part of that
monitoring process. SAMPLE EXAM
Authorisation showing that the accountant has reviewed the reconciliation.
Correct answer(s):
D Verification
This is a verification because it involves comparing an item with what ISA (UK) 315 refers to as a
‘policy’ (in this example, the budget), and is likely to involve a follow-up action if the expenditure is
not consistent with the budget. SAMPLE EXAM
C Authorisation of data for input
Information processing controls apply to the processing of information in IT applications (eg, sales,
purchases, inventory), hence authorisation of data for input (say of purchase orders) is the
information processing control. The remaining options are general IT controls, which relate to many
applications and support the operation of the whole IT environment. SAMPLE EXAM

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B User selection of passwords
E Displaying the password on screen
User selection of passwords and displaying the password on screen would reduce password
effectiveness. The existence of frequent changes of passwords, automatic disconnection after failed
attempts and disciplinary offences if passwords are revealed would all increase password
effectiveness. SAMPLE EXAM
The internal audit function monitors internal controls that are already in operation.
Correct answer(s):
The audit committee is part of the control environment as it contributes to the status of internal
controls within an organisation.
A Human error
For the preparation of reconciliations where calculations are involved, the inherent limitation is that
these reconciliations are susceptible to human error.
Correct answer(s):
D Collusion
Even where duties are segregated, this control can be overridden by the collusion of the parties
involved.
A True
The external auditor is appointed by shareholders, but the audit committee makes recommendations
in relation to this.
Correct answer(s):
C True
The audit committee reviews the integrity of the financial statements of the company and formal
announcements relating to the company’s performance.
A Document counts
D Programmed matching of input to an expected input control file
All options are examples of information processing controls. Document counts ensure that the
expected number of documents is submitted, and hence that the documents are complete.
A manual check to ensure input was by authorised personnel is a control over input authorisation,
not completeness.
A screen warning to prevent logout before processing is complete is a control over input processing.
A programmed matching of input to an expected input control file is a control over input
completeness (this is similar in principle to a document count).

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A Preventive
Segregation of duties is a preventive control here because its aim is to prevent unauthorised
purchases from being made.
Correct answer(s):
D Detective
Reconciliation of the payables ledger with supplier statements aims to detect any misstatements that
have already been made – it is therefore a detective control.
Correct answer(s):
E Preventive
Restricting users to read-only access of key folders on internal network aims to prevent unauthorised
changes being made to the files in these folders.
A General IT
Approval of applications by a sample of users and by management is a general IT control related to
the development of computer applications.
Correct answer(s):
C General IT
Virus checks on software on employees’ computers is a general IT control.
Correct answer(s):
A check that all data entered in a field contains the correct number of digits is an Information
processing control, since it relates to the processing of data in a particular field in a particular
application.

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Chapter 6: Revenue system

B Goods may be despatched but not invoiced
D Money might be received at the premises but not banked
The third option 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.
A Authorisation of credit terms to customers
D Checking the ageing of the current receivables ledger balance before to accepting orders
Authorisations of credit terms to customers and checking the ageing of current receivables ledger
balance before accepting orders in order to assess the creditworthiness and history of payments.
Options two and three are not correct as they are procedures that take place after the customer has
made the purchase.
A Strength
Correct answer(s):
D Deficiency
This is a deficiency 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).
Correct answer(s):
F Deficiency
This is a deficiency as reception staff are unconnected with any of the departments with whom
customers might have a query – ordering, warehouse or accounts.
A True
Correct answer(s):
C True
The duties of authorisation, recording and custody of assets should be segregated
C Debts might be included on the receivables ledger that are not collectable
If overdue accounts are not followed up, debts might be included on the receivables ledger that are
not collectable.
Correct answer(s):
D Invoiced sales might not be properly recorded
Where invoices are not in numerical sequence, invoiced sales might not be properly recorded.

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D Sales might be recorded in the wrong customer accounts
If credit notes are valid then the related invoice is cancelled. Goods received are part of the
purchases system. As such, options two and three are not risks associated with the sales system.
C Matching of despatch records with sales invoices
Despatch records are evidence of goods delivered. If there are sales invoices for each of these all
sales will be invoiced. Options one and two are incorrect as they relate to the completeness of sales
orders and ensure that all orders are subsequently despatched respectively. The fourth option is also
incorrect as requiring customers to sign for goods confirms delivery only.
B Invoices may not be raised for all goods despatched
If despatch records are not pre-numbered they may be lost and therefore no invoice raised.
Correct answer(s):
F Customers may not pay promptly
If customers do not evidence receipt of goods disputes may arise leading to slow payment.
A Sales are only made to credit worthy customers
D Orders can be fulfilled
Correct invoicing is an objective of the invoicing stage of the sales system. Cut-off affects the
recording stage of the sales cycle.
A Strength
Orders placed by telephone, once credit checked, are entered into the system is a strength as it
ensures the prompt recording of an order. Also, the customer is checked for creditworthiness before
the order being generated – indicating that the company is protecting itself from loss. SAMPLE EXAM
Correct answer(s):
D Deficiency
The order should only be accepted once it has been confirmed that the goods ordered are available.
The invoice should be generated once it is confirmed that the goods have reached the customer (as
evidenced by the customer signing the despatch record). SAMPLE EXAM
Correct answer(s):
E Strength
A copy of any despatch records with incomplete orders filed and reviewed daily will ensure that
orders are filled at a later date. SAMPLE EXAM
A Credit notes are only issued for valid reasons.
Statement B is a control activity, not a control objective. Statement C is a test of controls, not a control
objective. Statement D is a control objective relating to the purchases system, not the sales system.

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C The use of a pre-numbered goods despatched record for every sales transaction and internal
A sale should be recognised as soon as goods have been safely despatched to a customer and every
despatch should be accompanied with a goods despatched record. Consequently, to obtain
assurance about the completeness of sales, the auditor needs to be confident that all despatch
records have been recorded in the accounting system (option C). Checking that all sales invoices
have been processed merely confirms that ‘all sales invoices have been processed’ (option B) and
similarly the existence of authorisation controls merely provides assurance as to whether transactions
have been authorised (option D). The existence of segregation of duty controls (option A) does not in
itself provide assurance as to completeness of recording of sales transactions.
C Goods despatch records
Revenue is usually recognised when goods have been despatched to the customer as this is the
point at which control transfers to the customer. In order to test for completeness of sales, auditors
should therefore start from the goods despatched records.
A Credit notes are only issued for valid reasons
Credit notes are only issued for valid reasons – this is a control objective relating to the revenue
system which will ensure that credit notes are not issued without appropriate reasons.
Checking sales invoices to despatch records is a control, not an objective.
Scrutinising customer accounts is a control, not an objective.
Orders are made only from authorised suppliers – this is a control objective relating to the purchases
system.
C The use of a pre-numbered goods despatched note for every sales transaction and internal
Only the third option provides evidence of sales completeness.
Segregation of duties does not principally provide assurance of sales completeness.
Issuing pre-numbered sales invoices just confirms that all the invoices have been processed through
the invoicing system – this does not mean that the invoices tie in with goods actually despatched.
Authorisation controls provide assurance only that the transactions have been authorised, and do not
help with the completeness assertion.
A Sales are included in the wrong customer accounts
D Credit notes might not be properly recorded
If sales are included in the wrong customer accounts, or credit notes are not properly recorded, then
this comes as a result of an error in recording.
Goods being recorded incorrectly is, logically, not a risk associated with recording. It might result
from deficiencies with sales ordering, for example.
Goods being despatched but not invoiced for would be more likely to result from an error in
despatching and invoicing than from recording.

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Chapter 7: Purchases system

C Verifications
Correct answer(s):
F Physical or logical
Analysis of actual performance against budget is verification (since it involves the comparison of an
item with a policy). Checking numerical sequences is a logical control to do with the completeness of
records.
A Accepting inferior quality goods
The second option is incorrect as does not relate to the goods inwards stage of the purchase system.
The third option is also incorrect as the question refers to goods and not services.
Correct answer(s):
E False invoices could be paid
The checking of invoices to orders will reduce the risk of accepting invoices for goods or services
which were not ordered.
B Deficiency
There is no authorisation of payment orders SAMPLE EXAM
Correct answer(s):
C Strength
Company only recognises liability for services received SAMPLE EXAM
Correct answer(s):
E Strength
Payments authorised. SAMPLE EXAM
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
The answer is not option C as inappropriate orders could still be made with authorised suppliers. The
answer is not option D as once inappropriate orders have been authorised, matching the order with
the invoice will not prevent that act having taken place. SAMPLE EXAM
C 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 the purchasing
director.
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.

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A Matching of purchase invoices with goods received records
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.
Correct answer(s):
D Physical controls
Purchases not being made from the approved list is an error of authorisation and approval. Physical
security measures should reduce risk of theft.
B Purchase of inferior goods
Purchase of goods from unauthorised suppliers is likely to lead to inferior goods being purchased.
Correct answer(s):
D Payment to fictitious suppliers
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.
A All orders are authorised by a senior staff member
B Blank order forms are kept in a secure location with restricted access
D Order forms are sequentially pre-numbered
The third statement is not a control activity, it is a control objective relating to the purchases system.
The others are all control activities.
B Deficiency
Although a record of orders is kept, there is a lack of segregation of duties as the buyer both places
and authorises the order. A director should authorise purchases (particularly those above a certain
cost limit) rather than the buyer.
Correct answer(s):
D Deficiency
The buyer only checks the goods received to ensure that the quantities are the same as was ordered.
Correct answer(s):
F Deficiency
The buyer appears to have complete control over what is purchased by Woggle Ltd. There does not
appear to be any kind of purchase limit placed upon him, or any reference made to the sales
department for what they want to sell. There is a risk that the buyer could purchase items for personal
use.

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The risk of not taking full advantage of a period of credit would be a consequence of problems with
goods received or payments.
Correct answer(s):
C Goods may be misappropriated for private use
The risk of goods and services not being obtained on the most advantageous terms would be more
likely to arise at the ordering stage.
Correct answer(s):
F Invoices are paid at the wrong time
The risk of invoices not being recorded would arise at the goods received/invoicing stage, before
the production of a payment listing.
Comparing goods received records with purchase orders is mainly a check on whether the
purchases have been authorised and are bona fide purchases.
Correct answer(s):
D Goods and services may not be obtained on the most advantageous terms
Monitoring supplier terms helps ensure that the terms obtained are the most advantageous ones
available.
Correct answer(s):
E Goods and services received may not be accurately recorded
Although it is true that pre-numbered goods received records would help to ensure that liabilities are
recorded correctly, this is only as a consequence of the goods or services first having been recorded
accurately.
B Deficiency
Blank order forms should not be readily available, but should be secured; if they were readily
available then anyone with access to them could place an order.
Correct answer(s):
D Deficiency
Instead of allowing buyers a free choice of suppliers, there should be a central policy for the choice
of suppliers so that only authorised suppliers are used. Such suppliers should have been vetted to
verify that they give the best value for money.
Correct answer(s):
E Strength
Preparing order forms only when a pre-numbered purchase requisition has been received is a
strength, as goods will only be ordered once the need for such goods has been approved.
A A purchase ledger clerk checks all supplier invoices against the order and the goods received
record
D All purchase order forms are sequentially pre-numbered
The remaining options describe control objectives rather than control activities.

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Chapter 8: Employee costs

B Temporary staff should complete work schedules, authorised by their supervisor.
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.
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
D BACS transfer lists should be authorised by the head of personnel
The third option is not correct as it does not relate directly to the employees’ payments but to their
tax deductions.
B False
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.
Correct answer(s):
C True
Correct answer(s):
E True
A Employees may be paid the wrong amounts
Correct answer(s):
C Employees may be paid the wrong amounts
Both cases lead to the possibility that employees are paid the wrong amounts.
A Strength
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.
Correct answer(s):
C Strength
Correct answer(s):
E Strength
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

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The first two options 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.
B The payroll clerk can amend standing data on the payroll system without authorisation of a
senior member of staff
C Personnel records are not kept up to date
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. The first and fourth options would not lead to
misstatement in the financial statements.
A True
Correct answer(s):
C True
Correct answer(s):
F False
Whilst the risk of errors is 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.
B Use of hierarchical passwords over standing data files
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. SAMPLE EXAM
B Access controls
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. SAMPLE
EXAM

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The deficiency arises when calculating wages and salaries: a failure to check wages to the personnel
file could result in an employee who has left (which would be recorded on the file) being included on
the payroll. The recording of pay in the general ledger would not be directly affected by this.
Correct answer(s):
D The various elements of pay might not be calculated correctly
The deficiency arises when calculating pay (ie, ensuring that the amounts on the payroll reflect the
amount recorded on the timesheets), so would not directly affect the general ledger.
Correct answer(s):
E Payments might be made incorrectly
The deficiency arises after the calculation of the payroll, so although it might expose errors in that
calculation it is more likely to expose errors in the amount paid/general ledger.
B False
The payroll master file would not contain details of cumulative statutory deductions to date – these
would be included on the monthly payroll instead.
Correct answer(s):
D False
Statutory deductions do not affect gross pay.
Correct answer(s):
E True
A One for one checking of payroll details back to independently maintained personnel records
C Reconciliation of total pay and deductions between one pay day and the next
Segregation of duties would not help ensure that the elements of pay are recorded correctly
(although it may help eg, to prevent unauthorised payments from being made).
Encryption of data would help to safeguard the payroll data.
Not keeping adequate records of changes in personnel and pay rates would not in itself affect the
entries to the general ledger.
Correct answer(s):
Having no procedures for dealing with non-routine matters would not cause employees to be paid
too much money in itself, but is more likely to affect the entries to the general ledger.
Correct answer(s):
F The company may pay employees who have left
A lack of segregation of duties would be more likely to result in making the wrong payment than in
an error making entries to the ledger.

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Chapter 9: Internal audit

A Examination of financial and operating information
B Review of the company’s compliance with laws and regulations
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.
A Monitoring the company’s overall risk strategy
C Testing internal controls in the purchasing department
The second and fourth options are not correct as they are too operational and would compromise
internal audit’s monitoring role.
B Giving expert advice on technical accounting matters
C Liaising with the external auditors
D Auditing board reports not audited by the external auditors
The first option 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 cooperation between the
internal and external auditors where this is possible.
B False
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.
Correct answer(s):
C True
Correct answer(s):
E True
B False
Correct answer(s):
D False
Correct answer(s):
F False
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.

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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
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.
A Monitoring of internal controls
B Making recommendations regarding improvements to controls
C Examining and testing financial information
Expressing an opinion on the truth and fairness of the financial statements is done by the external
auditor only.
B An audit of the operational processes of the organisation
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.
A Board of directors
C Audit committee
The second and fourth options 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.
A Review of compliance with laws and regulations
B Assessment of the effectiveness of internal controls
D Carrying out tests of details on transactions and balances
The external auditor may identify efficiency issues during the course of the statutory audit but audit
work is not specifically planned with this objective.
A Examination of financial and operational information for management
C Review of accounting systems and related controls
D Advising management on cost effective controls for systems and activities
Internal audit should not have operational responsibilities so should not authorise transactions or
routinely prepare bank reconciliations. SAMPLE EXAM

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B Their work is focused on the operations of the entire business
C The role can be carried out by employees of the entity
External auditors do not focus on operations, as their prime focus is providing an opinion on the
financial statements.
External auditors are appointed by the shareholders of an entity and cannot be employees of the
entity in order to maintain their objectivity and independence.

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Chapter 10: Documentation

B To help 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
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.
A The name of the client
C The date the work was carried out
D The date the work was reviewed
The second option is not correct because the details relating to the planning of the work will be
included in the planning memorandum. The answer is not the fifth option 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.
A Engagement letter
D Previous year’s signed financial statements
The second, third and fifth options will be kept on the current year audit file.
B Permanent audit file
Correct answer(s):
D Current audit file
Correct answer(s):
G Current audit file
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.
B Communications with experts
C Audit file review notes
D Copies of management accounts
Details of the history of the client’s business and lease agreements would be held on the permanent
audit file.
A True
Correct answer(s):
C True
Correct answer(s):

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F False
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, 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.
A Valid
Correct answer(s):
D Not valid
Correct answer(s):
E Valid
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.
B Not valid
Fieldwork documentation does not help in establishing the audit strategy. SAMPLE EXAM
Correct answer(s):
C Valid
Fieldwork documentation helps in an effective review process. SAMPLE EXAM
Correct answer(s):
E Valid
The fieldwork documentation provides a record of evidence gathered. SAMPLE EXAM
A They may result in substantial time-savings
B The risk of errors is reduced
D They will be easier to review
The third option is not correct as computerised audit processes cannot replace the exercise of
judgement by the auditor.
C Six years from the end of the accounting period to which they relate
Six years from the end of the accounting period to which they relate is the ICAEW requirement.
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
A True
Matters of significance should be documented for both current and future audits.

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However, documentation must be prepared on a timely basis, as any delay could lead to inaccurate
working papers. The need for reflection is unlikely to benefit the auditor’s judgement in such cases!
Working papers can also be updated as and when subsequent information/evidence is obtained.
Correct answer(s):
D False
Correct answer(s):
E True

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Chapter 11: Evidence and sampling

B Inspection of a purchase invoice confirms the cost of inventory
D Inquiry of third parties gives better evidence than inquiries of entity insiders
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.
A When checking calculations on a selection of invoices
B When extracting a sample of invoices over a certain value
C When extracting all invoices to specific customers
The fourth option is not correct as test data, as opposed to audit software, is used to test controls
over processing.
A consider whether the information they might require will be available.
B consider the knowledge gained during previous assurance engagements.
C consider the source of the information and whether it is reliable.
The fourth option 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.
D Recalculating the interest accrued on the basis of outstanding amount, interest rate and period
to which it relates
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. SAMPLE EXAM
A When testing for overstatement, the assurance provider will test items from the accounting
D When testing for understatement, the assurance provider will select items from outside the
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.
C A decrease in the assurance provider’s assessment of the risk of material misstatement

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D An increase in the level of expected misstatement

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.
A Random selection
B Systematic selection
E Monetary unit selection
Sequence sampling would more commonly be used in testing controls. Haphazard selection should
not be used when the assurance provider is using statistical sampling.
C Confirmation
Correct answer(s):
D Inspection
Correct answer(s):
H Observation
Documents and other pieces of evidence are inspected. Processes are observed. External
confirmations involve seeking evidence from a third party.
A True
Correct answer(s):
C True
Correct answer(s):
F False
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 are used to test controls by inputting data
which should activate a control and checking that it does so.
D Inspection of a sales invoice
Inspection of a sales invoice produced by the client would constitute the least persuasive method of
gathering evidence as it is the least reliable of all the options. The supplier’s invoice is more reliable
as it comes from a third party and reperformance of calculations and reconciliations is also more
reliable as this evidence is generated by the assurance provider/reporting accountant. SAMPLE
EXAM
B Decrease
Correct answer(s):
F Negligible effect
Correct answer(s):
H Decrease

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For tests of controls:

• An increase in tolerable misstatement will cause a decrease in sample size as an increase in the
amount of ‘acceptable misstatements’ (or audit risk acceptable) will reduce the extent of the work
necessary to be performed (as there is a corresponding acceptable increase in detection risk).
• An increase in the population will have a negligible effect on sample size as it is not a factor that
determines the sample size.
• A decrease in the auditor’s required confidence level will lead to a decrease in sample size.
B A decrease in the expected 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 decrease the sample size.
Per ISA (UK) 530, regarding factors influencing sample sizes for tests of controls:
• An increase in the number of sampling units will have a negligible effect on the sample size.
• A decrease in the tolerable misstatement will increase sample size.
B False
Correct answer(s):
C True
Correct answer(s):
F False
Physical examination of property, plant and equipment confirms existence (it may belong to a third
party). The reliability of inquiry depends on who is providing the information. A third party eg, a bank
would normally be a reliable source.
B Less reliable
A sales invoice is less reliable than a purchase invoice as it is internally generated.
Correct answer(s):
C More reliable
Original documents are more reliable than copies.
Correct answer(s):
E More reliable
A bank statement is more reliable than the cash at bank nominal ledger account as it is generated by
a third party.
B Observation of a procedure
The weakness of observation of a procedure is that the conclusion drawn as a result only applies to
the system at the time the observation took place – hence it is limited to the point in time it takes
place. SAMPLE EXAM
Correct answer(s):
C Performing analytical procedures
The usefulness of the performance of analytical procedures is limited by the underlying accounting
system which generates the balances under review. SAMPLE EXAM

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Correct answer(s):
F Direct confirmation of a payables balance
A respondent will agree to an overstated balance if that is direct confirmation in respect of a
payables balance (he would disagree if the amount he owed – ie, a receivables balance – were
overstated). SAMPLE EXAM
A Compulsory
Correct answer(s):
D Optional
Correct answer(s):
E Compulsory
Per ISA (UK) 315 (Revised), analytical procedures must be used at the risk assessment stage of an
audit. Per ISA (UK) 520, they must also be used at the overall review stages of an audit and may be
used as a substantive procedure.
B Budgeted figures in the past have proved to be highly optimistic
D Significant deficiencies in the internal control system have been identified in the past
If budgets are not realistic they will not provide a reasonable basis for comparison with actual.
Deficiencies in internal controls reduce the reliability of the basic accounting information which will
be used in the analytical procedures.
A Selecting a sample of despatch records and tracing these to a matching sales invoice and entry
in the sales account
C Selecting a sample of items of plant physically verified by the assurance provider and tracing
these to an entry in the asset register
Tests for understatement (ie, omission) cannot start from the source being tested for
understatement/omission. They must start from some other source and trace through to the
accounting records, to prove that nothing has been omitted (ie, the entity’s transactions or balances
are not understated).
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
The fourth option is not correct as tolerable misstatement is related to the auditor’s judgement about
materiality.
A Increase
An increase in the auditor’s assessment of the risk of material misstatement would cause the sample
size to increase as an increase in audit risk can only be addressed and reduced by an increase in the
work carried out. SAMPLE EXAM
Correct answer(s):
D Decrease

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An increase in the use of analytical procedures to test the same assertion would decrease the sample
size, so that the area is not over-audited. SAMPLE EXAM
Correct answer(s):
E Increase
An increase in the expected misstatements would lead to an increase in the sample size. SAMPLE
EXAM
B False
Correct answer(s):
C True
Correct answer(s):
F False
Test data are used to test controls. Audit software (not test data) can be used to help in the
calculation of ratios.
A A misstatement or deviation that is demonstrably not representative of misstatements or
deviations in a population
The misstatement that the auditor expects to be present in the population = expected misstatement.
Control deviations, when performing tests of control, or misstatements, when performing substantive
procedures = misstatement. The maximum error in the population that the auditor would be willing
to accept = tolerable misstatement.
A Monetary unit sampling
Correct answer(s):
E Block selection
Systematic selection involves selecting items using a constant interval between selections, the first
interval having a random start.
B False
Correct answer(s):
C True
Correct answer(s):
E True
Positive confirmations may request that the respondent provides the balance owing as opposed to
simply confirming the balance stated. A sample taken from a list of receivables is more effective than
for payables, as in this way testing the balance for overstatement is carried out directly. For payables,
the auditor’s key concern is that of understatement and testing a sample from the payables listed will
not test understatement. A positive confirmation is more reliable than a negative confirmation as in
the first case, a response is always sought.
D Recalculating the portion of the invoice amount which relates to the reporting period

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A supplier statement would not include this invoice, as it was dated after the year end.
Vouching the payment would not help to determine whether the expense and the payable were
included correctly.
Testing internal controls would provide evidence over accruals in general, but would not be relevant
to this invoice specifically.
Only by recalculating the prorating of the invoice can the auditor be confident that the correct
amount has been included.
B Testing primarily for completeness of accruals
Reviewing post year-end invoices begins with the invoices and traces them back to the accounting
system. This is an attempt to find expenses which have been omitted from the system.
Correct answer(s):
C Not a relevant procedure for payables
Reviewing post year-end supplier payments is a test not often conducted – all it could really tell the
auditor is whether the entity has the cash to pay its suppliers. This procedure is not to be confused
with post year-end receipts from receivables, which is an important test of debt recoverability.
Correct answer(s):
E Testing primarily for cut-off of accruals
Recalculating the amount accrued is primarily a test of cut-off because it focuses on the split between
the period before and after the year end. It does also, therefore, test completeness, but this is not its
primary aim.
A True
A key element of data analytics is the ability to process very large and complex data into simple
visual representations, which can help auditors to spot trends they might otherwise have missed.
Correct answer(s):
D False
Data analytics is not about spending time tailoring the procedures to the client (as was the case with
the older computer–assisted audit techniques). A major advantage of data analytics is that they are
standardised.
Correct answer(s):
E True
Data analytics makes it possible not just to test large quantities of transactions very quickly, but also
to test whole populations of transactions and so, potentiality and in the future, to revolutionise the
whole basis of auditing!
B False
Inquiring about controls over petty cash will not be strong evidence on its own as employees could
misrepresent the facts in their responses (especially if attempting to conceal a fraud they may be
involved in).
Correct answer(s):
C True
Recalculation by the auditor of amounts used by the client do provide strong evidence as there is no
influence from the client.
Correct answer(s):

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F False
Re-performance of an internal control can be strong evidence as long as the auditor has completed
some or all of this re-performance – otherwise, it is less likely to be considered strong evidence as the
employee may have deliberately avoided certain conditions that would have provided audit
evidence of poor operation.
C Extracting samples of transactions for further examination
Computer-assisted audit techniques (CAATs) have been used by auditors to extract samples of
transactions for many years, but the advent of computers that can handle such ‘big data’ now means
that entire populations can be tested, rather than just samples.
The remaining options are all recommended by the FRC (2017) as areas where audit data analytics
can be used to streamline the audit.
B The size of the misstatement
C The circumstances of the occurrence of the misstatement
D The nature of the misstatement
It is possible that a misstatement below the materiality level for the financial statements as a whole
may still be considered material if it remains uncorrected – examples of the reasons given include the
extent to which the misstatement affects compliance with regulatory requirements or debt covenants,
masks a change in earnings or other trends or even increases management compensation and
triggers the payment of a bonus.
The remaining options (size, nature and circumstances) are all used by the auditor to determine
whether an uncorrected misstatement is material.

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Chapter 12: Written representations

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
The fourth option is not correct as the level of materiality used during the audit is the responsibility of
the auditors.
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
Auditors may only obtain written representations to support other audit evidence (ISA (UK) 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.
A True
Correct answer(s):
D False
Correct answer(s):
F False
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.
A Required
Correct answer(s):
D Not required
Correct answer(s):
F Not required
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).
A To support other evidence about the suitability of accounting policies
C To support inspection of a board minute introducing the directors’ intention to sell a material
investment

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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.
A Whether there are plans to abandon product lines that will result in obsolete inventory
D Whether there are any undisclosed subsequent events
The auditor should be able to obtain sufficient alternative evidence regarding the existence of plant
and equipment and reconciling items on the cash at bank account.
B False
Correct answer(s):
C True
Correct answer(s):
F False
It is usually only of senior management that auditors request written representations as they are
responsible for matters of judgement, cooperating with the auditors etc.
Written representations cannot be used as a substitute for other evidence that is expected to be
available.
A Acknowledgement that management has fulfilled its responsibility for the preparation of the
C Acknowledgement by management of its belief that the aggregate of uncorrected
misstatements are immaterial to the financial statements
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. SAMPLE EXAM
B ISA (UK) 300, Planning an Audit of Financial Statements
ISA (UK) 300, Planning an Audit of Financial Statements is not referred to in a written representation
letter as it relates to how the auditor plans the audit, which is beyond the scope of management and
those charged with governance of an audited entity.
Fraud, related parties and subsequent events are all areas where the auditor has a responsibility to
receive representations from management regarding specific aspects of the audit.

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Chapter 13: Substantive procedures – key

financial statement figures
A Title deeds
B Purchase invoices
C Vehicle registration documents
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.
D Cut-off
Cut-off is a financial statement assertion that affects classes of transactions, not account balances.
B Post year-end sales invoices
C Post year-end sales orders
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).
B It requires the customer to reply giving or confirming or disagreeing with the balance
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 “It is carried out in the auditor’s name”, since negative confirmations are also carried out in the
auditor’s name. “It only requires the customer to reply if he disagrees with the balance” describes a
negative confirmation and so is not correct. “It requires replies to be sent to the client” does not
apply to any type of confirmation.
B Direct confirmations with customers
C Review of cash paid after date
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.
A An individual cash float is material

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D The auditor suspects that a fraud has been committed in relation to immaterial cash floats
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.
A Completeness
Completeness (ie, understatement): liabilities are generally tested for understatement, as they are
more likely to be understated than overstated.
Existence (overstatement): a higher-risk assertion for assets, as opposed to liabilities. Presentation
and classification are generally less risky assertions in this case.
B The auditors suspect that the client is deliberately understating payables
C The internal controls relating to purchases are weak
D Supplier statements are unavailable
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 the final three options.
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
“Sales constitute a high volume of similar transactions which are suitable for controls testing” is
correct – that sales constitute a high volume of similar transactions and are hence suitable to controls
testing. Regarding “Controls over sales in a company are often strong”, where controls are expected
to be strong, ISA (UK) 330 requires that the auditors test them so this is also correct. “There are
usually too many individual transactions to test them individually” cannot be used as a reason for
testing internal controls over sales. However many transactions there are, if controls appear to be
deficient, then those transactions will need to be subjected to tests of detail. “Because there are so
many individual transactions, there is a significant risk that sales are misstated” is incorrect as where
there is a high risk of misstatement, substantive procedures should be used.
B Purchases and payables
C Purchases and inventories
D Gross margin
Applying analytical procedures to the operating margin which contains the effect of all expenses, not
just purchases, will not provide direct evidence as to the accuracy of purchases.
C Extend sample
For the misstatement in cut-off, the sample should be extended to measure the full extent of the cut-
off misstatement.
Correct answer(s):

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Missing supplier statements (which should make the auditor suspicious) should be referred to a
senior colleague, so that this is investigated and alternative procedures designed if necessary.
B Not misstatement
Correct answer(s):
D Not misstatement
Both disagreements are due to timing differences and hence do not constitute misstatements in the
accuracy of total trade receivables.
B Does not prove valuation
Correct answer(s):
C Proves valuation
The first statement represents a test of control over inventory counting procedures and therefore the
completeness or existence of the quantity of inventory. It is not a test of valuation. Checking
inventory items against sales invoices tests for net realisable value (NRV) and hence valuation of the
inventory.
A Test
The current account balance should be tested as it is over the materiality threshold.
Correct answer(s):
D Not test
The petty cash float is not material and hence need not be tested.
Correct answer(s):
E Test
The special directors’ cash account should be tested whatever its monetary value. Strict materiality
thresholds do not apply to directors’ emoluments which need to be disclosed whatever their
amount. In any case the auditor needs to ascertain what this balance represents.
B Existence
Only existence and rights and obligations are assertions about account balances. Occurrence and
cut-off are assertions in respect of classes of transactions and events for the period.
C Completeness
Testing for omissions is the same as testing for completeness (ie, saying that nothing has been
omitted from the register means the same as saying the register is complete).
A Vouching a sample of motor vehicles in the asset register to registration documents
C Review of purchase invoices for motor vehicles acquired in the period

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Physical inspection and confirmation of calculations provide evidence of existence and valuation
respectively as opposed to rights and obligations.
The rights and obligations assertion means that the entity holds or controls the rights to assets.
Although registration documents show registered keeper, not owner, the keeper is likely to have
control of the asset. Purchase invoices give evidence of ownership (which gives control).
C Cut-off
Correct answer(s):
The cut-off assertion is affected by including inventory sold in inventory at the end of the period (ie,
cut-off is incorrect). Where damaged items have not been written down to NRV, then the accuracy,
valuation and allocation assertion is directly affected (ie, inventory is incorrectly valued).
A Completeness
The completeness assertion is affected by the omission of inventory items (ie, inventory is not
complete).
Correct answer(s):
The accuracy, valuation and allocation assertion is affected by miscalculations of cost and the not
writing down of damaged items (ie, inventory is incorrectly valued).
B Deficiency
Correct answer(s):
D Deficiency
Correct answer(s):
E Strength
The inventory count should involve personnel who are independent of the warehouse staff. Count
sheets should be completed in pen so that there is a permanent record. By having two teams of
counters involved in the inventory count, there is a check within the inventory counting process that
the count is being carried out correctly.
A True
Correct answer(s):
D False
All inventory lines must be counted at least once per year, not once per month.
Correct answer(s):
E True
A An increase in the cost of raw materials which cannot be passed on to the customer
C Errors in production

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D An increase in production overheads

An increase in selling price increases net realisable value. Trade discounts from suppliers reduce
cost.
A Existence
Accuracy, valuation and allocation is not supported as we have no evidence that these receivables
intend to pay. Completeness is not supported as it is the list of receivables provided by the client that
is subject to direct confirmation (ie, the test is for existence and ownership (= rights and obligations)
from that list). Occurrence is a financial statement assertion that affects classes of transactions and
not account balances.
B Analysis of after-date receipts
Whereas the procedures described in A and D are helpful with respect to the valuation assertion,
subsequent receipt of cash confirms absolutely that the balance was recoverable at the year end.
Checking that customers on the customer list have receivables ledger accounts is a test of
completeness, not valuation.
A Test of control
The instructions are likely to lead to an accurate count. SAMPLE EXAM
Correct answer(s):
C Test of control
Despatch procedures are being properly followed. SAMPLE EXAM
Correct answer(s):
Remembering that substantive procedures include analytical procedures, which is what this
describes. SAMPLE EXAM
B Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records, therefore
casting the list of year-end receivables is a recalculation procedure. SAMPLE EXAM
Correct answer(s):
F Reperformance
Reperformance is the auditor’s independent execution of procedures or controls which were
originally performed as part of the entity’s internal control, therefore using CAATs to check the
ageing of the year-end list of aged receivables is a reperformance of that ageing analysis, which is
itself a control over the recoverability of receivables. SAMPLE EXAM
B False
A positive confirmation may take two forms: requesting a response indicating whether they agree or
disagree with the information provided, or requesting the recipient to state the amount owed by/to
them. SAMPLE EXAM

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Correct answer(s):
C True
Receivables are tested for overstatement therefore it is acceptable to select the sample from the
client’s list of balances. The direct confirmation would be likely to elicit a response (even if negative
confirmation is used) if the balance is indeed overstated. However, payables are tested for
understatement and the auditor is looking for balances which are not on the client’s list, but should
be. Therefore this sample should be drawn from a list of all possible payables, not from the client’s
list, which may already be understated. SAMPLE EXAM
Correct answer(s):
E True
With a positive confirmation, a response is expected whether there is agreement or disagreement.
With a negative confirmation, there is an element of uncertainty as to the reasons for non-response.
Hence the former is ordinarily more reliable than the latter. SAMPLE EXAM
C Completeness
A sequence check will highlight missing documents which may indicate unrecorded transactions – ie,
test the completeness of sales. SAMPLE EXAM
C Obtaining direct confirmation of the bank balance from the client’s bank
Obtaining direct confirmation of the bank balance from the client’s bank will confirm the existence of
the cash at bank with a third party (ie, the bank). SAMPLE EXAM (amended)
B Not a misstatement
This disagreement stems from a timing difference and, as such, does not indicate a misstatement in
the receivables balance. SAMPLE EXAM
Correct answer(s):
D Not a misstatement
This disagreement stems from a misposting which does not affect the total receivables balance in the
financial statements. SAMPLE EXAM
A Overstatement
The amount is an asset so we test primarily for overstatement. The amount owed is considered
irrespective of the materiality threshold due to the nature of the item (director loan). SAMPLE EXAM
Correct answer(s):
F Not test
The amount is below the materiality threshold. The likelihood of material fraud or misstatement
within the balance is very low. SAMPLE EXAM
C Unrecorded branch requisitions
Actual inventory levels at branches are higher than book inventory – ie, there must be unrecorded
goods inwards. Only unrecorded branch requisitions (goods coming in from head office) would
explain this. All the others would lean to book inventory higher than actual inventory. SAMPLE EXAM

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A Draw conclusion
No misstatements are found; therefore, the appropriate action would be to draw a conclusion.
SAMPLE EXAM
Correct answer(s):
F Extend sample
An arithmetic misstatement of £5,000 found would be above the materiality threshold and so the
auditor should extend his sample. SAMPLE EXAM
Correct answer(s):
H Refer to senior colleague
A misstatement of £10 found, sanctioned by the finance director (FD) should lead to the auditor to
refer the matter to a senior colleague due to the FD’s sanctioning. SAMPLE EXAM
C Trace an entry in the non-current asset register to the physical item
To test for existence the reporting accountant should work from the financial statements to the
physical item. However, the financial statements themselves do not contain an analysis of the
individual items that make up non-current assets so the reporting accountant will need to select his
sample from the non-current asset register (having checked that this record agrees to the financial
statements). SAMPLE EXAM
A Purchase invoices for assets purchased within the year may contain evidence in relation to the
risk of omission of assets owned by the company.
D Sales invoices for assets sold within the year may contain evidence in relation to the risk of the
company not actually owning the assets.
Purchase invoices for assets purchased within the year may contain evidence in relation to the risk of
omission of assets owned by the company.
Physical inspection of the assets themselves by the auditor would not generate evidence in relation
to the risk of the company not actually owning the assets. The mere existence of the physical assets
does not tell us that the company has the rights and obligations that relate to them.
Valuations carried out by third party valuers would not generate evidence in relation to the risk of the
assets being incorrectly presented in the financial statements. Although the assets may be valued
correctly, this does not necessarily mean that they have been presented in line with IFRSs.
Sales invoices for assets sold within the year may contain evidence in relation to the risk of the
company not actually owning the assets. This helps address the risk that the assets do not exist.
B False
Completeness of debts receivable is not usually considered a major risk (ie, understatement of
assets) – the opposite is usually the case ie, existence is a major risk.
Correct answer(s):
D False
Although existence of long-term liabilities is indeed a risk, it is not the principal risk.
Correct answer(s):
E True

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Incorrect valuation of inventory – particularly obsolete or damaged inventory – is a major risk of

misstatement.
A Car wash
D Pawn shop
A car wash or a pawn shop is likely to have a large number of cash transactions, which makes it a
suitable front business for a money laundering operation.
A True
Inventory cost includes the costs of bringing the inventory to its present location and condition, in
line with IAS 2 Inventory.
Correct answer(s):
C True
This is a deficiency because the inclusion of the inventory quantity on the count sheets may deter the
inventory counters from performing the count accurately because they already have a suggested
quantity for each inventory item. Similarly, the count sheets may not be up to date.

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Chapter 14: Codes of professional ethics

A Accountants have access to confidential information
B Assurance providers claim to give an independent view
C The financial community relies on accountants
There is no legal requirement for ethical codes.
B ICAEW Code of Ethics
C FRC’s Ethical Standard
ICAEW qualified auditors acting in the UK are subject to the ICAEW Code and the FRC’s Ethical
Standard. The principles of the IESBA Code are incorporated within the ICAEW code, but ICAEW
members are not bound by it directly.
A Integrity
B Objectivity
D Confidentiality
Independence and courtesy are not fundamental principles of the IESBA Code.
B False
Correct answer(s):
C True
Correct answer(s):
E True
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.
A ICAEW
B IESBA
D FRC
The IAASB issues ISAs, but not ethical guidance.
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.
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.

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C Both
Correct answer(s):
E FRC’s Ethical Standard only
Correct answer(s):
I Both
Correct answer(s):
L Both
Both the IESBA Code of Ethics and the FRC’s Ethical Standard identify the following five threats: self-
interest, self-review, advocacy, familiarity and intimidation. The FRC’s Ethical Standard also identifies
the management threat in addition; the IESBA Code of Ethics does not specify a ‘management threat’
as such, but notes that the assumption of ‘management responsibilities’ would create other threats.
A The public’s expectations of accountants
B Public interest in financial information
D Credibility of published financial information
Tradition is not a valid reason why objectivity and independence matter.
B False
A principles-based code does not contain specific rules for auditor compliance. SAMPLE EXAM
Correct answer(s):
D False
A rules-based code does not require auditor adherence to a set of principles. SAMPLE EXAM
Correct answer(s):
F False
ICAEW uses a principles-based approach. SAMPLE EXAM
B False
Principles-based guidance may contain rules for prohibitions, although its substantial content would
be based on general principles.
Correct answer(s):
D False
It is a major strength of principles-based guidance that its general principles may be applied to
unique situations, eg, situations for which a specific rule may not have been created under a rules-
based approach.
Correct answer(s):
E True
Principles-based guidance may permit multiple correct responses in a given situation. Advocates of
rules-based approaches see this as one of its principal defects.
B Self-review threat

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Auditing financial statements prepared by the firm represents a self-review threat – the firm would be
auditing (‘reviewing’) material that it had itself produced, and may be inclined to trust it more than if
it had been produced by an entity that was independent of it.
Correct answer(s):
C Familiarity threat
An audit team member having family at the client represents a familiarity threat – the audit team
would be overly familiar with the client. This is related to a self-review threat in the sense that both
threats involve proximity to the information being audited; where the familiarity threat differs is that
the information is prepared by someone else but with whom the auditor has a close relationship.
Correct answer(s):
F Self-interest threat
Making a loan to an audit client represents a self-interest threat because the auditor may have an
incentive not to do anything that could imperil the client’s financial position (such as modifying the
audit opinion) lest this prejudice their ability to repay the loan.

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Chapter 15: Integrity, objectivity and

independence
A Withdrawing from the engagement
B Applying specific safeguards
C Making disclosures to the client
Making disclosures to ICAEW is no substitute to the other options.
A A member of the audit team
B A minor child of a member of the audit team
D A spouse of a member of the audit team
The third option 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.
A Self-interest
C Intimidation
D Familiarity
The second option 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.
B Cash It Ltd only
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.
A There is a presumption of dependence when annual fee income from all services to the client
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.
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

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The fourth option is not correct as it is assistance that is provided as opposed to management or
operational decisions being taken.
A Alan Johnson has been the audit engagement partner of Domino Ltd for 11 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.
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.
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
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 while at the same time, soliciting
advice from 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 ICAEW would be the authority in this area as to the appropriate course of
action to be taken.
A Report her concerns to the audit committee
D Obtain advice from the human resources department at KiwiCorp plc
Before seeking legal advice or even resigning, 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).
A Self-interest
Correct answer(s):
D Self-interest
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.
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).
Correct answer(s):

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Accept with safeguards (despite the time lag, the finance director may have too good a knowledge
of the firm’s procedures).
B Familiarity
A familiarity threat is possibly present as the prior year audit team may have developed personal
relationships with client staff which may threaten their objectivity.
Correct answer(s):
F Intimidation
By expressing his dissatisfaction, the finance director is posing an intimidation threat – effectively
seeking a different audit opinion or threatening the auditors with replacement.
B Discuss the issues with the audit committee
Correct answer(s):
Where there is a high proportion of fee income derived from a particular client (the 5% and 10%
rules), if the amount is not prohibitive (the 10% and 15% rules), then safeguards should be put in
place. One safeguard would be to discuss the issues with the audit committee, if there is one (which
there would be for a major listed company).
Having separate personnel assigned where there are competing clients is the most appropriate
safeguard to protect independence.
A Where there is a close business relationship between the auditor and the client
C Where the auditor has a financial interest in the client
D Where there are a significant amount of overdue fees
The second option present a self-review threat as opposed to a self-interest threat.
Correct answer(s):
Correct answer(s):
E Safeguards possible
A firm should not accept a fee calculated on a contingency basis. Where total fees exceed 15% (10%
for a listed entity) of the annual fee income of the firm there is a presumption of dependence and the
firm should resign. Where total fees exceed 10% (5% for a listed entity) safeguards should be applied
as necessary.
C Morgan Ltd only
Sam Brown has been a director of Hastle Ltd within the last two years and therefore cannot be used
on the audit. James Andersen had the role of office junior and as such was not in a position to exert
direct and significant influence over the subject matter of the audit; therefore, he can be used on the

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audit of Hastle Ltd, even though it is only six months since he resigned. Sally Jones’ position, while
one where she would have been able to exert direct and significant influence over the subject matter
of the audit, falls outside the two-year period, therefore she could be used on the audit of Morgan
Ltd.
B Inform the audit manager
Resolving ethical conflicts should be kept in-house where possible.
A Firm must decline
Correct answer(s):
D Individual excluded
Correct answer(s):
E Firm must decline
If a partner, a person in a position to influence the outcome of that engagement (eg, the audit
manager), or an immediate family member of either of these (eg, spouse) has a financial interest in a
company the firm cannot accept appointment unless the interest is disposed of. As long as Sam
Larson is excluded from the audit of Burton Ltd, the firm can accept the appointment.
By assigning separate personnel to each assignment the confidentiality of each client and hence the
auditor’s independence will be protected.
Correct answer(s):
An internal audit role cannot be taken on for any audit client, per FRC’s Ethical Standard. Hence,
there are no safeguards possible. SAMPLE EXAM
Jane should initially seek advice from ICAEW before deciding on her next steps. The general
approach to resolving conflicts should be firstly to resolve within the employer if possible, then seek
advice from ICAEW, then take legal advice, then resign (perhaps on legal advice, but, in any case, as
a last resort).
B No threat
Correct answer(s):
D No threat
Correct answer(s):
E Threat
The car loan has been given at a special rate and is likely to be material to the audit manager. All
other loans are in the normal course of business on commercial terms.

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B Advocacy
Advocacy threat as the auditor is taking the part of the client in underwriting the client’s shares in a
flotation.
Correct answer(s):
C Self-review
Self-review threat as the audit firm will be preparing the financial statements and will then review
them (though the use of separate teams would reduce this threat).
C Management and self-review
Management threat – selection of systems should be carried out by management. If the auditor
undertakes this role he becomes too closely aligned with management and this threatens his
independence.
Self-review threat – the audit firm will audit the system it has implemented.
There are no indications of a familiarity threat, as no indication is given of the length of the
relationship nor of any family or close personal relationships between audit firm and client. SAMPLE
EXAM
C New Generation Insurance and Co only
New Generation Insurance is a threat as a personal guarantee appears to have been given by the
auditor in favour of the company, in return for the audit should the buy out take place. Hence there is
a dependency that threatens the independence of the assurance provider.
NatEast plc is not a threat as the loan to Hammers LLP is modest and in the normal course of
business for a major high street bank.
A Accept with safeguards
Valuations are only prohibited for non-listed companies where the item to be valued is material to
the financial statements and involves a significant degree of subjectivity (for listed companies, any
material valuation is prohibited). However, safeguards must be implemented to minimise self-review
(eg, the valuation should be carried out by a different team).
Correct answer(s):
C Accept with safeguards
Helping a non-listed company with accounts preparation is acceptable with safeguards to ensure
that the role of management is not assumed by the audit firm.
Correct answer(s):
No safeguards are possible with the design and implementation of the IT system as the very same
system is relied upon for the purposes of the external audit.
C Accept Beta Ltd as a client and refuse Alpha plc
Accept Beta Ltd as 12% is below the 15% threshold for private companies. Refuse Alpha plc as 11%
is above the 10% threshold for listed companies. SAMPLE EXAM

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A Do not accept
Do not accept Titania plc as it is not acceptable to prepare and audit the financial statements of a
listed company. SAMPLE EXAM
Correct answer(s):
The audit of Puck Ltd can be accepted with safeguards – such as not letting the FD’s brother take any
part in the audit. SAMPLE EXAM
A Perform the work
At Oberon LLP, the junior can go ahead and perform the work, given the low risk nature of the
receivables balance, and the fact that the junior has covered this in his training. The junior is also to
join an audit team, where resources for guidance, supervision and review will also be available.
SAMPLE EXAM
Correct answer(s):
F Contact the ICAEW telephone helpline
With regards to Lear LLP, the junior should contact the ICAEW telephone helpline. Commencing the
audit of a client unsupervised, may lead to exposure of both the junior and the firm to risks. In a
larger firm the junior could refer to his training partner, but since this is a sole practitioner firm the
practitioner himself must also be the training partner. SAMPLE EXAM
B Resign his post
D Take legal advice
David has no other option in this case but to resign his post and take legal advice. Given that these
instructions have come from the board of directors, it would seem fruitless to pursue this issue
internally. SAMPLE EXAM
B Intimidation
The FD having a very strong personality may lead to an intimidation threat. SAMPLE EXAM
Correct answer(s):
D Familiarity
The audit and client team remaining unchanged for many years is likely to lead to a familiarity threat.
SAMPLE EXAM
C Intimidation, advocacy and self-interest
An intimidation threat arises because of Mr Black’s attitude. There is an advocacy threat if the firm
acts in the company’s defence. A self-interest threat arises because the firm will be afraid of losing
the audit fee.

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Since the assets of Luxemburg Ltd are immaterial, it is possible to accept both engagements subject
to safeguards (if Luxemburg Ltd had been a public interest entity then the valuation service should
have been declined).
Correct answer(s):
D Do not accept
Auditors are prohibited from providing bookkeeping services to listed clients, so the work for Cliff
plc may not be accepted.
Correct answer(s):
D Perform the work
In relation to Cioran Ltd, this point should be referred to the training partner. It appears that the audit
trainee in question does not have sufficient knowledge or experience to perform the work being
asked of them.
In relation to Schopenhauer Ltd, you can go ahead and perform the work, given the low risk nature of
the non-current assets balance, and the fact that you have covered this in your training. You are also
to join an audit team, where resources for guidance, supervision and review will also be available.

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Chapter 16: Confidentiality

A It is a fundamental principle of all the major ethical codes
C Accountants need their clients to be comfortable to make full disclosure of company affairs to
them
“Failure to keep information confidential reflects badly on the accountant” and “ It means that
accountants can work for competitors” are not the principal reasons for the importance of
confidentiality.
A Discuss client matters with third parties
B Discuss client matters with colleagues in public places
D Leave working papers in the car
“Discuss client matters with colleagues in non-public places” does not apply as accountants may
discuss client matters with colleagues in non-public places.
A When the client has granted permission
C When there is a public duty to make disclosure
D When there is a legal duty to make disclosure
“In order to obtain audit evidence about an amount in the financial statements” is not correct as it is
not acceptable to disclose confidential information in a bid to secure further audit evidence.
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 National Crime Agency
(NCA)
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.
C Report to the firm’s money laundering nominated officer
In the first case, report to the firm’s money laundering nominated officer as the case is suspicious.
Correct answer(s):
D Make no external report
In the second case, make no external report as there is no public or legal duty to disclose an internal
control deficiency.
A May make disclosure
Correct answer(s):

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C May make disclosure

Correct answer(s):
F Must make disclosure
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.
D The firm’s money laundering nominated officer
The money laundering nominated officer will then decide on the appropriate course of action.
B False
Correct answer(s):
C True
Correct answer(s):
F False
If the audit firm believes that the conflict of interest can be managed through safeguards the firm can
continue to act for both parties. The clients involved, however, should be informed of the situation.
A On a change of employment, using experience gained in a previous position
C Providing a prospective auditor with information required by him in order for him to decide
whether or not to accept the appointment
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.
B In order to avoid giving an incorrect auditor’s report to another client
In order to avoid giving an incorrect auditor’s 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). SAMPLE EXAM
D Report the matter to a designated officer within your firm without the client’s permission
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. SAMPLE EXAM
C Auditors may disclose matters to third parties without their client’s consent if it is in the public
interest, and they must do so if there is a statutory duty to do so.

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There is no blanket prohibition on disclosure, nor is there any general right of the police or taxation
authorities to demand information. Auditors have an implied contractual duty of confidentiality.
There is no statutory duty of confidentiality.
A Inform the audit committees of both Caterpillar and Snail of the potential conflict of interest and
obtain their consent to act for both parties
D Prevent unauthorised physical access to the information relating to both company audits
Separate audit teams should be used including audit partners and independent review partners.
Confidentiality agreements should be signed by Leaf LLP’s staff, not by the client.
B False
The UK GDPR applies to any data held on individuals, not companies. It would, however, apply to
data held on an audit client’s staff.
Correct answer(s):
C True
Losing client staff personal information is a clear breach of the UK GDPR and should be reported to
the Information Commissioner’s Office (ICO).
Correct answer(s):
F False
If an audit client breaches the UK GDPR then it is the client’s responsibility to report the breach to the
ICO. The auditor owes the client a duty of confidentiality regarding breaches of laws and regulations
(such as this), but should consider disclosure to the ICO if this is in the public interest.

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Appendix

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Mock Exam guidance notes

Suggested structure for Mock Exams in 2021
Exam standard
The Mock Exam should be set at the same level of difficulty as that represented by the 2021 sample
exam.
Exam format
The Mock Exam should consist of 50 questions worth two marks each.
Style of exam questions

Each question should conform to the style used in the sample exam ie:
• Multiple Choice Question (MCQ) (1 from 4);
• Multi-part Multiple Choice MPMC (eg, 2 or 3 ´ true or false or other choice); or
• Multiple Response Question (MRQ) (more than 1 from 4 or more).
Note that there are no partial marks awarded. All parts of a question must be answered correctly to
attain the marks.
Exam coverage and balance

A Mock Exam should have approximately the syllabus coverage and balance set out in the table
below.
Syllabus area Weighting Number of questions

%
1 The concept, process and need 20 10 10

for assurance
2 Internal controls 25 12 13
3 Gathering evidence on an 35 18 17
assurance engagement
4 Professional ethics 20 10 10
Total 100 50 50
The following matrix contains three sets of questions, selected from within this Question Bank.
Each one contains an appropriate balance of questions which form a ‘sample exam’ for you to
attempt. Note that the question topics listed here are only examples of the nature of questions which
may be included – the actual exam questions may be on different topics.
Question Sample exam 1 Sample exam 2
1 Ch1; Q7 Ch1; Q2
2 Ch1; Q3 Ch1; Q5
3 Ch1; Q4 Ch1; Q6
4 Ch2; Q1 Ch2; Q7
5 Ch2; Q6 Ch2; Q3
6 Ch2; Q2 Ch3; Q1
ICAEW 2022 Appendix 193

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7 Ch3; Q13 Ch3; Q11
8 Ch3; Q23 Ch3; Q12
9 Ch4; Q1 Ch4; Q2
10 Ch4; Q11 Ch4; Q12
11 Ch5; Q1 Ch5; Q8
12 Ch5; Q8 Ch5; Q17
13 Ch5; Q9 Ch5; Q25
14 Ch5; Q31 Ch5; Q34
15 Ch6; Q1 Ch6; Q2
16 Ch6; Q4 Ch6; Q5
17 Ch6; Q7 Ch6; Q8
18 Ch7; Q5 Ch7; Q6
19 Ch7; Q13 Ch7; Q14
20 Ch8; Q4 Ch8; Q6
21 Ch8; Q14 Ch8; Q11
22 Ch9; Q2 Ch9; Q5
23 Ch9; Q4 Ch9; Q12
24 Ch10; Q1 Ch10; Q3
25 Ch10; Q2 Ch10; Q6
26 Ch10; Q4 Ch10; Q7
27 Ch10; Q10 Ch10; Q12
28 Ch11; Q1 Ch11; Q2
29 Ch11; Q3 Ch11; Q5
30 Ch11; Q6 Ch11; Q7
31 Ch11; Q8 Ch11; Q9
32 Ch11; Q13 Ch11; Q16
33 Ch12; Q3 Ch12; Q5
34 Ch12; Q7 Ch12; Q9
35 Ch13; Q1 Ch13; Q2
36 Ch13; Q3 Ch13; Q4
37 Ch13; Q9 Ch13; Q10
38 Ch13; Q11 Ch13; Q12
39 Ch13; Q25 Ch13; Q13
40 Ch13; Q37 Ch13; Q21

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41 Ch14; Q6 Ch14; Q7
42 Ch14; Q10 Ch14; Q11
43 Ch15; Q4 Ch15; Q5
44 Ch15; Q8 Ch15; Q9
45 Ch15; Q10 Ch15; Q13
46 Ch15; Q12 Ch15; Q18
47 Ch15; Q16 Ch15; Q32
48 Ch15; Q31 Ch15; Q33
49 Ch16; Q5 Ch16; Q6
50 Ch16; Q9 Ch16; Q12
ICAEW 2022 Appendix 195

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Assurance ICAEW Question Bank

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Icaew AS - Question Bank (2022)

Assurance (BPP University)

Studocu is not sponsored or endorsed by any college or university

The Institute of Chartered Accountants in England and Wales

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1 Concept of and need for assurance 1 111

2 Process of assurance: obtaining an engagement 5 115

3 Process of assurance: planning the assignment 9 119

4 Process of assurance: evidence and reporting 17 125

5 Introduction to internal control 23 129

6 Revenue system 35 137

7 Purchases system 39 141

8 Employee costs 45 145

9 Internal audit 51 149

11 Evidence and sampling 59 157

12 Written representations 69 165

13 Substantive procedures – key ﬁnancial statement ﬁgures 73 167

14 Codes of professional ethics 85 175

15 Integrity, objectivity and independence 89 179

16 Conﬁdentiality 103 187

Appendix: Mock Exam guidance notes 193

ICAEW 2022 Contents iii

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iv Assurance ICAEW 2022

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Professional skills focus: Assimilating and using information

Professional skills focus: Structuring problems and solutions

Professional skills focus: Applying judgement

Professional skills focus: Concluding, recommending and communicating

ICAEW 2022 Introduction v

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vi Assurance ICAEW 2022

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viii Assurance ICAEW 2022

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Chapter 1: Concept of and need for assurance

3 Which two of the following are limitations of the provision of assurance?

ICAEW 2022 1: Concept of and need for assurance 1

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2 Assurance ICAEW 2022

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9 Which one of the following best describes the concept of assurance?

ICAEW 2022 1: Concept of and need for assurance 3

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4 Assurance ICAEW 2022

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Chapter 2: Process of assurance: obtaining

ICAEW 2022 2: Process of assurance: obtaining an engagement 5

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6 Assurance ICAEW 2022

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8 Which two of the following must be included in the engagement letter?

9 Which three of the following are purposes of a letter of engagement?

10 Which one of the following best describes professional scepticism?

11 Which two of the following must be included in the engagement letter?

ICAEW 2022 2: Process of assurance: obtaining an engagement 7

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8 Assurance ICAEW 2022

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Chapter 3: Process of assurance: planning

3 Which three of the following constitute analytical procedures?