AAT L4 Audit and Assurance Principles 2

Question 1

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

Accepted Answer

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

Answer

Significant net current liabilities combined with a near-term loan renewal requirement are classic indicators of going concern doubt, as the business may be unable to meet its obligations as they fall due.

Question 2

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

Accepted Answer

Existence

Answer

Receivables confirmations verify that the debts recorded actually exist — that customers acknowledge owing the amounts stated. This directly tests the existence assertion.

Question 3

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

Accepted Answer

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

Answer

Audit risk is the risk that the auditor gives an unmodified (clean) opinion on financial statements that are, in fact, materially misstated. It is the product of inherent risk, control risk, and detection risk.

Question 4

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

Accepted Answer

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

Answer

When internal controls appear strong, the auditor can test those controls (tests of controls) and, if they prove effective, reduce the extent of substantive testing required, saving time and cost.

Question 5

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

Accepted Answer

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

Answer

The engagement letter sets out the terms of the audit, including objectives, scope, responsibilities of both parties, and the basis of fees, reducing the risk of misunderstanding.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Audit and Assurance Principles 2