AAT L4 Audit & Assurance 3 — Questions and Answers
Question 1: Under ISA 520, analytical procedures used as substantive procedures involve:
- Counting physical inventory
- Comparing recorded figures against expectations developed from independent sources or prior periods to identify unusual fluctuations (Correct answer)
- Testing individual transactions for accuracy
- Reperforming calculations in the accounts
Correct answer: Comparing recorded figures against expectations developed from independent sources or prior periods to identify unusual fluctuations
Substantive analytical procedures compare recorded amounts against independently developed expectations; unexplained significant differences indicate a risk of misstatement, requiring additional investigation.
Question 2: Which assertion for income statement items relates to whether the amounts have been correctly calculated?
- Occurrence
- Completeness
- Accuracy (Correct answer)
- Cut-off
Correct answer: Accuracy
The accuracy assertion for transactions and events asserts that recorded amounts and other data relating to transactions have been recorded appropriately — the calculations are correct and amounts are proper.
Question 3: Under ISA 560, events occurring after the balance sheet date but before the auditor's report is signed are called:
- Contingent liabilities
- Non-adjusting events
- Subsequent events — which may be adjusting or non-adjusting depending on their nature (Correct answer)
- Post-balance sheet provisions
Correct answer: Subsequent events — which may be adjusting or non-adjusting depending on their nature
Subsequent events are events occurring after the reporting date but before the auditor's report is signed. ISA 560 categorises them as adjusting (confirming conditions at year end) or non-adjusting (indicating conditions arising after year end).
Question 4: The auditor's report on a set of financial statements is addressed to:
- The directors of the company
- The shareholders (members) of the company (Correct answer)
- The audit committee only
- HMRC and Companies House
Correct answer: The shareholders (members) of the company
The auditor's report is addressed to the shareholders (members) of the company — reflecting the fact that shareholders appoint the auditor to provide assurance on their behalf on the accounts prepared by management/directors.
Question 5: Audit documentation (working papers) must be retained for at least:
- 1 year
- 3 years
- 5 years (Correct answer)
- 7 years
Correct answer: 5 years
Under ISA 230 and regulatory requirements (ISQM 1), audit documentation must be retained for at least 5 years from the date of the auditor's report, enabling subsequent review of the audit quality.
Question 6: Independence in fact and independence in appearance are both required because:
- Only public companies need auditor independence
- Actual independence protects judgement quality; apparent independence maintains public confidence in the audit (Correct answer)
- Independence in appearance is required but independence in fact is optional for SME audits
- Both are the same concept with different names
Correct answer: Actual independence protects judgement quality; apparent independence maintains public confidence in the audit
Independence of mind (in fact) ensures the auditor actually reaches unbiased conclusions; independence in appearance ensures that reasonable observers would perceive the auditor as independent — both are necessary to maintain trust in the audit process.
AAT L4 Audit & Assurance 3
Under ISA 520, analytical procedures used as substantive procedures involve: