AAT L4 Audit & Assurance 4 — Questions and Answers
Question 1: The Conceptual Framework for Assurance Engagements identifies three parties to an assurance engagement. These are:
- Client, auditor, and HMRC
- Practitioner, intended users, and the responsible party (management) (Correct answer)
- Auditor, audit committee, and shareholders
- Client, regulator, and auditor
Correct answer: Practitioner, intended users, and the responsible party (management)
The three parties are: the practitioner (performing the engagement), the intended users (who rely on the conclusion), and the responsible party (management, who is responsible for the subject matter — e.g., the financial statements).
Question 2: Which of the following is a key difference between an internal audit function and an external audit?
- Internal auditors apply ISAs; external auditors do not
- External auditors report to shareholders and provide statutory assurance; internal auditors report to management/governance to improve internal controls (Correct answer)
- Internal audit is mandatory for all UK companies
- External audit is voluntary; internal audit is statutory
Correct answer: External auditors report to shareholders and provide statutory assurance; internal auditors report to management/governance to improve internal controls
External audit provides independent statutory assurance to shareholders on the financial statements; internal audit is an internal function focused on improving risk management, controls, and governance — reporting to management and the audit committee.
Question 3: The objective of a forensic audit is:
- To provide a standard audit opinion on financial statements
- To investigate suspected fraud, financial irregularity, or disputes for legal proceedings (Correct answer)
- To review internal controls annually
- To prepare financial statements for tax purposes
Correct answer: To investigate suspected fraud, financial irregularity, or disputes for legal proceedings
Forensic audits are specialist investigations into suspected fraud, financial crime, or disputes; they often provide evidence suitable for use in legal proceedings and are more detailed and focused than a financial statement audit.
Question 4: Under ISA 700, the auditor's report must include a section describing Key Audit Matters (KAMs) for:
- All entities subject to statutory audit
- Listed entities and, where required by law or regulation, other public interest entities (Correct answer)
- Only companies with turnover above £100 million
- All entities applying IFRS
Correct answer: Listed entities and, where required by law or regulation, other public interest entities
ISA 701 requires KAMs disclosure in audit reports of listed entities and those where regulators or law require it. For unlisted entities applying ISA 700, KAMs are not required (though they may be included voluntarily).
Question 5: Due professional care in auditing requires the auditor to:
- Guarantee that all fraud is detected
- Apply the skill and care of a reasonably competent, diligent auditor (Correct answer)
- Perform all audit procedures personally
- Agree with all of management's accounting judgements
Correct answer: Apply the skill and care of a reasonably competent, diligent auditor
Due professional care requires the auditor to exercise the skill, knowledge, and diligence expected of a competent professional. It does not require perfection — the standard is that of a reasonably competent auditor.
Question 6: Which of the following represents a threat to auditor independence in the UK?
- The audit firm uses an internal quality review of the engagement
- A partner of the audit firm holds shares in a listed audit client (Correct answer)
- The engagement partner has five years of experience with the client
- The auditor requests written representations from management
Correct answer: A partner of the audit firm holds shares in a listed audit client
A partner holding shares in an audit client creates an unacceptable self-interest threat to independence; audit engagement partners (and others in the audit team) must not hold financial interests in audit clients.
AAT L4 Audit & Assurance 4
The Conceptual Framework for Assurance Engagements identifies three parties to an assurance engagement.
These are: