AAT Level 4 - Professional Diploma in Accounting Audit and Assurance Principles Questions and Answers — Questions and Answers
Question 1: An audit junior at a UK firm is offered a significant 'friends and family' discount on a new car by a client, a large car dealership. The discount is substantially better than that available to the general public. According to the FRC's Ethical Standard, which threat to professional ethics is most prominently created in this situation?
- Self-review threat
- Advocacy threat
- Self-interest threat (Correct answer)
- Familiarity threat
Correct answer: Self-interest threat
A self-interest threat arises when a financial or other interest influences an auditor's judgement or behaviour. Accepting a significant gift or preferential treatment, such as a large discount, creates a financial interest that could compromise the auditor's objectivity and professional scepticism. The other threats are less relevant: a self-review threat involves auditing one's own work, an advocacy threat involves promoting a client's position, and a familiarity threat arises from a long or close relationship.
Question 2: According to ISA (UK) 700 (Revised), which of the following is a fundamental element that MUST be included in the 'Basis for Opinion' section of an unmodified audit report for a UK company?
- A detailed list of all uncorrected misstatements found during the audit.
- A statement that the audit was conducted in accordance with International Standards on Auditing (UK). (Correct answer)
- The names of all senior members of the audit engagement team.
- A summary of the company's key performance indicators for the year.
Correct answer: A statement that the audit was conducted in accordance with International Standards on Auditing (UK).
The 'Basis for Opinion' section immediately follows the 'Opinion' section in an audit report. It must state that the audit was conducted in accordance with ISAs (UK) and refer to the 'Auditor's Responsibilities' section of the report. It also includes a statement that the auditor is independent and has fulfilled other ethical responsibilities. Uncorrected misstatements are communicated to management and those charged with governance, not typically listed in the report itself. Naming the entire team or summarising KPIs are not requirements for this section.
Question 3: An auditor is verifying the year-end trade receivables balance of a UK manufacturing company. They select a sample of customer balances and send letters directly to those customers, asking them to confirm in writing the amount they owed at the year-end. This procedure is an example of which type of audit evidence?
- Analytical procedures
- Inspection
- Observation
- External confirmation (Correct answer)
Correct answer: External confirmation
External confirmation is audit evidence obtained as a direct written response to the auditor from a third party (the confirming party). Sending letters to debtors to confirm balances is a classic example of this procedure. Inspection involves examining records or assets, observation involves watching a process being performed, and analytical procedures involve evaluations of financial information through analysis of plausible relationships.
Question 4: An auditor is assessing the risks for a new client operating in the highly volatile and complex cryptocurrency market. The nature of the client's transactions is complicated and involves a high degree of estimation and judgment, making the accounts susceptible to misstatement regardless of the internal controls in place. These factors are most likely to increase which component of the audit risk model?
- Inherent risk (Correct answer)
- Detection risk
- Control risk
- Sampling risk
Correct answer: Inherent risk
Inherent risk is the susceptibility of an assertion to a material misstatement before considering any related internal controls. Factors such as industry volatility, complexity of transactions, and high levels of judgment increase inherent risk. Control risk relates to the client's internal controls failing, and detection risk is the risk that the auditor's procedures will not find a misstatement. Sampling risk is not part of the main audit risk model.
Question 5: Which of the following provides the most accurate description of the primary purpose of an Engagement Quality Control Review (also known as a 'hot review') within a UK audit firm?
- To ensure the final audit fee is profitable for the firm and has been billed correctly to the client.
- To provide an objective evaluation of the significant judgements made and conclusions reached by the audit team before the report is signed. (Correct answer)
- To serve as the primary training mechanism for new audit staff by reviewing their completed work papers.
- To check that the financial statements have been correctly filed with Companies House within the statutory deadline.
Correct answer: To provide an objective evaluation of the significant judgements made and conclusions reached by the audit team before the report is signed.
An Engagement Quality Control Review (EQCR), as described in ISA (UK) 220, is a process designed to provide an objective evaluation of the significant judgments the engagement team made and the conclusions they reached in formulating the auditor's report, before the report is issued. It is performed by an experienced partner or manager not involved in the engagement to act as a safeguard for quality.
Question 6: Under the UK Companies Act 2006, who holds the primary responsibility for appointing the very first external auditors of a newly incorporated private company?
- The members (shareholders) by ordinary resolution at the first general meeting.
- The company's primary bank or lender to protect their interests.
- The directors of the company. (Correct answer)
- Her Majesty's Revenue and Customs (HMRC) as part of the registration process.
Correct answer: The directors of the company.
The Companies Act 2006 explicitly states that the first auditors of a company are to be appointed by the directors. Subsequent appointments are typically made by the members (shareholders) in a general meeting. This allows the company to have auditors in place before its first annual accounts are prepared.
AAT Level 4 - Professional Diploma in Accounting Audit and Assurance Principles Questions and Answers
An audit junior at a UK firm is offered a significant 'friends and family' discount on a new car by a client, a large car dealership.
The discount is substantially better than that available to the general public.
According to the FRC's Ethical Standard, which threat to professional ethics is most prominently created in this situation?