ACA Assurance & Audit 2 — Questions and Answers
Question 1: An auditor discovers a significant deficiency in internal controls. Under ISA 265, this must be communicated to:
- The general public
- Those charged with governance (Correct answer)
- The tax authorities
- The company's bankers
Correct answer: Those charged with governance
ISA 265 requires the auditor to communicate significant deficiencies in internal control in writing to those charged with governance and management.
Question 2: Under ISA 240, the auditor's responsibility regarding fraud is to:
- Prevent and detect all fraud
- Obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error (Correct answer)
- Investigate all suspected fraud in detail
- Report all suspicions directly to the police
Correct answer: Obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error
ISA 240 clarifies that the auditor's objective is to obtain reasonable assurance; the primary responsibility for prevention and detection of fraud rests with management and those charged with governance.
Question 3: Substantive procedures in an audit include:
- Walkthrough tests and control testing only
- Tests of details and analytical procedures (Correct answer)
- Obtaining an understanding of internal controls
- Documenting the flow of transactions
Correct answer: Tests of details and analytical procedures
Substantive procedures comprise tests of details (examining individual transactions and balances) and substantive analytical procedures, both aimed at detecting material misstatements.
Question 4: Under ISA 560, subsequent events that come to the auditor's attention after the financial statements are issued:
- Do not require any action
- Require the auditor to discuss with management and consider whether amendment is needed (Correct answer)
- Are automatically adjusted in the statements
- Only need to be noted in the next year's audit
Correct answer: Require the auditor to discuss with management and consider whether amendment is needed
ISA 560 requires the auditor to discuss newly discovered facts with management, determine whether amendment is needed, and take appropriate action if management refuses to amend.
Question 5: Professional scepticism in auditing means:
- Assuming management is dishonest
- An attitude that includes a questioning mind and critical assessment of evidence (Correct answer)
- Accepting all audit evidence at face value
- Only querying transactions that appear unusual
Correct answer: An attitude that includes a questioning mind and critical assessment of evidence
Professional scepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate misstatement, and critically assessing audit evidence regardless of past experience.
Question 6: The primary purpose of an audit engagement letter is to:
- Provide audit findings to shareholders
- Agree the terms of the engagement and define responsibilities (Correct answer)
- Set out the audit fee structure only
- Confirm the entity's accounting policies
Correct answer: Agree the terms of the engagement and define responsibilities
The engagement letter, required by ISA 210, defines the terms of the audit, including the objective, scope, responsibilities of each party, and the form of any reports to be issued.
ACA Assurance & Audit 2
An auditor discovers a significant deficiency in internal controls.
Under ISA 265, this must be communicated to: