ACA Audit and Assurance 2 — Questions and Answers
Question 1: Which of the following is an example of a substantive procedure?
- Testing whether purchase orders are properly authorised
- Sending confirmation letters to trade receivables (Correct answer)
- Observing whether duties are properly segregated
- Reviewing the entity's code of conduct
Correct answer: Sending confirmation letters to trade receivables
Sending confirmation letters to trade receivables is a substantive procedure — specifically a test of detail — designed to obtain evidence about the existence and accuracy of account balances. The other options are tests of controls.
Question 2: Under ISA (UK) 520, what is the primary purpose of analytical procedures performed at the planning stage of an audit?
- To provide substantive evidence about account balances
- To identify areas of potential risk and focus the audit effort (Correct answer)
- To confirm the accuracy of the prior year's audit
- To satisfy the requirement for a final analytical review
Correct answer: To identify areas of potential risk and focus the audit effort
Analytical procedures at the planning stage help the auditor understand the entity and its environment, identify areas where material misstatements are likely, and determine the nature, timing, and extent of further audit procedures.
Question 3: Under UK company law, for how long must audit working papers be retained?
- 3 years
- 6 years (Correct answer)
- Indefinitely
- 1 year
Correct answer: 6 years
Under the FRC's ethical and quality management standards, audit working papers must generally be retained for a minimum of 6 years from the date of the audit report (or longer if required by law or regulation). This aligns with the UK limitation period for contractual claims.
Question 4: What does the concept of 'audit materiality' represent?
- The total value of assets on the balance sheet
- The threshold above which misstatements could influence the economic decisions of users of the financial statements (Correct answer)
- The minimum fee the auditor will charge
- The level of detail required in audit documentation
Correct answer: The threshold above which misstatements could influence the economic decisions of users of the financial statements
Under ISA (UK) 320, materiality is the magnitude of misstatements that, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. It is a matter of professional judgement.
Question 5: Which of the following situations would most likely require the auditor to issue a disclaimer of opinion?
- A minor disagreement over an accounting policy
- The auditor is unable to obtain sufficient appropriate evidence due to a pervasive limitation on the scope of the audit (Correct answer)
- A material but isolated misstatement in inventory
- The entity has changed its depreciation method
Correct answer: The auditor is unable to obtain sufficient appropriate evidence due to a pervasive limitation on the scope of the audit
Under ISA (UK) 705, a disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence and the possible effects on the financial statements could be both material and pervasive. This represents the most severe scope limitation.
Question 6: Under ISA (UK) 240, which of the following is TRUE regarding the auditor's responsibility for fraud?
- The auditor is responsible for preventing all fraud
- The auditor must obtain reasonable assurance that the financial statements are free from material misstatement due to fraud (Correct answer)
- The auditor has no responsibility regarding fraud
- The auditor must report all fraud directly to the police
Correct answer: The auditor must obtain reasonable assurance that the financial statements are free from material misstatement due to fraud
ISA (UK) 240 requires the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error. The primary responsibility for prevention and detection of fraud rests with management and those charged with governance.
ACA Audit and Assurance 2
Which of the following is an example of a substantive procedure?