ACCA AS Audit and Assurance (AA) 2 — Questions and Answers
Question 1: Under ISA 315, which component of internal control encompasses the entity's attitudes, awareness, and actions regarding internal control?
- Control activities
- Information system
- Control environment (Correct answer)
- Monitoring of controls
Correct answer: Control environment
The control environment is the foundation of all other components of internal control. It includes governance and management functions, management's integrity and ethical values, organizational structure, assignment of authority, human resource policies, and the overall attitudes toward internal control. It sets the 'tone at the top'.
Question 2: An auditor is planning to attend the year-end inventory count. Under ISA 501, which of the following procedures should the auditor perform?
- Count all inventory items and compare to the client's records
- Evaluate management's instructions, observe the count procedures, and perform test counts (Correct answer)
- Rely solely on the client's internal audit team to verify inventory quantities
- Confirm inventory quantities with the entity's suppliers
Correct answer: Evaluate management's instructions, observe the count procedures, and perform test counts
ISA 501 requires the auditor to attend the physical inventory count (where practicable) to: evaluate management's instructions and procedures, observe the performance of the count, inspect the inventory, and perform test counts. The auditor is not required to count all items — sampling-based test counts are sufficient.
Question 3: What is the purpose of an engagement letter in an audit?
- To guarantee that no material misstatements exist in the financial statements
- To document the agreed terms of the engagement between the auditor and the client (Correct answer)
- To provide the auditor's preliminary opinion on the financial statements
- To satisfy the regulatory requirement for audit registration
Correct answer: To document the agreed terms of the engagement between the auditor and the client
Under ISA 210, the engagement letter documents the agreed terms of the audit engagement, including the objective and scope of the audit, the responsibilities of the auditor and management, identification of the financial reporting framework, and the expected form of any reports. It helps prevent misunderstandings between the parties.
Question 4: Which of the following audit procedures provides the MOST reliable audit evidence?
- Inquiry of management about related party transactions
- Analytical review of revenue trends
- Direct confirmation from a bank of the client's cash balances (Correct answer)
- Inspection of internally generated sales invoices
Correct answer: Direct confirmation from a bank of the client's cash balances
ISA 500 establishes that evidence is more reliable when obtained from independent external sources. Direct bank confirmation is the most reliable because it comes from an independent third party (the bank) and directly confirms the existence and amount of cash balances. Management inquiry is the least reliable, and internal documents are less reliable than external sources.
Question 5: Under ISA 320, why does the auditor set performance materiality at a level lower than overall materiality?
- To increase the amount of audit work performed
- To reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality (Correct answer)
- To satisfy regulatory requirements for conservative auditing
- To ensure all transactions above a certain amount are tested
Correct answer: To reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality
Performance materiality is set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds overall materiality. It acts as a safety buffer, recognising that the auditor may not detect all misstatements.
Question 6: Which of the following is an example of a 'subsequent events' audit procedure?
- Reperforming the client's bank reconciliation at the year end
- Reviewing minutes of board meetings held after the reporting date (Correct answer)
- Confirming year-end trade receivable balances with customers
- Testing the depreciation charge for the year
Correct answer: Reviewing minutes of board meetings held after the reporting date
Under ISA 560, the auditor must perform procedures to identify events between the date of the financial statements and the date of the auditor's report that may require adjustment or disclosure. Reviewing board minutes after year end is a key subsequent events procedure, as it may reveal significant events, commitments, or legal issues arising after the reporting date.
ACCA AS Audit and Assurance (AA) 2
Under ISA 315, which component of internal control encompasses the entity's attitudes, awareness, and actions regarding internal control?