ACCA AS Audit and Assurance (AA) 2

Question 1

Under ISA 315, which component of internal control encompasses the entity's attitudes, awareness, and actions regarding internal control?

Accepted Answer

Control environment

Answer

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?

Accepted Answer

Evaluate management's instructions, observe the count procedures, and perform test counts

Answer

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?

Accepted Answer

To document the agreed terms of the engagement between the auditor and the client

Answer

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?

Accepted Answer

Direct confirmation from a bank of the client's cash balances

Answer

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?

Accepted Answer

To reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality

Answer

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.

ACCA Applied Skills Practice Test

ACCA Applied Skills Practice Test

ACCA AS Audit and Assurance (AA) 2