ACCA AS Audit & Assurance 2 — Questions and Answers
Question 1: Which of the following is an indicator of a 'going concern' problem?
- The company has recently issued additional share capital
- Net current liabilities (negative working capital) (Correct answer)
- A high gross profit margin
- Favourable year-on-year revenue growth
Correct answer: Net current liabilities (negative working capital)
Net current liabilities (current liabilities exceeding current assets) indicate potential liquidity problems and are a significant indicator of going concern uncertainty.
Question 2: Substantive analytical procedures are MOST effective when:
- There is a high volume of unpredictable transactions
- The auditor expects relationships between data items to be predictable and stable (Correct answer)
- The client has no prior year comparatives
- The client operates in a rapidly changing industry
Correct answer: The auditor expects relationships between data items to be predictable and stable
Analytical procedures are most powerful when the auditor can establish a reliable expectation of a balance, which requires predictable and stable relationships between data (e.g., rent expense vs floor area).
Question 3: An auditor discovers a material misstatement that management refuses to correct. The auditor should:
- Accept the misstatement as immaterial
- Issue a qualified or adverse opinion (Correct answer)
- Resign immediately without issuing any report
- Issue an unmodified opinion with an emphasis of matter
Correct answer: Issue a qualified or adverse opinion
If management refuses to correct a material misstatement, the auditor modifies the audit opinion: a material but not pervasive misstatement results in a qualified ('except for') opinion; a pervasive misstatement results in an adverse opinion.
Question 4: Which of the following is a responsibility of management (not the auditor) regarding financial statements?
- Applying professional scepticism
- Forming an opinion on the financial statements
- Preparing financial statements that give a true and fair view (Correct answer)
- Designing audit procedures to detect fraud
Correct answer: Preparing financial statements that give a true and fair view
The preparation of financial statements that give a true and fair view is management's responsibility. The auditor's role is to audit those statements and express an opinion.
Question 5: An 'emphasis of matter' paragraph in an audit report:
- Modifies the audit opinion
- Draws attention to a matter already adequately disclosed in the financial statements that is fundamental to users' understanding (Correct answer)
- Indicates the auditor has found a material misstatement
- Replaces the auditor's conclusion
Correct answer: Draws attention to a matter already adequately disclosed in the financial statements that is fundamental to users' understanding
An emphasis of matter paragraph (ISA 706) highlights a matter properly presented and disclosed in the financial statements that the auditor considers fundamental to users' understanding. It does not modify the opinion.
Question 6: Which of the following is the correct order of the audit risk model?
- Detection risk = Audit risk ÷ (Inherent risk × Control risk)
- Audit risk = Inherent risk × Control risk × Detection risk (Correct answer)
- Control risk = Audit risk − Inherent risk − Detection risk
- Audit risk = Detection risk ÷ (Inherent risk × Control risk)
Correct answer: Audit risk = Inherent risk × Control risk × Detection risk
Audit risk = Inherent risk × Control risk × Detection risk. The auditor assesses inherent and control risk, then sets detection risk to achieve an acceptable overall audit risk level.
ACCA AS Audit & Assurance 2
Which of the following is an indicator of a 'going concern' problem?