Advanced Audit and Assurance (AAA) Flashcards

An auditor discovers that the finance director has overridden internal controls to process a series of journal entries at year-end that materially inflate revenue. Under ISA 240, this is indicative of:

Answer: Fraud through management override of controls

ISA 240 specifically identifies management override of controls as a fraud risk that exists in all entities. When a senior manager deliberately circumvents controls to process fictitious or inflated revenue entries, this constitutes fraud (intentional misstatement for personal gain or to mislead users). The auditor must consider the implications for the entire audit, the reliability of other management representations, and potential reporting obligations to regulators.

An auditor is considering whether to place reliance on the work of internal audit. Under ISA 610 (Revised), which factor is LEAST relevant to this assessment?

Answer: The size of the internal audit department's budget

ISA 610 (Revised) requires the external auditor to evaluate the internal audit function's objectivity (reporting lines, organisational status, freedom from management influence), competence (qualifications, experience, training), and systematic approach (planning, documentation, quality control). The budget size of internal audit is not directly relevant — a small but highly competent and objective function may be more reliable than a large but poorly managed one.

A company's auditors discover a subsequent event after the date of the auditor's report but before the financial statements are issued. Under ISA 560, what is the auditor's responsibility?

Answer: The auditor must discuss the matter with management and consider whether the financial statements need amendment

Under ISA 560 Subsequent Events, if the auditor becomes aware of facts after the auditor's report date but before the financial statements are issued, they must discuss the matter with management, determine whether amendment is needed, and if management amends the financial statements, perform necessary procedures on the amendment and provide a new or amended auditor's report. The auditor cannot simply ignore post-report-date discoveries.

In the context of audit evidence, which of the following combinations provides the MOST reliable evidence?

Answer: External confirmation from a third party combined with physical inspection of assets

External confirmation (evidence from independent third parties) and physical inspection (direct verification of existence) are among the most reliable forms of audit evidence because they come from independent sources and involve direct auditor observation. Inquiries and management representations are the least reliable (self-serving). Analytical review provides corroborative but not conclusive evidence. Recalculation of internal documents only confirms arithmetic, not the underlying data.

The audit committee of a listed company asks the external auditor to perform a non-audit service involving the design and implementation of internal controls over financial reporting. Under ethical requirements, this is:

Answer: Prohibited because it creates a self-review threat — the auditor would be auditing their own work

Designing and implementing internal controls over financial reporting for an audit client creates an unacceptable self-review threat — the auditor would subsequently be evaluating the effectiveness of controls they designed. This is explicitly prohibited under the IESBA Code and FRC Ethical Standard for public interest entities. No safeguards (including audit committee approval, separate partners, or fee limits) can reduce this threat to an acceptable level.

An auditor determines that the financial statements are materially misstated due to the non-disclosure of a significant related party transaction, and management refuses to correct the financial statements. Under ISA 705, the auditor should issue:

Answer: A qualified opinion (except for) or adverse opinion depending on the pervasiveness of the misstatement

Under ISA 705, when the financial statements are materially misstated and management refuses to amend them, the auditor must modify the opinion. If the misstatement is material but not pervasive (i.e., it affects specific disclosures but the rest of the financial statements are fairly presented), a qualified (except for) opinion is appropriate. If the misstatement is both material and pervasive (undermining the overall picture), an adverse opinion is required. A disclaimer relates to inability to obtain evidence, not disagreements.