ACCA Chartered Certified Accountant (Applied Skills) — Questions and Answers

Question 1: What is the purpose of a 'walk-through' procedure in an internal control audit?

To independently reperform a complete transaction cycle to confirm system accuracy
To review all journal entries posted during the period for unusual items
To trace a single transaction through each step of the relevant process to confirm that controls exist and operate as described (Correct answer)
To physically inspect the facilities where transactions are processed

Correct answer: To trace a single transaction through each step of the relevant process to confirm that controls exist and operate as described

A walk-through traces one or a few transactions through the entire process from initiation to recording, confirming that documented controls exist and function as described in the narrative or flowchart.

Question 2: Independence of the internal audit function is best maintained by having the Chief Audit Executive (CAE) report functionally to:

The Controller
The CFO
The Audit Committee of the Board (Correct answer)
The CEO only

Correct answer: The Audit Committee of the Board

Functional reporting to the Audit Committee (rather than management) preserves the internal audit function's objectivity and independence, as the committee can act on audit findings without management influence.

Question 3: What is 'variance analysis' in the context of the budgeting process?

Comparing actual results to budgeted amounts to identify and explain differences (Correct answer)
Analyzing cost behavior patterns across departments
Evaluating alternative investment scenarios
Measuring statistical variability in financial data sets

Correct answer: Comparing actual results to budgeted amounts to identify and explain differences

Variance analysis compares actual financial performance against budgeted figures to identify the amount and causes of differences for management action.

Question 4: An engagement partner retires and joins the client as CFO two years later. Under SOX 'revolving door' provisions, which is true?

This is only restricted for Big Four partners
This violates the one-year cooling-off period required by SOX Section 206 (Correct answer)
This is permissible since the partner retired first
This requires audit committee approval only

Correct answer: This violates the one-year cooling-off period required by SOX Section 206

SOX Section 206 requires a one-year cooling-off period for lead partners before accepting key financial roles at former audit clients, regardless of how the relationship ended.

Question 5: Under the passive activity loss rules, which of the following taxpayers may deduct up to $25,000 of rental losses against ordinary income?

A real estate professional with unlimited participation
An active participant with MAGI under $100,000 (Correct answer)
A passive investor with no material participation
Any taxpayer who owns rental property

Correct answer: An active participant with MAGI under $100,000

The $25,000 rental loss allowance phases out between $100,000–$150,000 MAGI and requires active participation.

Question 6: When advising a client on market entry, the 'born global' strategy refers to firms that:

Partner with local firms before going independent
Expand internationally only after dominating their home market
Target international markets from inception (Correct answer)
Use franchising as the sole entry mode

Correct answer: Target international markets from inception

Born global firms pursue international markets from or near their founding, bypassing the traditional sequential internationalization process.

Question 7: Which form must employers file to report annual federal unemployment (FUTA) tax?

Form W-3
Form 941
Form 944
Form 940 (Correct answer)

Correct answer: Form 940

Form 940 (Employer's Annual Federal Unemployment Tax Return) is used to report and pay FUTA tax annually.

Question 8: In a forensic investigation, what does 'chain of custody' refer to?

The sequence of accounting entries in a transaction cycle
The order in which financial statements are prepared
The chronological documentation tracking the handling and transfer of evidence (Correct answer)
The hierarchy of management approvals required for transactions

Correct answer: The chronological documentation tracking the handling and transfer of evidence

Chain of custody is the unbroken documentation showing the seizure, custody, control, transfer, and analysis of evidence, which is critical for admissibility in court.

Question 9: What is the primary purpose of forensic accounting?

To audit publicly traded financial statements
To manage corporate budgets and forecasts
To investigate financial fraud and disputes for legal proceedings (Correct answer)
To prepare corporate tax returns

Correct answer: To investigate financial fraud and disputes for legal proceedings

Forensic accounting combines accounting, auditing, and investigative skills to examine financial records for use in legal proceedings.

Question 10: Which of the following best describes the concept of 'professional skepticism' in auditing?

Refusing to accept any management representations
Requiring corroboration for every audit finding
Assuming management is dishonest until proven otherwise
Questioning mindset with critical assessment of evidence (Correct answer)

Correct answer: Questioning mindset with critical assessment of evidence

Professional skepticism is a questioning mindset that critically assesses audit evidence without assuming management is either honest or dishonest.

Question 11: The primary purpose of a risk register in enterprise risk management is to:

Calculate the aggregate financial exposure of all risks to determine insurance premiums
Satisfy regulatory requirements for documentation of compliance activities
Record identified risks, their likelihood and impact assessments, risk owners, and planned responses in a single repository (Correct answer)
Replace the internal audit function's annual risk assessment process

Correct answer: Record identified risks, their likelihood and impact assessments, risk owners, and planned responses in a single repository

A risk register is a centralized document that captures identified risks, their assessed likelihood and impact, assigned owners, and the controls or actions planned to manage each risk.

Question 12: The Dodd-Frank Act enhanced whistleblower protections in the United States by:

Offering financial awards to individuals who report securities law violations resulting in SEC enforcement actions over $1 million (Correct answer)
Requiring companies to publish all internal audit reports publicly
Mandating that all employees attend annual fraud awareness training
Prohibiting companies from conducting background checks on new hires

Correct answer: Offering financial awards to individuals who report securities law violations resulting in SEC enforcement actions over $1 million

Dodd-Frank established an SEC whistleblower program that pays eligible individuals 10–30% of sanctions collected in successful enforcement actions exceeding $1 million, significantly incentivizing reporting.

Question 13: What is 'participative budgeting' (also called bottom-up budgeting)?

Budgets benchmarked against industry peer performance
A process where lower-level managers participate in setting their own budget targets (Correct answer)
A budgeting process where costs are allocated based on activity cost drivers
A budgeting approach performed by external management consultants

Correct answer: A process where lower-level managers participate in setting their own budget targets

Participative budgeting involves lower-level managers in the budget-setting process, which can improve forecast accuracy and increase employee commitment to targets.

Question 14: Under ISA 315, which element is NOT one of the components of an entity's system of internal control?

Risk assessment process
External audit opinion (Correct answer)
Monitoring of controls
The control environment

Correct answer: External audit opinion

ISA 315 identifies five components of internal control: control environment, entity's risk assessment process, control activities, information systems, and monitoring of controls — the external audit opinion is not a component.

Question 15: Which regulatory body issues auditing standards for public company auditors in the United States regarding internal controls?

COSO
FASB
AICPA
PCAOB (Correct answer)

Correct answer: PCAOB

The Public Company Accounting Oversight Board (PCAOB) was established by SOX to issue auditing standards for registered public accounting firms, including AS 2201 on ICFR audits.

Question 16: Which body is primarily responsible for overseeing a company's financial reporting and external auditor relationship in a U.S. public company?

The Audit Committee of the Board of Directors (Correct answer)
The CFO
The Internal Audit Department
The SEC Enforcement Division

Correct answer: The Audit Committee of the Board of Directors

The Audit Committee, composed of independent directors, is responsible for overseeing financial reporting integrity, hiring the external auditor, and reviewing audit findings.

Question 17: In evaluating the severity of a control deficiency, which factor is most relevant?

The magnitude of the potential misstatement and the likelihood it would occur (Correct answer)
The number of employees in the accounting department
Whether the company is publicly or privately held
The age of the accounting software in use

Correct answer: The magnitude of the potential misstatement and the likelihood it would occur

Severity is assessed by considering both the likelihood that the deficiency would result in a misstatement and the magnitude (quantitative and qualitative) of that potential misstatement.

Question 18: An external auditor discovers that a key audit team member has a direct financial interest in the audit client. The appropriate action is to:

Reduce the audit scope to compensate for the bias risk
Remove the team member from the engagement to eliminate the independence threat (Correct answer)
Disclose the interest in the audit report footnotes
Obtain client management approval to continue with enhanced safeguards

Correct answer: Remove the team member from the engagement to eliminate the independence threat

A direct financial interest in an audit client creates a self-interest threat to independence that cannot be mitigated by safeguards; the team member must be removed from the engagement.

Question 19: The 'margin of safety percentage' is calculated as:

Break-even sales ÷ Budgeted sales × 100
(Fixed costs ÷ Contribution margin) × 100
(Actual sales – Break-even sales) ÷ Actual sales × 100 (Correct answer)
(Contribution margin – Fixed costs) ÷ Variable costs × 100

Correct answer: (Actual sales – Break-even sales) ÷ Actual sales × 100

The margin of safety percentage shows how far actual sales can fall below current levels before the business reaches break-even, expressed as a proportion of actual sales.

Question 20: What is 'check kiting'?

Exploiting the float time between banks by writing checks against insufficient funds (Correct answer)
Forging authorized signatures on company checks
Altering the payee or amount on a check after it has been issued
Stealing blank checks and using them for personal purchases

Correct answer: Exploiting the float time between banks by writing checks against insufficient funds

Check kiting exploits the time lag between when a check is deposited and when it clears, creating artificially inflated balances across multiple bank accounts.

Question 21: Under IAS 10, which of the following is an adjusting event after the reporting period?

Discovery of fraud that existed at the reporting date (Correct answer)
A significant decline in asset values due to post-period market changes
Declaration of an ordinary dividend after year-end
A major fire destroying a factory after year-end

Correct answer: Discovery of fraud that existed at the reporting date

Fraud discovered post-period that existed at the reporting date is an adjusting event because it provides evidence of conditions at the balance sheet date.

Question 22: Which type of occupational fraud involves an employee creating fictitious vendors and submitting fraudulent invoices for payment?

Payroll fraud
Cash larceny
Billing scheme (Correct answer)
Check tampering

Correct answer: Billing scheme

A billing scheme involves submitting false invoices from fictitious or shell companies to steal funds through the accounts payable process.

Question 23: Which forensic technique examines hidden metadata within digital documents to verify their authenticity and detect tampering?

Continuous auditing
Data mining
Regression analysis
Digital forensics (Correct answer)

Correct answer: Digital forensics

Digital forensics involves the recovery and investigation of electronic data, including metadata that records when, where, and how a document was created or modified.

Question 24: Which of the following BEST describes 'business continuity risk'?

The risk that a competitor introduces a superior product causing revenue decline
The risk that key personnel leave the organization without adequate succession planning
The risk of regulatory non-compliance resulting in fines and sanctions
The risk that disruptions to critical operations prevent an organization from delivering products or services within acceptable timeframes (Correct answer)

Correct answer: The risk that disruptions to critical operations prevent an organization from delivering products or services within acceptable timeframes

Business continuity risk refers to the potential that an unexpected disruption — such as a natural disaster, cyberattack, or supply chain failure — prevents the organization from maintaining critical operations within defined recovery time objectives.

Question 25: Which of the following retirement account types allows tax-free qualified withdrawals in retirement?

SEP-IRA
Roth IRA (Correct answer)
SIMPLE IRA
Traditional IRA

Correct answer: Roth IRA

Roth IRA contributions are made with after-tax dollars, so qualified distributions in retirement are completely tax-free.

Question 26: What is the purpose of a cash flow statement?

To report profitability
To summarize asset valuations
To track cash inflows and outflows (Correct answer)
To measure shareholder dividends

Correct answer: To track cash inflows and outflows

The cash flow statement reports the cash generated and used by a company over a period, categorized into operating, investing, and financing activities. It provides insights into how a company manages its cash, distinct from its profitability, which is reported on the income statement.

Question 27: What is 'skimming' in the context of occupational fraud?

Taking cash before it is recorded in the accounting system (Correct answer)
Falsifying employee expense reports
Creating fictitious vendor invoices
Stealing from petty cash after it has been recorded

Correct answer: Taking cash before it is recorded in the accounting system

Skimming is an off-books fraud scheme where cash is stolen before it is entered into the accounting records, making it difficult to detect.

Question 28: Which red flag most strongly indicates potential payroll fraud?

Employees consistently claiming overtime hours
High employee turnover in a specific department
Employees frequently requesting pay advances
Multiple employees sharing the same bank account for direct deposit (Correct answer)

Correct answer: Multiple employees sharing the same bank account for direct deposit

Multiple employees sharing the same direct deposit bank account number is a strong indicator of ghost employee or payroll diversion schemes.

Question 29: Porter's generic strategy of 'differentiation focus' targets:

A narrow segment with unique product attributes (Correct answer)
All segments at the lowest cost
A narrow segment at the lowest cost
All market segments with unique features

Correct answer: A narrow segment with unique product attributes

Differentiation focus combines a niche market scope with a differentiation competitive advantage, not broad market reach.

Question 30: What is 'capital budgeting'?

The process of evaluating and selecting long-term investment projects (Correct answer)
Planning working capital requirements for the operating cycle
Preparing the federal government's annual capital spending plan
The process of budgeting employee compensation and benefit costs

Correct answer: The process of evaluating and selecting long-term investment projects

Capital budgeting is the process of analyzing and deciding which long-term investments — such as equipment, facilities, or acquisitions — are worth undertaking.

Question 31: Which analytical technique is commonly used in forensic accounting to identify unusual numeric patterns that may indicate fraud?

Ratio analysis
Break-even analysis
Trend analysis
Benford's Law analysis (Correct answer)

Correct answer: Benford's Law analysis

Benford's Law predicts the expected frequency distribution of leading digits in naturally occurring data and deviations from this pattern can signal fraudulent manipulation.

ACCA Chartered Certified Accountant (Applied Skills)

The ACCA Applied Skills exams assess candidates on core accounting and finance disciplines required to earn the Chartered Certified Accountant designation, covering audit & assurance, management accounting, financial reporting, and governance.

100

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150 min

Time Limit

50%

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