Section A

1 ABC Co
(a) The correct answer is: (a), (b), (c) and (d)
(b) The correct answers are:
• Assessing and monitoring internal control procedures
• Evaluating the overall risk management policies of the company
Internal auditors must retain objectivity towards the systems which it monitors. This would be
impaired if it managed the accounting and finance department or implemented changes to
systems.
(c) The correct answers are:
• The role of the external auditor is set down in law whilst the role of the internal auditor will
depend on the requirements of the company.
• The internal auditor can be an employee of the company whilst the external auditor must
be independent.
The external auditor’s report is addressed to the shareholders, not the board of directors.
Internal auditors’ reports would normally be addressed to the board or the audit committee.
(d)

Advantage of Advantage of in-house

outsourcing
Provides flexibility with TRUE -
regards to level of staffing
and resources

Develops expertise of ABC - FALSE

Co staff

Results in lower staff TRUE -

training costs

Provides access to specialist TRUE -

skills

(e) The correct answer is: The audit committee

It would be acceptable for the internal auditors to report to the board but greater
independence is achieved by reporting to the audit committee. The effectiveness of the
internal audit function would be reduced if it reported to the finance director as the finance
director is likely to be responsible for many of the systems being monitored by the internal
audit department. It would not be appropriate for the internal audit department to report to
the external auditors as internal auditors are employed by the company for its own purposes.

2 Balotelli Beach Hotel Co

(a) The correct answer is: Depreciation should be $10,660, assets are understated
Depreciation should be calculated as:
Treadmills/exercise bikes = (18,000 + 17,000)/36 × 8 months = 7,778
Rowing machines/cross trainers = (9,750 + 11,000)/36 × 5 months = 2,882
Total 10,660

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 Therefore, the correct answer is $10,660 and assets are currently understated as too much
depreciation has currently been charged.
The second option is based on depreciation being applied for a full year instead of for the
relevant months.
The third option is based on depreciation not being charged in the month of acquisition (ie
seven and four months).
The fourth option is based on depreciation for the exercise bikes being divided by the three
years instead of allocated on a monthly basis.
(b) The correct answers are:
• Agree a sample of additions included in the non-current asset register to purchase invoice
and cash book
• Recalculate the depreciation charge for a sample of assets ensuring that it is being
applied consistently and in accordance with IAS 16 Property, Plant and Equipment
• Review physical condition of non-current assets for any signs of damage
• Ensure disposals are correctly accounted for and recalculate gain/loss on disposal
Reviewing board minutes for evidence of disposals is a test for existence and reviewing the
repairs and maintenance account is a test for completeness. All other tests are relevant for
valuation.
(c) The correct answer is: Send an enquiry letter to the lawyers of Balotelli to obtain their view as
to the probability of the claim being successful
While all procedures would be valid in the circumstances, only the written confirmation from
the company’s lawyers would allow the auditor to obtain an expert, third party confirmation
on the likelihood of the case being successful. This would provide the auditor with the most
reliable evidence in the circumstances.
(d) The correct answers are:
• It provides evidence from an independent external source
• It improves the reliability of audit evidence as the process is under the control of the
auditor
The evidence obtained from the trade receivables circularisation should be reliable as it is
from an external source and the risk of management bias and influence is restricted due to
the process being under the control of the auditor.
Customers are not obliged to answer and often circularisations have a very low response
rate. A circularisation will not provide evidence over the valuation assertion for receivables
and therefore the second and third options are drawbacks of a circularisation.
(e)

Customer Audit procedure

Willow Co No further audit procedures required

Cedar Co Agree to pre year end invoice

Maple Co Agree to post-year end cash book and bank statement

Laurel Co Discuss with management and consider whether amount

should be included in allowance for receivables

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 Willow Co – The external confirmation has confirmed the balance and no further work is
required.
Cedar Co – The difference represents an invoice in transit and therefore should be confirmed
to a pre year end invoice to verify that it is a legitimate timing difference.
Maple Co – The difference represents a payment in transit and should be agreed to post year
end payment to confirm that it is a legitimate timing difference.
Laurel Co – The customer is disputing the balance and therefore the need for an allowance
against the balance should be assessed.

3 X Co
(a) The correct answer is: 15 March 20X7
In accordance with ISA 580 (para. 14) written representations must be dated as near as is
practicable, but not after, the date of the auditor’s report.
The third and fourth options are after the date of the auditor’s report therefore would not be
relevant audit evidence in forming the audit opinion.
The first option is possible as it is before 15 March but does not answer the question which is
asking for the latest date on which they can be signed.
(b) The correct answer is: (a) only
ISA 560 (para. 6) requires auditors to obtain sufficient appropriate evidence of events
occurring between the date of the financial statements (31 December 20X6) and the date of
the auditor’s report (15 March 20X7).
Event 2 takes place after 15 March 20X7 and so the auditor does not therefore have a
responsibility in respect of this.
(c) The correct answer is: All misstatements other than those which are clearly trivial must be
communicated to the appropriate level of management.
All misstatements accumulated during the audit must be communicated to the appropriate
level of management (ISA 450: para. 8). Accumulated misstatements are all misstatements
except those which are clearly trivial.
The fourth option is incorrect as it only refers to material uncorrected misstatements being
communicated.
Uncorrected misstatements only are communicated to those charged with governance (ISA
450: para. 12) therefore, the first and second options are incorrect.
(d) The correct answer is: The Other Information section will state that the auditors have
concluded that a misstatement of the other information exists
ISA 720 (para. 21) requires the inclusion of an Other Information section in the auditor’s
report.
The first and fourth options are incorrect as the matter is addressed in the auditor’s report
but not in an Emphasis of Matter paragraph.
Option three is incorrect as the audit opinion is on the financial statements, not the other
information.
(e) The correct answer is: Unmodified - Material Uncertainty Related to Going Concern
Unmodified audit opinion, Material Uncertainty Related to Going Concern section disclosure
The audit opinion is not modified as the auditor agrees with the treatment of the claim and
the disclosure is adequate. There is a material uncertainty re going concern and in
accordance with ISA 570 (para. 22) this is addressed in the Material Uncertainty Related to
Going Concern section of the auditor’s report.
The first and third options are incorrect as the audit opinion would not be modified as the
financial statements are not misstated and sufficient audit evidence has been obtained.

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 The fourth option is incorrect as an Emphasis of Matter paragraph is not used to disclose a
material uncertainty related to going concern.
Multiple choice questions
The remaining questions in this section of the Practice Question Bank are not in the current
exam format, but are intended as useful practice for the material in the chapters. The
Practice & Revision Kit provides a large number of exam format questions.

4 The correct answer is: External audits give reasonable assurance that the financial statements are
free from material misstatement.
Statutory audits give reasonable assurance. It is not possible to give absolute assurance, given
the inherent limitations of audit. Limited assurance is given in review engagements, where the
audit opinion is expressed in a negative form.

5 The correct answer is: (a) and (b)

Both statements are true. The directors are stewards of the shareholders’ investment and the
auditors act as an agent for the shareholders because they assess whether or not the financial
statements prepared by the directors are free from material misstatement.

6 The correct answer is: IAASB

The ISAs are issued by the International Auditing and Assurance Standards Board (IAASB), a
technical standing committee of the IFAC. The International Accounting Education Standards
Board (IAESB), also part of the IFAC, publishes the International Education Standards aiming to
increase the competence of the global accountancy profession. The International Accounting
Standards Board (IASB) issues the International Financial Reporting Standards. The Financial
Reporting Council (FRC) issues ISAs (UK), not the international standards.

7 The correct answers are:

• The ISAs aim to ensure that audits performed on different companies, in different
jurisdictions, adhere to common standards.
• The ISAs apply to the audit of smaller entities.
All of the ISAs must be complied with in an audit of historical financial information. A ‘comply or
explain’ approach is not possible here. The ISAs also apply to smaller entities, although specific
guidance is given on how certain requirements may be met in this case. There is no legal
requirement to comply with ISAs, rather this is a professional requirement.

8 The correct answer is: Both the directors and the audit committee
Best practice indicates that the internal audit function should have a dual reporting relationship,
reporting both to management and the audit committee. If the internal audit function does not
report to the audit committee, management may be able to unduly influence the internal audit
plan and scope, thus compromising the effectiveness of internal audit. The external auditors, not
the internal auditors, report to the shareholders.

9 The correct answer is: (a) and (b)

Risk management is a key feature of effective corporate governance. Similarly, whilst not
obligatory, the existence of an internal audit function improves corporate governance as it
enhances internal control.

10 The correct answers are:

• The audit manager of DEF Co owns a small number of shares in DEF Co
• The husband of the audit partner owns shares in DEF Co

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 The ACCA Code of Ethics and Conduct (s. 510.2) does not allow the following to have a direct or
indirect material financial interest in a client: the audit firm, a member of the audit team and an
immediate family member of a member of the audit team.

11 The correct answer is: Provision of bookkeeping services

Valuation for an immaterial matter can be undertaken for a public interest entity provided
safeguards exist, such as second partner review and the use of separate personnel for the
valuation and the audit. Assistance can be given in tax disputes provided the firm is not acting as
an advocate of the client and the effect of the matter is material to the financial statements.
Internal audit services can be provided except where this would result in the audit firm’s personnel
assuming management responsibility.

12 The correct answer is: Value for money audit

Economy, efficiency and effectiveness are sometimes referred to as the ‘3E’s’ of VFM audits.

13 The correct answer is: Inherent risk and control risk

The risk of material misstatement at the assertion level is made up of inherent risk and control risk.
Detection risk is the risk that the auditor’s procedures will not detect a misstatement that exists in
an assertion that could be material. Audit risk is the risk that the auditor gives an inappropriate
audit opinion when the financial statements are materially misstated. Audit risk is made up of
inherent risk, control risk and detection risk (AR = IR × CR × DR)

14 The correct answer is: (b) only

The audit engagement partner is not required to review all audit documentation. However, ISA 220
(para. 17) requires reviews to be performed to ensure that any significant issues are addressed on
a timely basis and sufficient and appropriate audit evidence is obtained to support the audit
opinion. All audit work should be directed, supervised and review by a more senior member of the
audit team in order to identify any errors, inconsistencies and areas where further audit work is
required.

15 The correct answer is: (a), (b) and (c)

Performance materiality may be set for particular classes of transactions, account balances or
disclosures. Directors’ remuneration is an account where law and regulation affect users’
expectations regarding disclosure. A lower level of performance materiality therefore should be
applied. Exploration and development costs are material due to the industry in which the
company operates, and therefore merits a lower performance materiality level.
ISA 320 (para. 11) requires performance materiality to be set to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality for the financial statements as a whole. All uncorrected misstatements should be
cumulated and communicated to management, unless they are clearly trivial.

16 The correct answer is: The applicable financial reporting framework

The applicable financial reporting framework would be expected to be covered in an overall audit
strategy document. The nature, timing and extent of audit procedures at the assertion level
should be included in the more detailed audit plan, as should the timetable for audit work and the
level of performance materiality.

17 The correct answer is: (a) and (b)

Both statements are true. Existence asserts that asset, liabilities and equity interests exist and cut-
off asserts that transactions and events have been recorded in the correct accounting period.

18 The correct answer is: (a) and (c)

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 The auditor cannot affect control risk or inherent risk. The auditor can reduce audit risk by
manipulating detection risk. Increasing sample sizes and assigning more experienced staff to the
audit will both reduce detection risk and therefore audit risk.

19 The correct answer is: Products or services and markets of the client’s business
The matters mentioned in the fourth option relate specifically to business operations. The matters
mentioned in the other options relate specifically to financial reporting, investments and financing
respectively.

20 The correct answer is: 7 years

ACCA recommends a minimum retention period of seven years (ACCA, 2016).

21 The correct answer is: ICEQ

ICEQs would be best suited to help auditors identify the direct controls for controls testing. ICQs
focus on whether the desirable controls are present, and so would not identify the areas at risk of
specific errors or frauds. Narrative notes describe and explain the system, but their detailed
nature makes it difficult to identify control exceptions at a glance. Flowcharts also describe the
system but do not highlight exceptions.

22 The correct answers are:

• Batch reconciliations
• Document counts
Records of program changes and virus checks are general IT controls.

23 The correct answer is: Credit limits are checked before sales orders are accepted.
This means that customers are not able to exceed their credit limits and are therefore more likely
to be able to pay. The first option helps to ensure that goods are sold at the right price. The third
and fourth options are effective controls regarding the recovery of debts but do not prevent sales
being made to customers who are unlikely to pay as the sale has already been made by this
stage.

24 The correct answer is: Sales and trade receivables may be understated.
The matching of dispatch notes to an invoice ensures that for all goods dispatched an invoice has
been raised. If this is not the case sales and trade receivables may be understated. For option 2
an appropriate control would be to match dispatch notes to invoices. Matching dispatch notes
and invoices would not prevent orders being dispatched incorrectly (option 1) or prevent invoices
being input incorrectly (option 4).

25 The correct answers are:

• There is a risk of fraud
• The deficiency interacts with other deficiencies identified
This is in accordance with guidance given in ISA 265 (para. A6).
If the likelihood of material misstatement and the number of transactions affected by the
deficiency is low, the deficiency is unlikely to be judged to be significant.

26 The correct answer is: It ensures that sales and receivables are valid and accurate.
The control helps to ensure sales are valid as sales are only recognised for goods which have been
dispatched.

27 The correct answer is: For a sample of sales invoices, verify that there are matching goods
despatched notes.

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 The direction of the test is important here. The sample is taken from sales invoices, as this tests
whether each sales order has been fulfilled (the assertion of occurrence). If the sample is taken
from goods despatched notes, this would instead confirm whether the goods sold had been
correctly invoiced (the assertion of completeness). The third and fourth options both test for
completeness.

28 The correct answers are:

• For a sample of sales invoices around the period end, inspect the dates and compare with
the dates of goods despatch and the dates recorded in the sales and receivables ledger to
confirm the application of correct cut-off.
• For a sample of sales transactions recorded in the ledger, vouch the sales invoice back to
customer orders and shipping documentation.
The risk here is the overstatement of sales revenue. The first option is an audit procedure which
tests for cut-off, where potential errors may cause revenue to be overstated. The third option is a
test of occurrence, also focusing on the overstatement of revenue. The second option tests for
completeness, so therefore identifies the understatement of revenue instead. The fourth option
relates to classification – this assertion has no impact on the overall revenue balance.

29 The correct answer is: 139 days

(160/420) × 365

30 The correct answer is: (a) and (b)

The first sentence provides the definition of audit sampling as set out in ISA 530 Audit Sampling
(para. 5).
The second sentence is also true, the situation may arise where a population consists of a small
number of high value items and the level of audit risk is deemed to be high. In this case the auditor
may well test all items within the population to reduce audit risk to an acceptable level.

31 The correct answer is: Evaluation of the adequacy of the allowance for receivables
Computer-assisted audit techniques cannot replace the skill of judgement used by the auditor.

32 The correct answer is: The external auditor must not use the work of the internal audit function.
In accordance with ISA 610 Using the Work of Internal Auditors the external auditor is prohibited
from using the work of internal audit in this situation as the risks to the quality of the evidence
provided are too great.

33 The correct answer is: Inspection of vehicle registration documents

The vehicle registration document records the details of the legal registered owner of the vehicle.

34 The correct answer is: Inventory is understated and liabilities are understated.
As the goods have been received, the goods must be recognised as an asset and the liability for
the goods must be recognised at the period end. As a purchase invoice has not been received and
the invoice amount has not been accrued for, liabilities are understated. This implies that the
corresponding asset (inventory) is also understated.

35 The correct answer is: (a) and (b)

Both statements are true. However, if the auditor does become aware of a fact that, had it been
known at the date of the auditor’s report, may have caused the auditor to amend the auditor’s
report, the auditor shall discuss the matter with management and determine whether the
financial statements need amendment.

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 36 The correct answer is: Request that management extends the assessment period to 31 December
20X5
Where the period used by management to determine whether the entity is a going concern is less
than 12 months from the period end, the auditor should request that management extends the
assessment period to at least 12 months from the period end (ISA 570: para. 13).

37 The correct answer is: Neither (a) nor (b)

In accordance with ISA 580 Written Representations (para. 4), written representations support
other evidence relevant to financial statements, ie they are not sufficient appropriate evidence on
their own. Written representations should be prepared on the entity’s letterhead as they are a
formal communication from the entity’s management to the auditor.

38 The correct answer is: The auditor must accumulate misstatements identified during the audit,
other than those that are clearly trivial.
This is in accordance with ISA 450 Evaluation of Misstatements (para. 5) identified during the
audit.

39 The correct answer is: Deficiencies of internal controls

The basic elements of the auditor’s report are title, addressee, opinion paragraph, basis for
opinion paragraph, going concern paragraph, key audit matters paragraph, other information
paragraph, management’s responsibility for financial statements, auditor’s responsibility, other
reporting responsibilities, name of engagement partner, auditor’s signature, auditor’s address and
date of the report.

40 The correct answer is: Statement of financial position and statement of profit or loss
Both statements are materially misstated as the asset must be written off reducing the profit for
the year. An unmodified opinion can only be issued if both statements are adjusted.

41 The correct answer is: Qualified opinion

A qualified opinion is appropriate, because the matter is considered to be material, but not
pervasive. An unmodified opinion with an emphasis of matter paragraph is not relevant: it serves
to draw the attention of users to a matter appropriately presented or disclosed in the financial
statements, which is fundamental to the users’ understanding of the financial statements.

42 The correct answer is: Express an unmodified opinion and describe the material uncertainty in the
material uncertainty related to going concern paragraph
The matter should be described in a material uncertainty related to going concern paragraph, in
accordance with ISA 570 ((Revised): para. 19) Going concern. The other matter paragraph is used
to refer to a matter that is not presented or disclosed in the financial statements: the material
uncertainty is disclosed in this case, so that would not be appropriate. The emphasis of matter
paragraph does not modify the audit opinion. As the going concern assumption is appropriate
and there is adequate disclosure, the audit opinion should not be modified.

43 The correct answer is: (a) only

ISA 705 (para. 29) states that the auditor must not include a key audit matters section in the
auditor’s report where a disclaimer of opinion is expressed.
If there is insufficient evidence in relation to a pervasive matter, a disclaimer of opinion should be
issued.

44 The correct answer is: (b), (c) and (d)

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 The review of audit working paper files to ensure that the audit has been performed in
accordance with professional standards and regulatory and legal requirements is carried out by
the audit engagement partner.

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