ACCA - Audit and Assurance (AA) Questions With Complete Solutions, Exams of Auditing

Download ACCA - Audit and Assurance (AA) Questions With Complete Solutions and more Exams Auditing in PDF only on Docsity!

ACCA - Audit and Assurance (AA) Questions

With Complete Solutions

Objective of an external audit - Correct answer The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with applicable financial reporting framework. An audit of financial statements is an example of an assurance engagement. Advantages of a non-statutory audit - Correct answer It can provide a means of settling accounts between the partners. Where audited accounts are available this may make the accounts more acceptable to taxation authorities. The sale of the business or the negotiation of loan or overdraft facilities may be facilitated if the firm is able to produce audited accounts. An audit on behalf of a sleeping partner is useful since generally such a personal have you have a means of checking the accounts of the business or confirming the share of profits due to them. Accountability - Correct answer The quality or state of being accountable; that is, being required or expected to justify actions and decisions. It suggests an application or willingness to accept responsibility for one's actions. Stewardship - Correct answer Refers to the duties and obligations of a person who manages another persons property. Agents - Correct answer Are people who are employed or used to provide a particular service. In the case of a company, the people being used to provide the service or managing the business also have the second role of trying to maximise their personal wealth in their own right. Assurance engagement - Correct answer A practitioner that aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria. Elements of an assurance engagement - Correct answer A three party relationship. The three parties are the intended user, the responsible party and the practitioner. A subject matter, where the data to be evaluated has been prepared by the responsible party. It can take many forms, including the financial performance, non-financial performance, process and behaviour. Suitable criteria, where the subject matter is evaluated or measured against criteria in order to reach an opinion. Evidence, where sufficient appropriate evidence needs to be gathered to support the required level of assurance.

An assurance report, where a written report containing the practitioners opinion is issued to the intended user in the form appropriate to reasonable assurance engagement or a limited assurance engagement. Intended users - Correct answer The individual or organisation, or group thereof that the practitioner expects will use the assurance repot. Reasonable party - Correct answer The party responsible for the underlying subject matter. Practitioner - Correct answer The individual conducting the engagement which will usually be the engagement partner or other members of the engagement team, or as applicable, the firm. Objective of a reasonable assurance engagement - Correct answer Is a reduction in assurance engagement risk to an acceptably low level in the circumstances of engagement as the basis for the insurance practitioners conclusion. The conclusion would usually be expressed in a positive forum. Objective of a review engagement - Correct answer Is obtain limited assurance about whether the subject matter information is free from material misstatement. An attestation engagement - Correct answer Where underlying subject matter has not been measured or evaluated by the practitioner, and the practitioner concludes whether or not the subject matter information is free from material misstatement. A direct engagement - Correct answer Where the underlying subject matter has been measured and evaluated by the practitioner, and the practitioner then presents conclusions on the reported outcome in the insurance report. Internal audit function - Correct answer Will perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entities governance, risk management and internal control processes. True - Correct answer Information is factual and conforms with reality. In addition, the information conforms with required standards and law. The financial statements have been correctly extracted from the books and records. Fair - Correct answer Information is free from discrimination and bias and is in compliance with expected standards and rules. The accounts should reflect the commercial substance of the companies underlying transactions. Reasonable assurance - Correct answer An audit gives the reader this assurance on the truth and fairness of the financial statements, which is high, but not absolute, level of assurance. The auditors report does not guarantee that the financial statements are correct, but that they are true and fair with in a reasonable margin of error.

Materiality - Correct answer An expression of the relative significance or importance of a particular matter in the context of the financial statements as a whole. The matter is material if it's a mission or misstatement would reasonably be expected to influence the economic decisions of use is taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Corporate governance - Correct answer Is the system by which companies are directed and controlled. Chair - Correct answer The chair and the chief executive cannot be the same individual. There is a time limit on the chairs position, and cannot remain in post for beyond nine years. They must be independent, and cannot be a former Chief Executive of the same company except in exceptional circumstances. Non-executive directors - Correct answer Are directors who do not have day-to-day operational responsibility for the company. They are not employees of the company or affiliated with it in any way. They can be compromised by the following: Employment with the company or group in the last five years. Material business relationships with the company in the past three years. Remuneration beyond the basic fee for the role. Close family ties with any of the companies advisors, directors or senior employees. Representing a significant shareholder. Serving longer than nine years on the board. Remuneration committee - Correct answer Must be established, made up of at least 3 independent non-executive directors, but in smaller companies it may be 2. Executive directors cannot sit on this committee. The chair of the board cannot chair on this committee, but they can be a member of it if they were independent on appointment. It is responsible for: Setting remuneration for the chair, executive directors and senior management. Setting the remuneration policy for executive directors. Reviewing workforce remuneration and policies. Nomination committee - Correct answer Should be established to lead the process for making nominations for board appointments. This committee should be made up of a majority of independent non-executive directors. All directors are then subject to annual re-election by shareholders. Audit committee - Correct answer A subcommittee of the board of directors, usually containing a number of independent non-executive directors. The role and function of this committee should be set out in written terms of reference and extract from the UK corporate governance code.

Those charged with governance - Correct answer The person or organisation with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. Management - Correct answer The persons with executive responsibility for the conduct of the entities operations. Integrity - Correct answer Members shall be straightforward and honest in all business and personal relationships. Objectivity - Correct answer Members shall not allow bias, conflict-of-interest or undue influence of others to override professional or business judgements. Professional competence and due care - Correct answer Members have a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. Confidentiality - Correct answer Members shall respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not to disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships must not be used for the personal advantage of members or third parties. Professional behaviour - Correct answer Members shall comply with relevant laws and regulations and avoid any action that discredits the profession. Obligatory disclosure - Correct answer If members know or suspect their clients to have committed money laundering, treason, drug trafficking or terrorist offences, they are obliged to disclose all the information at their disposal to a competent authority. Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts. Non-compliance - Correct answer Refers to acts of omission or commission, intentional or unintentional, committed by the entity, or by those charged with governance, by management or by other individuals working for or under the direction of the entity, which are contrary to the prevailing laws of regulations. Non-compliance does not include personal misconduct unrelated to the business activities of the entity. Independence of mind - Correct answer The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

Independence in appearance - Correct answer The avoidance of facts and circumstances that are so significant that a reasonable and informed third-party would be likely to conclude, weighing all the specific facts and circumstances, that offence, or member of the audit or assurance teams, integrity, objectivity or professional scepticism has been compromised. Self-interest threat - Correct answer The threat that a financial or other interest will inappropriately influence the professional accountants judgement or behaviour. Financial interest - Correct answer Exists where an audit firm has a financial interest in the clients affairs, for example, that audit firm owns shares in the client or is a trustee of the trust that holds shares in the client. Key audit partner - Correct answer Is the engagement partner, individual responsible for the engagement quality-control review or one of the other audit partners on the engagement team. They make key decisions or judgements on significant matters with respect to the audit of the financial statements on which the firm will express an opinion. Depending on the circumstances and the role of the individuals on the audit, other audit partners may include, audit partners responsible for significant subsidiaries or divisions. Contingent fees - Correct answer Are fees calculated on a predetermined basis relating to the outcome of result of a transaction or the result of the work performed. Self-review threat - Correct answer Arise when members review their own work or advice as part of an assurance engagement. Valuation - Correct answer Comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or the business as a whole. Advocacy threat - Correct answer Arises in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised. Familiarity threat - Correct answer Having an audit client for a long period of time may create this threat to independence. The severity of the threat depends on such factors as how long the individual has been on the audit team, have seen the other person is, with the clients management has changed and whether the clients accounting issues have changed in nature or complexity. Intimidation threat - Correct answer Arises when members of the audit team may be deterred from acting objectivity by threats, actual or perceived. These could arise from the family and personal relationships, litigation, or close business relationships.

Preconditions of an audit - Correct answer The used by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an order is conducted. Engagement letter - Correct answer Are written terms of an engagement in the form of a letter. Peer review - Correct answer A review of the audit file carried out by another partner in the assurance firm. Hot review (pre-issurance review) - Correct answer A peer review carried out before the auditors report is signed. Cold review (post-issuance review) - Correct answer A peer review carried out after the auditors report is signed. Internal audit function - Correct answer A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entities governance, risk management and internal control processes. Value for money audits - Correct answer The purpose is to examine the economy, efficiency and effectiveness of activities and processes within a business. These are very important for assessing the performance of not-for-profit organisations. Their performance cannot be properly assessed using conventional accounting ratios. The internal audit function or try to determine whether the optimal combination of goods and services have been obtained for the lowest level of resources. Economy - Correct answer Attaining the appropriate quantity and quality of physical, human and financial resources (inputs) at lowest cost. Buying the resources at the cheapest cost - the best price. Efficiency - Correct answer The relationship between goods and services produced (outputs) and the resources used to produce them. Using the resources purchased as wisely as possible and obtaining maximum usage. Effectiveness - Correct answer This it's connected with how well an activity is achieving its policy objectives or other intended effects. Doing the right things and meeting the organisation's objectives. Information technology audits - Correct answer Is a test of controls in a specific area of the business, the computer systems. Increasingly in modern business, computers are vital to the functioning of the business, and therefore the controls over them are key to the business.

Best value audits - Correct answer Is a performance framework introduced into local authorities by the UK government. They are required to publish annual best value performance plans and review all their functions over five-year period. As a part of best value, authorities are required to strive for continuous improvement by implementing: challenge, compare, consult, compete. Financial audits - Correct answer Is the internal audits of traditional role. Its purpose is to evaluate the operating effectiveness of the key business processes which relate to the financial statements. Regulatory compliance audit - Correct answer The regulation which affects companies all vary depending on the nature of the organisation. Some regulations will be specific to the industry that the client operates in and some will apply to all companies operating in a region or country. The purpose of this audit is to assess the effectiveness of the business systems and processes that are designed to ensure that the company complies with the relevant laws and regulations. Fraud investigations - Correct answer To determine whether fraud risk management controls are adequate to ensure that fraud is prevented and or detected and to make recommendations if they are not. They will also determine whether fraud has actually occurred based on information which has come to light. Customer experience audit - Correct answer To help a business understand how it manages its customer relationships and to maximise the potential value of its customers. This will involve evaluating existing customer journey in order to identify any improvements which can be made and the systems which need to be in place. Operational audits - Correct answer Are audits of the operational processes of the organisation. They are also known as management or efficiency audits. Their prime objective is the monitoring of management performance, ensuring that company policy is adhered to. Procurement audits - Correct answer Is the process of purchasing for the business. This audit will therefore concentrate on the systems of purchasing departments. The internal audit out will be checking that the system achieves key objectives and that it operates accordingly to the company guidelines. Outsourcing - Correct answer Is the use of external suppliers as a source of finished products, components or services. It is also known as subcontracting. Professional scepticism - Correct answer An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of all the evidence. The auditor should be alert to: Audit evidence that contradicts other audit evidence which has been obtained.

Information that brings into question the reliability of documents and responses to enquiries to be used as audit evidence. Conditions that could indicate fraud. Circumstances which suggest need for audit procedures in addition to those required by ISAs. Professional judgment - Correct answer The application of relevant training, knowledge and existence in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Will be required in the following areas: Materiality and audit risk. Nature, timing and extent of audit procedures. Evaluation of whether sufficient appropriate audit evidence has been obtained. Evaluating management judgements in applying the applicable financial reporting framework. Drawing conclusions based on the order evidence obtained. Audit risk - Correct answer The it's good that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It will have two major components: One is dependent on the entity, and is the risk of material misstatement that arises in the financial statements, this will include inherent risk and control risk. The other will be dependent on the auditor, and is the risk that auditor will not detect material misstatements in the financial statements, and this will be detection risk. Inherent risk - Correct answer The susceptibility of an assertion about a class of transactions, account balance or disclosure to have a statement that could be material either individually or when aggregated with other misstatements, before consideration of any related internal controls. The risk that the financial statements contain a material misstatement due to the nature of the business. Control risk - Correct answer The risk that a material misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entities internal control. Detection risk - Correct answer The risk that the procedure is performed by the auditor to reduce audit risk to an acceptably low level will not detect and a statement that exists and that could be material, either individually or when aggregated with other misstatements. Performance materiality - Correct answer The amount or amounts set by the auditor at less than materiality for the financial statements as a whole 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. It also refers

to the amount or amount set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures. Analytical procedures - Correct answer Consist of evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. They also encompass investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. The relationship between two items of information. Assertions - Correct answer Representations by management, explicit or otherwise, that are embodied in the financial statements as used by the auditor to consider the different types of potential misstatements that may occur. Significant risks - Correct answer Are risks that require special audit consideration. The following factors indicate that a risk might be significant: Risk of fraud. The relationship with recent economic, accounting or other developments. The degree of subjectivity. It has unusual transactions. It is significant transaction with a related party. The complexity of transactions. Test of controls - Correct answer Audit procedures that are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the session level. The auditor will conduct these when it is not possible to obtain sufficient appropriate audit evidence simply from substantive procedures. These are procedures to test the effectiveness of the entities internal controls in preventing or detecting material misstatements. Substantive procedures - Correct answer Audit procedures designed to detect material misstatement at the assertion level. They consist of tests of details and substantive analytical procedures. That also will always carry these out on material items. Fraud - Correct answer An intentional act by one or more individuals amoung management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or a legal advantage. Fraud may be perpetrated by an individual, or colluded in with people internal or external to the business. Fraud risk factors - Correct answer Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Fraudulent financial reporting - Correct answer Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users. Misappropriation of assets - Correct answer Involves the theft of an entity's assets and is often perpetrated by employees in a relatively small and in immaterial amounts.

However, it can also involve management who are usually more able to disguise or conceal misappropriations in ways that are difficult to detect. Audit strategy - Correct answer Sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. Characteristics os the audit engagement - Correct answer Financial reporting framework. Industry specific reporting requirements. Expected audit coverage. Nature of the business segments. Availability of internal audit work. Use of service organisations. Effect of information technology on audit procedures. Availability of client personnel and data. Audit plan - Correct answer Converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptable level. The audit plan includes - Correct answer A description of the nature, timing and extent of planned further audit procedures at the insertion level. Other planned audit procedures required to be carried out for the engagement to comply with ISAs. Examples of items included in the audit plan can be: Timetable of audit work. Allocation of work to the audit team members. Audit procedures for each major account area. Materiality for the financial statements as a whole and performance materiality. Interim audits - Correct answer Designed to be carried out during the period of review. Procedures will include: Inherent risk assessment and gaining an understanding of the entity. Recording the entity system of internal control. Evaluating the design of internal controls. Carrying out tests of control and the companies internal controls to ensure they are operating as expected. Performing substantive testing of transactions and balances to gain evidence that the books and records are a reliable basis for the preparation of financial statements. Identification of issues that may have an impact on work to take place at the final audit. Final audits - Correct answer Will take place after the year end. Final audit procedures include: Substantive procedures involving verification of statement of financial position balances and amounts in the statement of profit or loss. Obtaining third-party confirmations.

Analytical procedures relating to figures in the financial statements. Subsequent events review. Agreeing the financial statements to the accounting records. Examining adjustments made during the process of preparing the financial statements. Consideration of the current concern status of the entity. Performing tests to ensure that the conclusions formed at the interim audit are still valid. Obtaining written representations. Audit documentation - Correct answer Is the record of audit procedures performed, relevant audit evidence obtained and conclusions the auditor reached. Audit evidence - Correct answer Is all the information used by the auditor in arriving at the conclusions on which the auditors opinion is based. The appropriateness of audit evidence - Correct answer Is the measure of the quality of all the evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditors opinion is based. Sufficiency of audit evidence - Correct answer Is the measure of the quantity of audit evidence. The quantity of all the evidence needed is affected by the auditors assessment of the risks and material misstatements and also by the quality of such audit evidence. Quality of evidence - External - Correct answer Audit evidence from external sources is more reliable than that obtained from the entities records because it is from an independent source. Quality of evidence - Auditor - Correct answer Evidence obtained directly by auditors is more reliable than that obtained indirectly or by inference. Quality of evidence - Entity - Correct answer Evidence obtained from the entities records is more reliable when the related control system operates effectively. Quality of evidence - Written - Correct answer Evidence in the form of documents either paper or electronic or written representations or more reliable than oral representations, since oral representations can be retracted. Quality of evidence - Originals - Correct answer Original documents are more reliable than photo copies or facsimiles, which can easily be altered by the client. Management expert - Correct answer An individual or organisation possessing expertise in the field other than auditing or accounting, whose work is in a field used by the entity to assist the entity in preparing the financial statements.

Financial statement assertions - Correct answer The representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential statements that may occur. The auditor obtains audit evidence by undertaking - Correct answer Obtaining an understanding of the entity and its environment to assess the risks of material misstatement at the financial statement and assertion levels - risk assessment procedures. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the insertion level - test of controls. Detect material misstatements at assertion level - substantive procedures. Internal control - Correct answer The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Control environment - Correct answer Includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entities internal control and its importance in the entity. Information system relevant to financial reporting - Correct answer A tenant of internal control that includes the financial reporting system, and consists of the procedures and records established to initiate, record, process and report entity transactions and to maintain accountability for the related assets, liabilities and equity. Control activities - Correct answer Policies and procedures that help ensure that the management directives are carried out. Monitoring of controls - Correct answer A process to assess the effectiveness of internal control performance over time. It involves assessing the effectiveness of controls on a timely basis and taking necessary remedial actions. Efficiency in internal control exists when - Correct answer A Control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis, or a control necessary to prevent, or detect and correct, miss statements in the financial statements on a timely basis is missing. Significant deficiency in internal control - Correct answer A deficiency or combination of deficiencies in internal control that, in order to professional judgement is a sufficient importance to merit to the attention of those charged with governance.

General IT controls - Correct answer Policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued a proper operation of information systems. These controls are commonly include Controls over data centre and network operations; system software acquisition, change and maintenance; access security; and application system acquisition, development and maintenance. Application controls - Correct answer Are manual or automated procedures that typically operate at business process level. These controls can be preventative or detective in nature and are designed to ensure the integrity of the accounting records. Types of substantive tests - Completeness - Correct answer Classes of transactions and related disclosures, account balances and related disclosures. Typical audit tests include: Review of post year-end items. Cut off testing. Analytical review. Confirmations. Reconciliations to control accounts. Types of substantive tests - Rights and obligations - Correct answer Account balances and related disclosures. Typical audit tests include: Doing invoices for proof that item belongs to the company. Confirmations with third parties. Types of substantive tests - Accuracy, valuation and allocation - Correct answer Account balances and related disclosures. Typical audit tests include: Matching amounts to invoices. Recalculation. Confirming accounting policy is consistent and reasonable. Review of post year and payments and invoices. Expert valuation. Types of substantive tests - Existence - Correct answer Account balances and related disclosures. Typical audit tests include: Physical verification. Third-party confirmations. Cut off testing. Types of substantive tests - Occurrence - Correct answer Classes of transactions and related disclosures. Typical audit tests include: Inspecting of supporting documentation.

Confirmation from directors that transactions relate to business. Inspection of items purchased. Types of substantive tests - Accuracy - Correct answer Classes of transactions and related disclosures. Typical audit tests include: Calculation of correct amounts. Third-party confirmation. Analytical review. Types of substantive tests - Classification - Correct answer Classes of transactions and related disclosures. Typical audit tests include: Confirming compliance with law and accounting standards. Reviewing notes for understandability. Types of substantive tests - Cut-off - Correct answer Classes of transactions and related disclosures. Typical audit tests include: Cut off testing. Analytical review. Model for drawing up an audit plan - Substantive procedures - Correct answer Agree opening balances with previous years working papers. Review general ledger for unusual records. Agree client schedules to or from accounting records to ensure completeness. Carry out analytical review. Test transactions in detail. Test balances in detail. Review presentation and disclosure in accounts. Accounting estimate - Correct answer An approximation of a monetary amount in the absence of a precise means of measurement. Estimation uncertainty - Correct answer The acceptability of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. Management point estimate - Correct answer The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate. Auditors point estimate or auditors range - Correct answer The count, a range of amounts, respectively, derived from audit evidence for use in evaluating management point estimate. Audit sampling - Correct answer The Application of audit procedures to less than 100% of items within the population of audit relevance such as that all sampling units have a

chance of selection in order to provide the audit with a reasonable basis on which to draw conclusions about the entire population. Population - Correct answer The entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. Statistical sampling - Correct answer An approach to sampling that has the following characteristics: Random selection of the sample items and the use of probability theory to evaluate results, including measurement of sampling risk. Non-statistical sampling - Correct answer Is a sampling approach that does not have the characteristics of statistical sampling. Sampling risk - Correct answer The risk that the auditors conclusions based on a sample may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure. Non-sampling risk - Correct answer Is the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling. An example would be the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognise any statement or deviation. Factors which increase non-sampling risk are: Auditors lack of experience. Time pressure Financial constraints Poor planning New client Lack of industry knowledge..... Sampling unit - Correct answer Is the individual items constituting a population. It may be a physical item or a monetary unit. Stratification - Correct answer Is the process of dividing a population into sub population, each of which is a group of sampling units which have similar characteristics. Anomaly - Correct answer Is a misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population. Tolerable misstatement - Correct answer Is a monetary amount set by the auditor in respect of which the auditor 6 to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.

Tolerable rate of deviation - Correct answer Is a rate of deviation from the prescribed internal control procedures set by the auditor in respect of which the user seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Computer-assisted audit techniques (CAATs) - Correct answer Are types of auditing procedures using the computer as an audit tool. Audit software - Correct answer Consists of computer programs used by the auditors as part of their auditing procedures, to process data of all the significance from the entities accounting system. It may consist of generalised audit software or custom audit software. Audit software is used for substantive procedures. Big data - Correct answer Is a broad term for the larger, more complex data sets that can be held by modern computers. The term refers to a qualitative shift in the amount of data that is available in comparison with the past. Data analytics - Correct answer Is the examination of data to try to identify patterns, trends or correlations. As the quantity of data has increased, it has become more and more necessary to involve ways of processing and making sense of it. Auditor's expert - Correct answer An individual organisation possessing expertise in a field other than accounting auditing, his work in the field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. And auditors expert may be either an auditors internal expert or an auditors external expert. Management expert - Correct answer An individual organisation possessing expertise in the field other than accounting auditing, his work in that field is used by the entity to assist the entity in preparing the financial statements. Internal audit function - Correct answer Is I function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entities governance, risk management and internal control processes. Direct assistance - Correct answer Refers to the use of internal auditors to perform audit procedures under the direction, supervision and review of an external auditor. Service organisation - Correct answer A third-party organisation that provides services to a user entity that are part of those entities information systems relevant to financial reporting. User entity - Correct answer An entity that uses a service organisation and whose financial statements are being audited. User auditor - Correct answer An auditor who audits and reports on the financial statements of a user entity.

Service auditor - Correct answer An auditor who at the request of the service organisation, provides an assurance report on the controls of the service organisation. Cost - Correct answer Comprises all costs of purchase and other costs incurred in bringing inventory to its present location and condition. Net realisable value - Correct answer Is the estimated selling price in ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. External confirmations - Correct answer Are all the evidence obtained as a direct written response to the auditor from a third-party, in paper form, or by electronic or other medium. Positive confirmation request - Correct answer A request that the confirming party responded directly to the auditor indicating whether a confirming party agrees or disagrees with the information in the request, or providing the requested information. Negative confirmation request - Correct answer A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. Exception - Correct answer A response that indicates a difference between information requested to be confirmed or contained in the entities records, and information provided by the confirming party. Non-response - Correct answer A risk of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered. Provision - Correct answer A viability of uncertain timing or amount. Liability - Correct answer A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Obligating event - Correct answer An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. Legal obligation - Correct answer An obligation that will derived from: a contract, legislation or other operation of law. Constructive obligation - Correct answer An obligation that derived from an entity's actions were: by an established pattern of past practice, published policies or sufficiently

specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. Contingent liability - Correct answer A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or A present obligation that arises from past events but it is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured without sufficient reliability. Contingent asset - Correct answer Is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Subsequent events - Correct answer Events occurring between the date of the financial statements and the date of the auditors report, and facts that become known to the auditor after the date of the auditors report. Adjusting events include - Correct answer Settlement the court case, sale of inventory after year and providing evidence of its net realisable value at year end, fraud or error showing the accounts are incorrect. Non adjusting events include - Correct answer Dividends cleared after the year end, fire causing destruction of major plant, announcement of a major restructuring. Going concern basis of accounting - Correct answer An entity is viewed as continuing in business for the for seeable future. When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. Break up basis - Correct answer Is likely to result in non-current assets and liabilities being classified as current. As it values will need to be stated at their realisable value, and they are no longer to be used in an ongoing basis. More liabilities may also arise as a result of closing down operations, and extra provisions may be necessary. Management may also need to disclose the fact that the going concern basis of accounting has not been used and explain why. Written representations - Correct answer Are written statements by management provided to the auditor to confirm certain matters or to support other audit evidence. They do not include the financial statements, assertions or supporting books and records.

Misstatement - Correct answer A difference between the reported amount, classification, presentation, or disclosure of a financial statement item and the amount, classification, presentation, or disclosure that is required from the item to be in accordance with the applicable financial reporting framework. The statements can arise from fraud or error. Uncorrected misstatements - Correct answer Is a misstatement that the auditor has accumulated during the audit and that has not been corrected. Unmodified opinion - Correct answer The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Opinion paragraph - Correct answer Must identify the entity being audited, state the financial statements have been audited, identify the title of each statement that compromises the financial statement being audited, refer to the summary of significant accounting policies and of explanatory notes, and specify the date or period covered by each statement comprising the financial statement. If the auto expresses an on modified opinion on the financial statements prepared in accordance with their presentation framework, the opinion shall use one of the following equivalent phrases: 'the financial statements present fairly in all material respects, in accordance with the applicable financial reporting framework' or 'the financial statements give a true and fair view of... in accordance with the applicable financial reporting framework' Basis of opinion - Correct answer Must State that the audit was conducted in accordance with the ISAs, and refer to the auditors responsibilities for the audit of the financial statements section which describes that auditors responsibilities under the ISAs. The auditor must also state that they are independent on the audited entity, in accordance with the relevant ethical Graclyn meant relating to the audit. Finally the auditor must state that they believe that audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion. Key audit matters - Correct answer Those matters that, in the auditors professional judgement, where of my significance in the audit of the financial statements for the period. Key audit matters are selected from matters communicated with those charged with governance. Emphasis of matter paragraph - Correct answer A paragraph included in the auditors report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors judgement, is of such importance that it is fundamental to use his understanding of the financial statements. Other matter paragraph - Correct answer A paragraph included in the auditors report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors judgement is relevant to users understanding of the audit, the auditors responsibilities or the auditors report.

Financial statements are materially misstated but not pervasive - Correct answer Qualified opinion given. Financial statements are materially misstated and pervasive - Correct answer Adverse opinion given. Inability to obtain sufficient appropriate audit evidence - Correct answer Material but not pervasive - qualified opinion given. Ability to obtain sufficient appropriate audit evidence where both material and pervasive

• Correct answer Disclaimer of opinion given. Qualified opinion - Correct answer Must be expressed in the auditors report when; the auditor concludes that misstatements a material but not pervasive, to the financial statements. The material misstatement could arise in respect of the appropriateness of selected accounting policies, the application of selected accounting policies. The appropriateness or adequacy of disclosures in the financial statements. The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but concludes that the possible effects of undetected misstatements, if any, could be material but not pervasive. Adverse opinion - Correct answer Expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are both material and pervasive to the financial statements. Pervasiveness - Correct answer Is a term used to describe the effects or possible effects on the financial statements of misstatements or undetected misstatements. There are three types of pervasive effect:

1. Those that are not confined to specific elements, accounts or items in the financial statements.
2. Those that are confined to specific elements, accounts or items in the financial statements and represent or could represent a substantial portion of the financial statements.
3. Those that relate to the disclosures which are fundamental to users understanding or the financial statements. Disclaimers of opinion - Correct answer An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit evidence on which to base that opinion and conclude that the possible effects on the financial statements of undetected miss statements, if any, could be both material and pervasive. Their opinion must also be disclaimed in situations involving multiple uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of uncertainties and their possible cumulative effect on the financial statements.

Narrative notes - Correct answer The purpose is to describe and explain the system, at the same time as making any comments or criticisms which will help to demonstrate an intelligent understanding of the system. Advantages of narrative notes - Correct answer They are relatively simple to record and can facilitate understanding by all audit team members. They can be used for any system due to the methods of flexibility. Editing in future years can be relatively easy if they are computerised. Disadvantages of narrative notes - Correct answer Describing something in narrative notes can be a lot more time-consuming than, say, representing it as a simple flowchart, particularly where the system follows a logical flow. They are awkward to update if written manually. It can be difficult to identify missing internal controls because notes record the detail of systems but may not identify control exceptions clearly. Flowcharts - Correct answer Can take many forms, but in general are graphic illustrations of the physical flow of information through the accounting system. They represent the sequence of processes, and other symbols represent the inputs and outputs to the process. Advantages of flowcharts - Correct answer After a little experience they can be prepared quickly. As the information is presented in a standard form, they are fairly easy to follow and review. They generally ensure that the system is recorded in its entirety, as all document flows have to be traced from beginning to end. Any loose ends will be apparent from a cursory examination. They eliminate the need for extensive narrative and can be of considerable help in highlighting the salient points of control and any deficiencies in the system. Disadvantages of flowcharts - Correct answer They are my suitable for describing standard systems. Proceeds for dealing with unusual transactions will normally have to be recorded using narrative notes. Major amendment is difficult without redrawing. Time can sometimes be wasted by charting areas that are of no audit significance. Internal control questionnaires (ICQs) - Correct answer The major question which they are designed to answer is 'How good is the system controls?'. They comprise a list of questions designed to determine whether desirable controls are present. They are formulated to say that there is one list of questions to cover each of the major transaction cycles.

Internal control evaluation questionnaires (ICEQs) - Correct answer These help reduce control criteria for each transaction stream down to a handful of key questions or control questions. The characteristics of these questions is that they concentrate on the significant errors or omissions that could occur at each phase of the appropriate cycle if controls are weak. Advantages of ICQs and ICEQs - Correct answer If drafted thoroughly they can ensure all controls are considered. They are quick to prepare. They are easy to use and control. Because they are drafted in terms of objectives rather than specific controls, ICEQs are easier to apply to a variety of systems than ICQs. Answering ICEQs should enable auditors to identify the key controls which they are most likely to test during controlled testing. ICEQs can highlight deficiencies where extensive substantive testing will be required. Disadvantages of ICQs and ICEQs - Correct answer The principal disadvantage is that they can be drafted vaguely, hence misunderstood and important controls not identified. They may contain a large number of irrelevant controls. They may not include unusual controls, which are nevertheless effective in particular circumstances. They can give the impression that all controls are of equal weight. In many systems one no answer will cancel out a string of yes answers. The client may be able to overstate controls. Checklists - Correct answer May be used instead of questionnaires document and evaluate the internal control system. The subtle difference with these is that, instead of asking questions, statements are made to mark off and take boxes are used to indicate where the statement holds true. CREST - Correct answer Criteria - What you're asking the auditors to measure against. Report - Report to be produced with an opinion. Evidence - Has to be gathered to support their opinion. Subject matter - What are we asking the auditor to look at. Three party relationship - Three people have to be involved, the user, the auditor and responsible party. Reasonable assurance - Correct answer High level. Positive expression. Limited assurance - Correct answer Lower but still high. Negative expression. ISA 200 objectives of the independent auditor and the conduct of an audit in accounting with international standards on auditing - Correct answer This ISA will state that, in conducting an audit of financial statements, the overall objective will be to obtain reasonable assurance about whether the financial statements are as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor

to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with and applicable financial statements, and communicate as required by the ISAs in accordance with the auditors findings. ISA 210 agreeing the terms of audit engagements - Correct answer States that the objective of the auditor is to accept or continue an audit only when the basis on which it is to be carried out has been agreed by establishing whether the preconditions for an audit or present and confirming that there is a common understanding between the auditor and management of the terms of engagement. ISA 230 audit documentation - Correct answer The auditor shall prepare audit documentation on a timely basis. ISA 240 the auditor's responsibilities relating to fraud in an audit of financial statements

• Correct answer Will provide guidance for auditors in this area. The primary responsibility for the prevention and detection of fraud is with those charged with governance and the management of the entity. This is affected by having commitment to creating a culture of honesty and ethical behaviour and active oversight by those charged with governance. ISA 250 consideration of laws and regulations in an audit of financial statements - Correct answer The auditor is also required to consider the issue of laws and regulations in the audit. Auditors are then given guidance around this. The objectives in relation to this for the auditor are: To obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations that have a direct effect on the termination of material amounts and disclosures in the financial statements. To perform specified audit procedures to help identify non-compliance with other laws and regulations that may have material effect on the financial statement. To respond appropriately to identified or suspected non-compliance with laws and regulations identified during the audit. ISA 260 Communication with those charged with governance - Correct answer Sets out guidance for auditors on the communication of audit matters arising from the audit of the financial statements of an entity with those charged with governance. ISA 265 communicating deficiencies in internal control to those charged with governance and management - Correct answer Requires the auditor to determine whether one or more deficiencies in internal control have been identified and, if so, without these constitute a significant deficiencies in internal control. The significance of a deficiency depends on whether any statement has occurred and also on the likelihood of misstatements occurring and its potential magnitude. It also includes examples of matters to consider when determining whether a deficiency in internal control is significant.

ISA 315 identifying and assessing the risks of material misstatement through understanding the entity and its environment - Correct answer An understanding of internal control assists the auditor in identifying types of potential statements and factors that affect the risk of material misstatement, and in designing the nature, timing and extent of further audit procedures. It also deals with the whole area of controls. Internal control has five components: The internal control environment. The entities risk assessment process. The information system relevant to financial reporting. Control activities. Monitoring of controls. ISA 320 materiality in planning and performing an audit - Correct answer Provides guidance for auditors in this area and states that the objective of the auditor is to apply the concept of materiality appropriately in planning and performance audit. ISA 330 the auditor's responses to assessed risks - Correct answer Is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through designing and implementing appropriate responses to those risks. ISA 402 audit considerations relating to an entity using a service organisation - Correct answer Provides guidance to auditors whose clients use such an organisation. It expands on how to use the order to obtain is an understanding of the user entity, including internal control sufficient to identify and assess the risks of material misstatement and in designing and performing further audit procedures responsive to those risks. ISA 450 evaluation of misstatements identified during the audit - Correct answer Requires the auditor to accumulate the statements identified during the audit, other than those that are clearly trivial. It distinguishes between factual statements, when statements about which there is no doubt, and judgemental misstatements that arise from managements judgement concerning recognition, measurement, presentation and disclosure or accounting policies and projected miss statements which are the auditors best estimate of the statements arising from sampling populations. ISA 500 audit evidence - Correct answer Requires auditors to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Sufficiency and appropriateness are interrelated and applied both tests of controls and substantive procedures. ISA 501 audit evidence - specific considerations for selected items - Correct answer Provides guidance for auditors on attending the physical inventory count to obtain evidence regarding the existence and condition of inventory.

ISA 505 external confirmations - Correct answer Covers a confirmation of amounts by third parties, including the confirmation of amounts by receivables. ISA 520 analytical procedures - Correct answer Provides guidance for auditors on the use of analytical procedures as substantive procedures. ISA 530 audit sampling - Correct answer Goes on to provide guidance specific to audit sampling. Is designed to enable the auditor to draw conclusions about an entire population, on the basis of the testing a sample drawn from it. ISA 540 auditing accounting estimates including fair value estimates and related disclosures - Correct answer Provides guidance on the audit of accounting estimates contained in financial statements. The auditors objective is to obtain sufficient appropriate audit evidence that with accounting estimates are reasonable and related disclosures are adequate. ISA 570 going concern - Correct answer Will advise on the basis of going concern and the objectives are: To obtain sufficient appropriate audit evidence regarding, and conclude on the appropriateness of management use of the going concern basis of accounting. To conclude whether material uncertainty exists related to events or conditions that may cast significant doubt on the entities ability to continue as a going concern. To report in accordance with ISA 570. It will include examples of events or conditions that may cast out on whether the going concern basis of accounting is appropriate. There are sometimes references to going concern indicators and fall under three headings: financial, operating, and others. ISA 580 written representations - Correct answer Provides guidance to auditors in this area. The objectives of the auditor: To obtain written representations that management believes it has fulfilled the fundamental responsibilities that constitute the premise on which an audit is conducted. To support other order evidence relevant to financial statements if determined by the auditor or acquired by other ISAs. To respond appropriately to written representations or if management does not provide written representations requested by the auditor. ISA 610 using the work of internal auditors - Correct answer Provides guidance for the external auditor when the external auditor expects to use the work of the internal audit function to modify the nature of timing, or reduce the extent of all the procedures to be performed directly by the external auditor. ISA 620 using the work of an auditors expert - Correct answer Requires the auditor to evaluate whether the auditors expert has the necessary competence, capabilities and