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The Institute of Chartered Accountants of Bangladesh

ASSURANCE
Professional Stage Knowledge Level

For exams in 2009 and 2010

Question Bank
www.icab.org.bd

Assurance Question Bank


The Institute of Chartered Accountants of Bangladesh Professional Stage
These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales
ISBN: 978-1-84152-813-7
First edition 2009
All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means or stored in any retrieval system, or
transmitted in, any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior permission of the publisher.

ii

The Institute of Chartered Accountants in England and Wales, March 2009

Contents

Page
Title

Question

Answer

1.

Concept of and need for assurance

79

2.

Process of assurance: obtaining an engagement

81

3.

Process of assurance: planning the assignment

11

83

4.

Process of assurance: evidence and reporting

17

85

5.

Introduction to internal control

23

87

6.

Revenue system

29

89

7.

Purchases system

33

91

8.

Employee costs

37

93

9.

Internal audit

41

95

10.

Documentation

45

97

11.

Evidence and sampling

47

99

12.

Management representations

55

101

13.

Substantive procedures key financial statement


figures

59

103

14.

Codes of professional ethics

67

107

15.

Integrity, objectivity and independence

69

109

16.

Confidentiality

75

111

The Institute of Chartered Accountants in England and Wales, March 2009

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iv

The Institute of Chartered Accountants in England and Wales, March 2009

Question Bank
Contents

The Institute of Chartered Accountants in England and Wales, March 2009

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 1: Concept of and need for assurance


1

Which THREE of the following constitute possible subject matter which may be evaluated for the
purposes of an assurance engagement?
A

Data

Systems or processes

Corporate governance

BAS

Which TWO of the following describe the roles of the responsible party in any assurance
engagement?
A

Setting the criteria of the assurance engagement

Gathering evidence on the subject matter

Issuing an opinion on the subject matter against the criteria set

Preparing the subject matter

In a 'reasonable assurance engagement' how are the assurance provided and the conclusion given best
described?
A

Absolute and negative

High and negative

High and positive

Low and positive

Which THREE of the following statements form part of the generally accepted definition of 'fair', in the
context of 'a true and fair view'?
A

The information is free from discrimination and bias

The accounts have been correctly extracted from the companys books and records

The information complies with generally accepted accounting practice

The accounts reflect the commercial substance of the companys underlying transactions

The Institute of Chartered Accountants in England and Wales, March 2009

Chapter 1: Concept of and need for assurance


5

Which TWO of the following statements are true with regards to Recognised Supervisory Bodies
(RSBs)?
A

RSBs offer professional qualifications

RSBs are approved by Bangladesh Bank

The Companies Act 1994 requires that accountants are members of RSBs

RSBs are responsible for monitoring their members

With respect to the benefits of assurance engagements, for each of the following statements select
whether they are true or false.
Assurance is an independent and professional activity that users value
A

True

False

The principal objective of assurance is to detect and correct fraud


C

True

False

Assurance assignments may take many forms

True

False

The following statements describe ways in which the assurance provider might be able to close the
expectations gap. For each statement select whether it is true or false.
By issuing an engagement letter setting out the work to be carried out and its limitations
A

True

False

By reducing the audit fee


C

True

False

By including a caveat in the assurance report

True

False

Which TWO of the following statements best describe the statutory audit?
A

It leads to a certification of the correctness of the financial statements

It is an independent examination

It is an opinion on the truth and fairness of the financial statements

It may be carried out by both external and internal auditors

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

The following statements describe possible limitations of the provision of assurance. For each
statement select whether it is a limitation or is not a limitation.
Sampling is part of the audit process
A

Is a limitation

Is not a limitation

The provision of assurance in itself can be a subjective process


C

Is a limitation

Is not a limitation

The auditors may be auditing that particular client for the first time

10

Is a limitation

Is not a limitation

Ilford Ltd is a large audit client of Smith & Co. Ilford Ltd has approached Smith & Co to request that
they carry out a review of the inventory system in operation at the Brent branch and the extent to
which it operates in line with company policy.
With reference to the above review engagement, select which part of the review description
constitutes the subject matter, which part the suitable criteria and which party is the responsible party.
The subject matter
A

The Brent branchs inventory system

Ilford Ltds inventory system policies

The suitable criteria


C

The Brent branchs inventory system

Ilford Ltds inventory system policies

The responsible party

11

Ilford Ltd

Smith & Co

The following is an extract from an independent auditors unmodified report.


'In our opinion, the financial statements prepared in accordance with Bangladesh Accounting Standards
(BAS) give a true and fair view of the state of the companys affairs as of 31 March 20X7, and of the
results of its operations and its cash flows for the year then ended and comply with applicable sections
of the companies act 1994 and other applicable laws and regulations.'
Which of the following describes the type of assurance provided by this statement?
A

Absolute assurance expressed positively

High level of assurance expressed positively

Limited level of assurance expressed positively

Limited level of assurance expressed negatively

The Institute of Chartered Accountants in England and Wales, March 2009

Chapter 1: Concept of and need for assurance

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 2: Process of assurance: obtaining an engagement


1

Which THREE of the following might indicate that an assurance client would be high risk?
A

Strong internal controls

Likely lack of finance

Few unusual transactions

Lack of experienced finance director

Poor forecast performance

Marnie & Co, an audit firm, have been asked by Opportunity Ltd to accept appointment as auditor.
Opportunity Ltds previous auditors were Kim & Co.
What action should Marnie & Co take if Opportunity Ltd refuse to give them permission to contact
Kim & Co?

Contact Kim & Co in writing in any case and then accept the appointment

Telephone Kim & Co in order to obtain the information sought and then accept the appointment

Contact Kim & Cos other clients to try and gain access to Kim & Co, and then accept the
appointment

Make no communication with Kim & Co or their other clients and decline the appointment

Under which THREE of the following circumstances MUST a firm decline an appointment as auditor to
a company?
A

The prospective client refuses to grant the firm permission to contact the previous auditor

The prospective client refuses to grant permission to the previous auditor to communicate with
the firm

The prospective client still owes audit fees to the previous auditor

The client is one for which your firm is ethically barred from acting

In order to comply with the Companies Act 1994, for how many years should a company keep
records of its accounting transactions?
A

For a minimum of six years

For a minimum of nine years

For a minimum of twelve years

There is no specific requirement

The Institute of Chartered Accountants in England and Wales, March 2009

Chapter 2: Process of assurance: obtaining an engagement


5

For each of the following statements about engagement letters select whether they are true or false.
The engagement letter provides an opportunity for management to set out in writing their opinion on
subjective areas in the financial statements
A

True

False

The engagement letter clarifies the role and responsibilities of auditors and directors
C

True

False

The engagement letter contains documentation on the preliminary client risk assessment
E

True

False

The engagement letter contains the auditors opinion on the financial statements

True

False

Which of the following is not a right that an auditor has under the Companies Act 1994?
A

The right of access to the companys accounting records

The right to receive all necessary information and explanations

The right to see all minutes of management and shareholders meetings

The right to disclose confidential information in every circumstance without the permission of
the client

The following sentence is taken from an engagement letter.


'The responsibility for safeguarding the assets of the company and for the prevention and detection of
fraud, error and non-compliance rests with yourselves.'
Which THREE of the following are reasons for the inclusion of the above sentence?

It clearly sets out the directors responsibilities in order to avoid any misunderstandings

It goes some way to closing the expectations gap

It clarifies the directors legal responsibilities

It absolves the auditor from all responsibilities relating to the audit

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

For each of the following factors at separate prospective clients, select whether that factor indicates
that inherent risk is likely to be high or low.
The client is experiencing financial difficulties
A

High risk

Low risk

Three firms of auditors have resigned from the client in the past five years
C

High risk

Low risk

The company carries out very few unusual transactions


E

High risk

Low risk

The Institute of Chartered Accountants in England and Wales, March 2009

Chapter 2: Process of assurance: obtaining an engagement

10

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 3: Process of assurance: planning the assignment


1

Which THREE of the following would be found in the overall audit strategy document?
A

Detailed plan of audit procedures

Calculation of preliminary materiality thresholds

Budget and fee

Timetable

According to BSA 315, which THREE of the following are reasons why the auditor should obtain an
understanding of the entity and its environment?
A

To identify and assess the risks of material misstatements

To be in a position to design and perform audit procedures

To be better able to assess the risks of fraud

To obtain information for other future assignments with the same client

Which THREE of the following describe analytical procedures?


A

Comparing a cash book balance with a bank balance and identifying reconciling items

Comparing actual results with forecast results

Comparing company ratios with industry averages

Comparing budgeted with actual results

Seal Ltd has the following results for 20X6 as compared with the results for 20X5.

Revenue
Cost of sales
Salaries
Distribution costs
Insurance expenses
Other expenses

20X5
CU000
5,890
4,440
550
230
90
50

20X6
CU000
6,050
4,200
560
650
180
54

Which THREE of the following areas would you be MOST LIKELY to investigate as a result of carrying
out analytical procedures?
A

Revenue

Cost of sales

Salaries

Distribution costs

Insurance expenses

The Institute of Chartered Accountants in England and Wales, March 2009

11

Chapter 3: Process of assurance: planning the assignment


5

For each of the following statements concerning materiality, select whether they are true or false.
Materiality should be determined at the beginning of an audit and should not be changed during the
course of an audit
A

True

False

Materiality always relates to monetary amounts


C

True

False

Materiality is calculated using the same formula for all audit clients

12

True

False

Where both control and inherent risks are low, what are the implications for the audit strategy?
A

Rely on controls, limited substantive procedures necessary

Rely on controls, no substantive procedures necessary

Rely on controls, extensive substantive procedures necessary

No reliance on controls, extensive substantive procedures necessary

Which of the following is an implication of purchase invoices not being authorised?


A

Unauthorised purchases will be made

Purchases will be made from unauthorised suppliers

Unauthorised payments will be made

Purchases will not be made at the best possible price

When using directional testing, what does an auditor normally test for?
A

Assets are overstated and liabilities are understated

Assets are understated and liabilities are overstated

Both assets and liabilities are understated

Both assets and liabilities are overstated

Which of the following THREE procedures could be used to identify audit risks?
A

Computation

Verification

Inquiry

Observation

Analytical procedures

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

10

Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples select the type of risk illustrated.
This is the first year of the audit
A

Inherent risk

Control risk

Detection risk

The client entity has an internal audit function


D

Inherent risk

Control risk

Detection risk

The client entity is intending to list on the stock exchange within two years

11

Inherent risk

Control risk

Detection risk

Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples select the type of risk illustrated.
The client entity operates in an industry where the auditor has no previous experience
A

Inherent risk

Control risk

Detection risk

Purchase invoices at the client entity are not authorised prior to payment
D

Inherent risk

Control risk

Detection risk

Management of the client entity is rewarded under a profit-related scheme

12

Inherent risk

Control risk

Detection risk

Which of the following describes control risk?


A

The susceptibility of an account balance or class of transactions to material misstatements,


assuming there are no related controls

The risk that the auditors procedures do not detect material misstatements

The risk that a material misstatement would not be prevented, detected or corrected by the
accounting and internal control system

The risk that a material misstatement is caused by external pressures faced by the company

The Institute of Chartered Accountants in England and Wales, March 2009

13

Chapter 3: Process of assurance: planning the assignment


13

14

Which of the following best describes an attitude of professional scepticism?


A

Disbelieving everything the client says

Asking the client a number of times the same question to see if the answer is the same

Making management sign off all evidence provided to the auditor

Forming a critical assessment and bringing into question the reliability of audit evidence

As part of his analytical procedures on the financial statements of Nails Ltd, Peter has identified that
the current ratio has decreased from 1.7 to 1.3. All purchases of inventory are currently made for
cash and all sales are credit sales.
Which TWO of the following could be a valid explanation for this decrease?

15

The company has increased its credit policy to customers from 30 to 50 days

The company has shifted its reliance from long-term debt to short-term debt

The company has decided to adopt a just in time inventory system (whereby the supplier will
deliver direct to its stores, eliminating the need for a distribution centre)

The company has recently offered special discounts to customers to attract more sales

As part of her analytical procedures on the financial statements of PC Ltd, a manufacturing company,
Amisha has identified that the gross margin has increased from 23% to 28%.
Which TWO of the following could be a valid explanation for this decrease?

16

14

The company has considerably reduced discounts for bulk purchases given to customers

The price of raw materials has increased and this increase has been passed on to customers
through increased sales prices

The recent increase in competition has resulted in sales prices having to be reduced

There has been a significant change in the sales mix

Which TWO of the following would increase inherent risk?


A

The company operates in a fast-moving industry

The company does not provide IT training to its employees

The company does not authorise sales orders prior to sales being made

The company has a number of legal claims against it which threaten its future

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

17

For each of the following situations, select the MOST appropriate approach which should be used by
the assurance firm in the given circumstance.
The audit of an existing client, with established internal controls
A

Tests of control only

Substantive procedures only

A mix of tests of control and substantive procedures

The review of a companys balance sheet in a limited assurance engagement


D

Tests of control only

Substantive procedures only

A mix of tests of control and substantive procedures

The Institute of Chartered Accountants in England and Wales, March 2009

15

Chapter 3: Process of assurance: planning the assignment

16

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 4: Process of assurance: evidence and reporting


1

For each of the following statements in respect of audit evidence select whether they are true or false.
Original documents are more reliable than photocopies
A

True

False

Oral representations are more reliable than written forms of evidence


C

True

False

External documents obtained from external sources are more reliable than external documents from
client sources

True

False

To what does 'sufficiency' of audit evidence relate?


A

The quality of audit evidence

The reliability of audit evidence

The quantity of audit evidence

The relevance of audit evidence

For each of the following forms of evidence select from 1 to 3 in order to rank them in terms of their
reliability (where 1 is the most reliable and 3 is the least reliable).
Schedule of aged receivables obtained from the client
A

Bank statement obtained from the client


D

Bank statement obtained directly from the bank


G

The Institute of Chartered Accountants in England and Wales, March 2009

17

Chapter 4: Process of assurance: evidence and reporting


4

18

Which THREE of the following relate to assertions about account balances at the period end?
A

Occurrence

Completeness

Existence

Valuation

Accuracy

Which THREE of the following relate to assertions about classes of transactions for the period under
audit?
A

Occurrence

Completeness

Existence

Valuation

Accuracy

Which of the following describes the meaning of 'financial statement assertions'?


A

The assertions made by management that are embodied in the financial statements

The assertions made by the auditor on the financial statements that are embodied in the audit
report

The assertions made by the auditor that are embodied in the financial statements

The assertions made by management in the management representation letter

Which TWO of the following approaches could the auditor use when gathering audit evidence?
A

Tests of control only

Substantive procedures only

Both tests of control and substantive procedures

Analytical procedures only

In carrying out tests of control, which THREE of the following types of procedures can be used?
A

Inquiry

Analytical procedures

Computation

Inspection

Reperformance

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

With regards to substantive procedures, select whether the following statements are true or false.
The auditor must always carry out substantive procedures on material items
A

True

False

Substantive procedures are made up of tests of detail only


C

True

False

Substantive procedures are carried out as part of the overall review of the financial statements

10

True

False

'In our opinion, the financial statements do not give a true and fair view of the financial position of the
company as of 31 December 20X4 and of the results of its operations and its cash flows for the year
then ended in accordance with Bangladesh Accounting Standards (BAS)'
Which of the following describes the type of opinion and assurance provided by the above?

11

12

Unqualified opinion, negative assurance

Unqualified opinion, positive assurance

Qualified opinion, negative assurance

Qualified opinion, positive assurance

Which THREE of the following are only reported on by exception in an audit report?
A

Proper books of accounts have been kept

Proper returns adequate for the audit have been received from branches not visited

The information given in the directors report is consistent with the financial statements

Details of directors remunerations have been correctly disclosed in the financial statements

In respect of the companys profit or loss for the period, the financial statements give a true and
fair view

Attending a period-end inventory count provides assurance primarily on which financial statement
assertion?
A

Existence

Valuation

Rights and obligations

Classification

The Institute of Chartered Accountants in England and Wales, March 2009

19

Chapter 4: Process of assurance: evidence and reporting


13

14

Sending external confirmations to receivables is not helpful for ascertaining which of the following?
A

The collectability of the receivables balance

The existence of the receivables balance

Whether the receivables balance belongs to the client entity

The accuracy of the receivables balance

For each of the following statements select whether they are true or false.
Reviewing supplier statement reconciliations selected on the basis of purchases turnover in the year
helps to confirm the completeness of the accounts payable balance
A

True

False

Recalculating the depreciation charge helps in verifying the rights and obligations assertion for noncurrent assets
C

True

False

Reviewing post balance sheet inventory movements helps verify the valuation of inventory

15

True

False

The following are types of test that might be carried out by an auditor. For each example, select the
financial statement assertion that is being tested.
A sample of purchases taken from throughout the year are checked against supplier invoices
A

Cut-off

Existence

Occurrence

Insurance expenses are compared year on year

20

Rights and obligations

Existence

Accuracy

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

16

Two types of procedures used in gathering evidence are tests of controls and substantive procedures.
Sometimes, a specific procedure can serve as both a test of control and substantive procedure.
For each of the following examples, select the type of procedure(s) illustrated.
The year end bank reconciliation is reviewed
A

Test of control

Substantive procedure

Both a test of control and a substantive procedure

Sales for the year are compared to budget


D

Test of control

Substantive procedure

Both a test of control and a substantive procedure

The Institute of Chartered Accountants in England and Wales, March 2009

21

Chapter 4: Process of assurance: evidence and reporting

22

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 5: Introduction to internal control


1

'To ensure that purchases are made at the best possible price.'
Which of the following best describes the above statement?

A risk

A control objective

A control procedure

A test of control

The following statements relate to small companies and their internal control systems.
For each statement select whether it is true or false.
Small companies have no need for internal control systems
A

True

False

Small companies can use unsophisticated methods of control to compensate for the lack of formal
controls
C

True

False

Small companies have difficulty with implementing segregation of duties controls

True

False

With regards to the following control procedures, select whether they are PRIMARILY preventative
or detective controls.
Bank reconciliations are prepared on a monthly basis
A

Preventative

Detective

Management accounts are compared on a monthly basis against budget.


C

Preventative

Detective

Supplier statements are reconciled with trade payables balances


E

Preventative

Detective

The Institute of Chartered Accountants in England and Wales, March 2009

23

Chapter 5: Introduction to internal control


4

Which THREE of the following are likely roles of the audit committee?
A

To review the working papers of the external audit firm

To monitor the independence of the external auditor

To monitor the effectiveness of the companys internal audit department

To make recommendations to the board in relation to the external auditor

The following are descriptions of internal controls in operation at Lilly Ltd. For each description select
the type of control activity which it illustrates.
Only authorised staff may access the inventories storeroom
A

Performance review

Information processing

Physical control

The despatch note signed by the customer is agreed to the authorised sales order

Performance review

Information processing

Physical control

Controls in an IT system are classified as general controls or application controls. For each of the
following controls select whether they are general controls or application controls.
Training of staff in use of computer programs
A

General

Application

Password protection of computer programs


C

General

Application

One-for-one checking of processed output to source documents

General

Application

Controls in an IT system are classified as general controls or application controls. For each of the
following select whether they are general controls or application controls.
Cyclical review of master files
A

General

Application

Back-up power sources

24

General

Application

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Computer maintenance agreements and insurance

10

General

Application

Which of the following methods of recording internal controls is generally regarded as the most
effective?
A

Flowcharts

Family trees

Narrative notes

Questionnaires

Which THREE of the following are components of a system of internal controls?


A

The control environment

The entitys strategy-devising process

The entitys risk assessment process

Control activities

BSA 315 states that an internal control system in an organisation consists of five components: the
control environment, the entitys risk assessment process, the information system, control activities
and monitoring of controls.
For each of the following examples, select the component which it illustrates.
The preparation of a reconciliation between the payables ledger and the payables ledger control
account
A

Control environment

Information system

Control activities

The authorising of all credit notes prior to being issued to customers for returns made
D

Control environment

Information system

Control activities

The Institute of Chartered Accountants in England and Wales, March 2009

25

Chapter 5: Introduction to internal control


11

The following statements refer to possible limitations of an internal control system. For each
statement, select whether it is true or false.
Internal controls are ineffective if staff collude to override them
A

True

False

Internal controls are designed to deal with all types of transactions, both routine and non-routine
C

True

False

Senior management staff may be in a position to ignore internal controls

12

True

False

The following are examples of internal controls which operate at Willow Ltd. For each example, select
the type of control activity which it illustrates.
The inventory count is carried out by two teams one team performs the count and the other team
checks the counting
A

Performance review

Information processing

Segregation of duties

The aged inventory list is reviewed on a monthly basis in order to decide on the level of inventory
provisions and write-offs

13

Performance review

Information processing

Segregation of duties

For each of the following statements select whether they are true or false in respect of business risk.
Inherent and control risks are components of audit risk
A

True

False

Auditors should provide suggestions for companies to overcome business risks


C

True

False

Identifying business risks is part of the companys risk assessment processes

26

True

False

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

14

Which TWO of the following are reasons why segregation of duties is important in an internal control
system?
A

It improves efficiency

It helps to prevent fraud

It improves the rate of detection of errors

It is way of assigning roles within a large organisation

The Institute of Chartered Accountants in England and Wales, March 2009

27

Chapter 5: Introduction to internal control

28

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 6: Revenue system


1

The following weaknesses have been identified at Cog Ltd. For each weakness select the MOST
LIKELY consequence.
Credit checks are not made for new customers
A

Increased risk of bad debts

Company may process loss-making sales orders

Entries are not recorded correctly in the receivables ledger leading to errors in the financial
statements

Invoices are not matched to sales order and despatch note prior to being raised

Increased risk of bad debts

Company may process loss-making sales orders

Entries are not recorded correctly in the receivables ledger leading to errors in the financial
statements

The following weaknesses have been identified at Smart Ltd. For each weakness select the most likely
consequence.
Sales discounts are not authorised prior to being given
A

Increased risk of client dissatisfaction

Company may process loss-making sales orders

Cash receipts are not recorded correctly in the cashbook

Invoices are not checked for arithmetic accuracy prior to being issued to customers

Increased risk of client dissatisfaction

Company may process loss-making sales orders

Cash receipts are not recorded correctly in the cashbook

Which of the following does not present a risk at the sales order stage?
A

Orders cannot be fulfilled

Prices authorised are not on the official price list

Goods despatched are not of the quality and quantity ordered

The customer is not in a position to pay

The Institute of Chartered Accountants in England and Wales, March 2009

29

Chapter 6: Revenue system


4

Which one of the following controls is LEAST LIKELY to address the risk that money received is not
banked?
A

Matching cash receipts with invoices

Monthly bank reconciliations

Prompt bank payments

Investigation of shortages and surpluses of cash in the business

The following describes processes which form part of the sales system at Blue Ltd, where all sales are
made on credit.
For each process, select whether it represents a strength or a weakness in the system.
Customers are not requested to sign as evidence of receipt of goods
A

Strength

Weakness

Sales orders are accepted by fax and are processed directly into the system without further action
C

Strength

Weakness

All sales orders are sequentially numbered within the computer system

30

Strength

Weakness

Claret Ltd operates a number of control procedures in its sales system. Assuming all controls operate
effectively, which of the following procedures is most likely to ensure that only goods ordered are
delivered?
A

Despatch notes are matched with sales orders

Invoices are matched with despatch notes

Invoices are matched with sales orders

Payment receipts are matched with invoices

Hammers Ltd operates a number of control procedures in its sales system. Assuming all controls
operate effectively, which one of the following procedures will help to ensure that invoices are
correctly and accurately prepared?
A

Sales orders are matched with despatch notes

Invoices are matched with despatch notes

Invoices are matched with sales orders

Payment receipts are matched with invoices

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

10

11

Which TWO of the following weaknesses could result in the misstatement of trade receivables?
A

Signed despatch notes are not agreed to sales invoices raised

Sales discounts are not always authorised

Customers normally pay within 40 days instead of the 30 day credit period

The receivables ledger is not reconciled to the receivables ledger control account

Which TWO of the following documents assist in testing sales cut-off?


A

Sales orders

Despatch notes

Sales invoices

Remittance advices

Which TWO of the following would assist in testing for the overstatement of revenue?
A

Gross profit margin

Debt/equity ratio

Trade accounts receivable days

Inventory days

The following weaknesses have been identified at Ring Ltd. For each weakness select the most likely
consequence.
Suppliers are not approved prior to being added to the official suppliers listing
A

Goods ordered are of an inferior quality

Goods received do not satisfy internal purchase requirements

Goods received are not checked against the order made


C

Goods ordered are of an inferior quality

Goods received do not satisfy internal purchase requirements

The Institute of Chartered Accountants in England and Wales, March 2009

31

Chapter 6: Revenue system

32

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 7: Purchases system


1

Why are purchase order forms prenumbered?


A

To ensure that all orders authorised are subsequently processed

To ensure the completeness of the payables balance

To ensure the correctness of the amounts paid to suppliers

To maintain supplier relations

The following weaknesses have been identified at Till Ltd. For each weakness select the most likely
consequence which might arise as a result of that weakness.
Purchase orders are not authorised prior to being placed
A

Goods may be misappropriated for personal use

The company may not purchase goods on the most advantageous terms

There are errors in the financial statements

Invoices are not always recorded

Goods may be misappropriated for personal use

The company may not purchase goods on the most advantageous terms

There are errors in the financial statements

On recording goods inwards on goods received notes, copies of the signed goods received notes
should then be sent to which TWO departments?
A

Human resources

Sales

Buying

Accounts

The directors of Park Ltd have just discovered a fraud carried out by one of their suppliers. The
supplier would deliver products that were not ordered to Park Ltd and then subsequently invoice Park
Ltd for these goods.
Which of the following controls would have prevented this fraud?
A

All orders are authorised by the purchases director

All purchase orders are kept in a locked box in the purchases department office

All goods received are agreed to purchase orders

All invoices received are agreed to goods received notes

The Institute of Chartered Accountants in England and Wales, March 2009

33

Chapter 7: Purchases system


5

The following are descriptions of internal controls in operation at Flash Ltd. For each description
select the type of control activity which it illustrates.
All goods received are stored in a secure storeroom with limited access
A

Performance review

Information processing

Physical control

The payables ledger is reconciled to the payables ledger control account on a monthly basis

Performance review

Information processing

Physical control

The following describes processes which form part of the purchases system in operation at Green Ltd.
For each process select whether it represents a strength or a weakness in the system.
All orders are placed directly with suppliers by the production department
A

Strength

Weakness

All supplier invoices are matched against purchase orders and goods received notes prior to being
entered into the accounting system

Strength

Weakness

Mary prepares the reconciliation between supplier statements and payables ledger accounts.
Which TWO of the following functions should Mary not be involved with?

34

Depositing cash receipts

Preparing the annual budget

Making purchase orders

Handling cash payments to suppliers

Numerical sequence should not necessarily be applied to which of the following types of
documentation?
A

Goods received notes

Purchase orders

Supplier statements

Purchase requisition notes

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

10

Which TWO of the following documents assist in testing cut-off for purchases?
A

Goods received notes

Purchase requisition notes

Supplier invoices

Purchase orders

Staple Ltd, which makes all of its sales on credit, has seen a fall in trade receivable days from 45 to 30
days in the past year.
Which TWO of the following are plausible reasons for this fall?

11

There has been a decrease in the volume of sales

Discounts for early settlement have been introduced

The company has tightened credit terms extended to customers

There has been a change in sales mix towards more expensive goods being sold

Twist Ltd is a large IT company that sells computer hardware and provides consultancy services.
Which TWO of the following internal controls will BEST ENSURE that computers are not
stolen/taken for the private purposes of employees?

12

All inventories are counted once a month and agreed to the inventory records

Inventories leave the storeroom only once there is an approved sales order

Sales invoices are matched against customer-signed despatch notes

Sales invoices are checked for accuracy prior to being posted

The organisational structure at Washy Ltd (a manufacturer and retailer of electrical goods) is as
follows. The sales department is headed by Olivia Jones and her assistant is Mary Smith. Olivia Jones
reports to the managing director John Waters. There are several other departments (production,
accounting, purchasing, HR and internal audit).
Which of the following statements reflects the most effective segregation/allocation of duties with
regards to sales ordering?
A

All sales orders should be recorded by Mary Smith and approved by Olivia Jones

Mary Smith should record the sales orders, Olivia Jones should review them and John Waters
should give the final approval

Both Mary Smith and Olivia Jones can approve the sales orders

It is not necessary for Olivia Jones to become involved in the recording and approval of sales
orders

The Institute of Chartered Accountants in England and Wales, March 2009

35

Chapter 7: Purchases system

36

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 8: Employee costs


1

The following system of time recording operates at Green Ltd.


Staff clock in and out of work using a swipe card. There is no supervision of this practice but there is a
control in place ensuring that only current employees have a swipecard in their possession.
Which of the following might be a consequence of the above?

Employees are paid at an inappropriate rate

Employee deductions are inappropriate

Employees are paid for more than the hours worked

Fictional employees may be set up

The auditors of Pink Ltd have performed analytical procedures on the salaries figures in the financial
statements and the salary per head appears to have increased by 10% from the previous year.
Assuming there are no errors in the salaries figure, which of the following explains this movement?

An increase in staff numbers along all staff levels

An increase in general inflation

An increase in the number of low-skilled staff

An increase in the number of highly-skilled staff

At Blue Ltd, the payroll department is responsible for both processing salaries and for maintaining all
staff records and contracts.
Which TWO of the following represent risks in this system arising from the above responsibilities?

Fictitious employees are easily created

Salary deductions are miscalculated

Salaries are paid at the wrong time

Changes in employee circumstances are not updated on the payroll

In a system where wages are paid in cash, which THREE of the following duties should be segregated?
A

Preparing the payroll summary

Requesting each employee to sign for his pay packet

Filing of pay packets

Distribution of wages

Requesting verification of employees identity

The Institute of Chartered Accountants in England and Wales, March 2009

37

Chapter 8: Employee costs


5

The following describes certain processes of the payroll system in operation at Orange Ltd.
For each process select whether it represents a strength or a weaknesses in the system.
There is no separate personnel department
A

Strength

Weakness

Only selected payroll staff have access to standing information on staff


C

Strength

Weakness

All changes in salary rates are approved by the head of human resources

Strength

Weakness

The following are descriptions of internal controls in operation at Josh Ltd.


For each description select the type of control activity which it illustrates.
Payroll information is agreed to personnel files prior to processing
A

Performance review

Information processing

Physical control

Budgeted salaries are compared to actual salaries on a monthly basis

Performance review

Information processing

Physical control

Maryland Ltd employs 150 employees and has very high annual staff turnover.
Which of the following controls would BEST ENSURE that only existing employees are paid and that
leavers do not continue to be paid?

38

Staff records are maintained for each member of staff

Staff complete work schedules, which they submit direct to the payroll department

Monthly comparisons are made between staff records held by the human resources manager and
the payroll office

Staff are paid by direct transfers to their bank accounts

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Picture Ltd maintains a computerised payroll system. All employees are paid by BACS directly into
their bank account.
Which TWO of the following controls will be most effective in ensuring that accurate payments are
made to employees?

Authorisation of overtime worked

A sample of calculations performed by the payroll package are manually reperformed each month

The autopay list is reviewed by the chief accountant together with supporting payroll
documentation

The print out from the bank is agreed to the autopay list and any discrepancies investigated

Hill Ltd operates a number of controls over its payroll. For the following three controls, select
whether they are preventative or detective controls.
All staff records are maintained by the human resources manager. Any changes in these records are
promptly communicated to the payroll department
A

Preventative

Detective

Payroll costs are compared to budget on a monthly basis


C

Preventative

Detective

All employees who are paid weekly by cash, must show evidence of their identification prior to
receiving their wages.
E

Preventative

Detective

The Institute of Chartered Accountants in England and Wales, March 2009

39

Chapter 8: Employee costs

40

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 9: Internal audit


1

The scope and objectives of internal auditing vary widely and depend on the size and structure of the
entity and the requirements of its management.
Which THREE of the following functions could internal audit perform and still operate effectively?

Evaluating corporate objectives

Performing operational audits

Monitoring controls

Authorising transactions

The following statements relate to the differences between internal and external auditors.
For each statement select whether it is true or false.
Internal auditors should not co-operate with external auditors
A

True

False

Statutory audits are carried out by external auditors only


C

True

False

The internal audit department forms part of the overall internal control system

True

False

The scope and objectives of internal auditing vary widely and depend on the size and structure of the
entity and the requirements of its management.
Which THREE of the following functions could internal audit perform and still operate effectively?

Advising on the implementation of accounting and operational standards

Liaising with external auditors

Recommending improvements in operations

Voting on decisions that involve external audit matters

Why should the internal audit function not get involved with operational matters?
A

For reasons of confidentiality

To preserve their integrity

Internal auditors do not possess the skills to handle operational matters

To preserve their independence

The Institute of Chartered Accountants in England and Wales, March 2009

41

Chapter 9: Internal audit


5

In order to preserve their independence, the internal audit function should report directly to which of
the following?
A

The chief accountant

The finance director

The audit committee

The non-executive directors

Smarter Supermarkets operates a chain of fifteen supermarkets across London. At head office, there is
an internal audit department which carries out audits and investigations on the individual supermarkets
in the chain.
Which THREE of the following could the internal audit department carry out?

Tests of the controls at the Westminster supermarket as part of a routine internal audit cycle

Temporarily filling the role of the Lewisham supermarket manager while she is on sick leave

Identification of risks at the proposed Waterloo supermarket, which is due to open next year

Investigation into the physical controls at all the supermarkets

Internal and external auditors provide a variety of services to companies.


For each of the following examples select whether it is a service which would be provided by internal
auditors only, by external auditors only or by either.
Preparation of a report on the effectiveness of internal controls
A

Internal auditors

External auditors

Either

Investigation into a material fraud committed in the entity

Internal auditors

External auditors

Either

Many of the procedures undertaken by the internal auditor are very similar to those performed by the
external auditor.
Which of the following procedures will NOT normally performed by the external auditor?

42

Testing internal controls

Making recommendations regarding improvements to controls

Making recommendations on the overall operational effectiveness of the entity

Examining and testing financial information

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

The scope and objectives of internal auditing vary widely and depend on the size and structure of the
entity and the requirements of its management.
Which TWO of the following functions could internal audit perform and still operate effectively?
A

Preparation of reconciliations between the payables ledger and the payables ledger control
account

Approving annual budgets

Reviewing accounting systems and related controls

Examining financial and operational information for management

The Institute of Chartered Accountants in England and Wales, March 2009

43

Chapter 9: Internal audit

44

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 10: Documentation


1

For each of the following statements concerning documentation, select whether they are true or false
in accordance with BSA 230 Audit Documentation.
The preparation of documentation is a legal requirement
A

True

False

Documentation assists team members to direct and supervise work done


C

True

False

Documentation may be in paper or electronic form

True

False

Which THREE of the following documents would be found on a permanent, as opposed to a current,
audit file?
A

Accounts checklist

Company memorandum and articles of association

Details of client company history

Legal documents such as lease agreements and title deeds

Which THREE of the following documents would be found on a current, as opposed to a permanent,
audit file?
A

Management accounts

Summary of unadjusted errors

Letter of representation

Engagement letter

For how many years does the ICAB require firms to retain their audit documentation after the end of
the accounting period to which the documentation relates?
A

Six years

Sufficient period of time

Eight years

Ten years

The Institute of Chartered Accountants in England and Wales, March 2009

45

Chapter 10: Documentation


5

James & Co are the auditors of Eye Ltd. Eye Ltd has asked to have a look at James & Cos working
papers in respect of itself. In accordance with ethical guidelines, what should the response of James &
Co be?
A

Refuse, as the working papers belong to James & Co and are not part of Eye Ltds records

Refuse but agree to show Eye Ltd any working papers they request only once the audit is
complete

Show Eye Ltd whatever working papers they request

Show Eye Ltd the working papers only at James & Cos discretion and only those documents that
will not prejudice the audit

Select whether the following statements are true or false in respect of the reasons for preparing audit
documentation.
To enable an experienced auditor to carry out quality control reviews
A

True

False

To provide evidence of audit work carried out in the event of a legal dispute
C

True

False

To retain a record of matters of continuing significance to future audits

True

False

With regards to auditors working papers, select whether the following statements are true or false.
Working papers belong to the auditor
A

True

False

Auditors prepare working papers on a voluntary basis


C

True

False

There are no circumstances under which auditors working papers should be given to a third party
without the permission of the client

46

True

False

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 11: Evidence and sampling


1

For each of the following statements concerning the use of test data and audit software select whether
they are true or false.
Test data involves the use of the assurance providers own software
A

True

False

Test data can test the operation of the clients system and so ascertain whether certain controls are in
operation
C

True

False

Audit software can be installed on a clients system to reperform calculations relating to year-end
balances

True

False

For each of the following statements concerning analytical procedures select whether they are true or
false.
Analytical procedures can be used in tests of controls
A

True

False

Analytical procedures are only helpful where the integrity of the underlying data is high
C

True

False

Analytical procedures must be carried out by senior audit personnel only

True

False

There are a number of factors that the auditor should consider when using analytical procedures.
These include suitability and reliability factors.
Which THREE of the following factors relate to reliability?
A

The source of the information

The materiality of the items involved

The relevance of the information available

The comparability of the information available

The Institute of Chartered Accountants in England and Wales, March 2009

47

Chapter 11: Evidence and sampling


4

Which of the following describes sampling risk?


A

The risk that the sample cannot be tested due to a lack of source documentation

The risk that the sample chosen is not representative of the population

The risk that the auditors testing techniques cannot be applied to the sample chosen

The risk that the underlying population is incomplete

The gross margin at West Ltd has increased from the previous year.
Assuming there are no errors in the financial statements, which of the following explains this increase?

48

Sales volume has increased

Administrative costs have increased

The cost of raw materials has increased without an effect on the sales price

The company now employs more efficient production techniques

Which of the following describes how an assurance provider would check the completeness assertion
for non-current assets?
A

Trace an entry in the non-current asset register to the physical item

Trace the physical item to a figure in the financial statements

Trace the physical item to an entry in the non-current asset register

Trace an entry in the financial statements to the physical item

Which of the following sources of evidence would assist in verifying the existence of the trade
receivables balance?
A

Trade receivables confirmations

Sales orders

Analytical procedures over the trade receivables balance

Recalculations of the individual receivable balances

In testing for the completeness of liabilities, which THREE of the following sources of documentation
would be helpful?
A

Board minutes

Correspondence with client solicitors

Bank statements

Bank letter

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

10

11

12

Which THREE of the following are the reasons why a bank letter is sent to all the clients banks?
A

Bank statements held by the client may have been tampered with

The bank statements may be less accurate

The bank letter contains other information which may be helpful in the audit

The bank letter is sent directly to the auditor and is therefore more reliable

When auditing a provision which TWO of the following methods are MOST LIKELY to detect
understatement of the provision?
A

Test the process used by management to estimate the amount

Use an independent estimate

Review subsequent events

Reperform the calculation of the provision

Which of the following best describes random selection in audit testing?


A

Testing 100% of a population

Testing all items in a population with a particular characteristic

Testing items in a population that appear unusual or suspicious

Testing less than 100% of a population where each item in the population has an equal chance of
selection

For each of the following statements concerning statistical and non-statistical sampling select whether
they are true or false.
Non-statistical sampling involves an element of subjectivity
A

True

False

Statistical sampling involves the random selection of a sample


C

True

False

Statistical sampling requires the auditor to input a required confidence level


E

True

False

The Institute of Chartered Accountants in England and Wales, March 2009

49

Chapter 11: Evidence and sampling


13

In testing the authorisation of sales orders select whether each of the following factors would cause an
increase in the sample size, a decrease in the sample size or would have no effect on the sample size.
An increase in the level of tolerable error
A

Increase

Decrease

No effect

An increase in the number of sampling units


D

Increase

Decrease

No effect

Detection risk is increased

14

Increase

Decrease

No effect

In testing whether all goods received notes are matched with purchase orders, select whether each of
the following factors would cause an increase in the sample size, a decrease in the sample size or
would have no effect on the sample size.
An increase in the level of expected error
A

Increase

Decrease

No effect

An increase in the auditors required confidence level

15

Increase

Decrease

No effect

In testing the valuation assertion for non-current assets, select whether each of the following factors
would cause an increase in the sample size, a decrease in the sample size or would have no effect on
the sample size.
An increase in the use of other substantive procedures directed at the same assertion
A

Increase

Decrease

No effect

Stratification of the population

50

Increase

Decrease

No effect

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

16

In testing the valuation assertion for trade receivables, select whether each of the following factors
would cause an increase in the sample size, a decrease in the sample size or would have no effect on
the sample size.
An increase in the level of tolerable error
A

Increase

Decrease

No effect

An increase in the auditors assessment of audit risk in this area

17

Increase

Decrease

No effect

With regards to tolerable error and sampling risk, select whether the following statements are true or
false.
Tolerable error is the minimum error that the auditor would be willing to accept
A

True

False

Tolerable error is used by management as a guide to the extent of errors they can make
C

True

False

Sampling risk is the risk that the actual errors found in a sample will exceed the expected errors

18

True

False

For each of the following descriptions relating to sample selection select whether they describe
random selection, haphazard selection or systematic selection.
Mark is selecting a sample of sales invoices to carry out a directional test. He uses a computerised
generator to identify the items to be selected
A

Random

Haphazard

Systematic

John is selecting a sample from a list of accounts payable. He makes his selection by choosing every
15th balance
D

Random

Haphazard

Systematic

The Institute of Chartered Accountants in England and Wales, March 2009

51

Chapter 11: Evidence and sampling


19

Inspecting board minutes is an important test of detail that can assist in evidence gathering for many
account balances and disclosures.
Which THREE of the following account balances are supported by the evidence likely to be provided
by board minutes?

20

21

22

23

Contingent liabilities

Company commitments

Sundry expenses

Additions to significant tangible non-current assets

Utility expenses

When may block sampling be appropriate?


A

When checking that controls were in operation throughout the year

When testing whether certain transactions have been allocated to the correct accounting period

When testing for understatement of assets

When testing for understatement of liabilities

When is monetary unit sampling most appropriate?


A

When testing for understatement of assets

When testing for overstatement of assets

When testing for understatement of liabilities

When testing for understatement of expenses

In respect of an assurance engagement which of the following is the LEAST persuasive method of
gathering evidence?
A

Reperformance of a depreciation calculation

Inspection of a supplier's invoice

Inspection of an internally-generated order for the purchase of a non-current asset

Communicating with a third party to confirm ownership of a non-current asset

All methods of obtaining evidence have weaknesses. These are listed below in the options presented.
For each method of obtaining evidence, select the weakness that is most likely to be present.
Analytical procedures
A

Limited to the point in time it takes place

Limited by underlying accounting system

Observation of a procedure

52

Limited to the point in time it takes place

Limited by underlying accounting system

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Direct confirmation of a payables balance

24

A balance which is understated may be agreed because it favours the respondent

A balance which is overstated may be agreed because it favours the respondent

Auditors obtain evidence using procedures set out in BSA 500 Audit Evidence.
For each of the following tests select the type of procedure which is being used.
The auditor examines a title deed to confirm that the company has ownership of a plot of land
A

Inspection

Observation

Confirmation

The auditor is present while a sales order is being processed to test if the controls are carried out
D

Inspection

Observation

Confirmation

The Institute of Chartered Accountants in England and Wales, March 2009

53

Chapter 11: Evidence and sampling

54

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 12: Management representations


1

Which THREE of the following are purposes of a management representation letter?


A

Confirmation that the financial statements are free of material misstatements

Confirmation that management acknowledges its responsibility for the preparation of the financial
statements

Confirmation that management acknowledges the terms of the engagement

Confirmation that management acknowledges its responsibility for the design and implementation
of internal control

For each of the following statements in respect of management representations select whether they
are true or false.
Management representation letters act as a substitute for other audit evidence
A

True

False

Management representation letters contain confirmation that the effects of uncorrected misstatements
are immaterial
C

True

False

Management representation letters contain the statement that management has disclosed all relevant
subsequent events to the auditors

True

False

For each of the following, select in which letter issued by the auditor they are referred to.
Details of any frauds or irregularities in the internal control system or confirmation that no such
frauds or irregularities have taken place
A

Letter of representation

Engagement letter

Management letter

Weaknesses in the internal control system


D

Letter of representation

Engagement letter

Management letter

The Institute of Chartered Accountants in England and Wales, March 2009

55

Chapter 12: Management representations


4

56

When should the management representation letter be signed?


A

Before the audit is commenced

During the course of the audit

Just prior to the signing of the audit report

After the audit report is signed

Who normally drafts and signs the management representation letter?


A

Auditor drafts and signs

Auditor drafts, senior management sign

Senior management draft and sign

Senior management draft, auditor signs

Which of the following issues would be likely to be included in a management representation letter?
A

Completeness of liabilities

Completeness of trade accounts receivable

Existence of non-current assets

Accuracy of prepayments

Which of the following statements is an accurate description of a management representation letter?


A

It confirms the scope of the engagement

It sets out material weaknesses in internal controls

It confirms matters management have said to audit staff as evidence towards the audit opinion

It sets out matters arising during the engagement which are of interest to management

Which TWO of the following situations would be referred to in the management representation
letter?
A

Management has refused the auditor permission to contact a major customer

Management has confirmed its belief that the ongoing litigation with a former employee will not
result in the company having to pay compensation

Management has confirmed that it believes that a defaulting customer will pay its debts in due
course

Management believes that no fraud has been committed by senior management in the period

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Which TWO of the following matters are management required to confirm in writing in a letter of
representation?
A

That management are responsible for the preparation of the financial statements

That management are responsible for protecting the interests of the shareholders

That management are responsible for the design and implementation of internal control

That the audit fee will be paid in full within three months of the signing of the audit report

The Institute of Chartered Accountants in England and Wales, March 2009

57

Chapter 12: Management representations

58

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 13: Substantive procedures key financial


statement figures
1

For each of the following substantive procedures carried out on a schedule of non-current assets
which agrees to the financial statements, select which financial statement assertion will be addressed.
Tracing items from the non-current asset register to the schedule
A

Completeness

Valuation

Existence

Confirming whether the casts on the schedule are correct

Completeness

Valuation

Existence

For each of the following substantive procedures on non-current assets, select which financial
statement assertion will be addressed.
Checking a sample of non-current assets to purchase invoices
A

Completeness

Valuation

Existence

Selecting a sample of assets on the non-current asset register and confirming that they are physically
present

Completeness

Valuation

Existence

When testing the rights and obligations assertion for a sample of plant and machinery, which of the
following sources of evidence would be most helpful?
A

The clients asset register

Physical verification of the assets

Purchase invoices

Recalculation of the depreciation charge

The Institute of Chartered Accountants in England and Wales, March 2009

59

Chapter 13: Substantive procedures key financial statement figures


4

For each of the following risks of misstatement in respect of intangible non-current assets select the
financial statement assertion which is directly affected.
Intangible assets are not tested for impairment on an annual basis
A

Completeness

Valuation

Existence

Expenses are inappropriately capitalised as intangible assets

Completeness

Valuation

Existence

For each of the following audit tests on inventory select which financial statement assertion would be
supported.
Enquiries about possible obsolete or slow-moving inventory
A

Completeness

Valuation

Cut-off

Taking the last 10 goods received notes of the period and the first 10 goods received notes of the
next period and checking that they have been allocated to the correct period

60

Completeness

Valuation

Cut-off

By attending the inventory count on which THREE of the following is the auditor gaining assurance?
A

The quantity of inventory

The existence of inventory

The rights and obligations over the inventory

The effectiveness of the companys controls over the inventory count

When reviewing the instructions for the inventory count in respect of the organisation of the count,
which would cause concern to the auditor?
A

All inventory is to be tidied and organised into sections for counting

The count will be supervised by the stores manager

There are restrictions on the movement of inventories while the count is underway

Third party inventory is placed in a separate area and marked as belonging to the third party

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

For each of the following statements in respect of perpetual inventory counts select whether they are
true or false.
Management do not need to ensure that inventory lines are counted at least once a year
A

True

False

Management should ensure that all material differences that arise from the inventory counts are
investigated and corrected
C

True

False

The inventory count should be organised so there is minimal movement of inventories at the time of
the count

10

True

False

Which THREE of the following are MOST LIKELY to indicate that the net realisable value of inventory
is lower than its cost?
A

There is physical deterioration of the inventory

There has been an increase in selling price

Newer models are now available

There has been a marketing decision to offer small discounts during a sale period

There has been a significant unforeseen increase in production costs which cannot be passed on
to the customer

There are a number of ways that the auditor can test whether inventories are stated at the lower of
cost and net realisable value.
Which TWO of the following procedures will assist the auditor in this?

11

Corresponding with suppliers

Reviewing post year-end sales

Comparing sales prices to cost

Sending receivables confirmations

Direct confirmation with customers assists in supporting which THREE of the following assertions?
A

Existence

Rights and obligations

Valuation

Cut-off

The Institute of Chartered Accountants in England and Wales, March 2009

61

Chapter 13: Substantive procedures key financial statement figures


12

The following statements relate to the types of confirmations which may be sought from receivables.
For each statement select whether it is true or false.
Under the negative method, the customer is requested to confirm the accuracy of the balance shown
or state his disagreement
A

True

False

Under one of the options available for the positive method of direct confirmation, the customer may
be requested to provide the balance owed
C

True

False

Positive confirmations must be used where there are a large number of balances

13

14

15

True

False

In which TWO circumstances might it be permissible to use the negative method of receivables
confirmation?
A

The assessed risk of material misstatement is high

A small number of large balances is involved

A substantial number of errors is not expected

The auditor has no reason to believe that customers will disregard the request

If the client refuses permission for the auditor to communicate with customers for the purposes of
confirming their trade accounts receivable balances, the auditor should do which of the following?
A

Seek evidence from the invoices sent to customers

Seek evidence from post year-end payments from customers

Consider it a limitation on the scope of the audit

Rely on analytical procedures

The following statements relate to the selection of a sample of customers from whom direct
confirmation of balances will be sought. For each statement select whether it is true or false.
Samples should be selected giving each customer an equal chance of being selected. There should be
no further considerations.
A

True

False

The sample of customers should include accounts that are old, unpaid, written off and with credit
balances

62

True

False

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Customers with whom it is difficult to communicate should be avoided

16

True

False

For each of the following audit tests on trade receivables select which financial statement assertion
would be supported.
Comparing the method of calculating the provision against trade receivables against other entities in
the same industry
A

Completeness

Valuation

Existence

Obtain and review an analysis of aged receivables at the period end for amounts outstanding for more
than the allowed credit period

17

Completeness

Valuation

Existence

During the course of the audit of Ham Ltd, Mary receives 24 replies out of the 27 direct customer
confirmation letters. Mary has already communicated with the three outstanding responders on at
least four occasions.
What action should Mary now take?

18

No action is necessary as 24 out of 27 responses is sufficient

Mary should pass on the details of the outstanding responses to an independent company official
for chasing

Mary should continue her efforts to contact the customers

Mary should deem that they are fictitious customers

For each of the following risks of misstatement in respect of the bank and cash balance select the
financial statement assertion to which they relate.
Not all the clients bank balances being disclosed
A

Completeness

Existence

Valuation

Reconciliation differences between the bank balance and the cash book balance are not investigated
and resolved by management
D

Completeness

Existence

Valuation

The Institute of Chartered Accountants in England and Wales, March 2009

63

Chapter 13: Substantive procedures key financial statement figures


19

Keeping the cash book open to take credit for remittances received after the year end, is one way of
window dressing.
How can the auditor address this risk?

20

21

22

By checking the cheque payment slips to ensure that outstanding payments really relate to the
current period end

By checking the bank paying in slips of outstanding lodgements to ensure they belong to the
current year end

By confirming with customers the date of their payment to the client

By confirming with suppliers the date of receipt of the clients payment

Which THREE of the following items will be included in a bank letter from a specific bank?
A

Details of all standing orders with the bank

The bank balance on each account with the specific bank

Any guarantees made by the client

Any titles or other assets held for safe custody by the bank

Direct confirmations from supplier are not always used by auditors. Under which TWO of the
following circumstances are supplier confirmations necessary?
A

Where supplier invoices and supplier statements are available and part of the standard
documentation of a purchases cycle

Where there is a pressure on the auditor to complete his audit on time

Where the auditor suspects that the client is deliberately trying to understate payables

Where the client refuses to provide supplier statements to the auditor

An important control within the payables cycle is the comparison between supplier statements and the
payables ledger accounts.
Which of the following assertions is most supported by this control procedure?

23

64

Existence

Completeness

Rights and obligations

Presentation

Which of the following sources of information will not be helpful for auditing non-current liabilities?
A

Loan agreements

Bank letters

Share certificates

Board minutes

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

24

The results of substantive tests on trade payables at Waltham Ltd are set out below. The materiality
threshold set for these tests was CU12,000.
For each of the following results, select the action which should be taken by the audit senior.
Of the 15 supplier confirmations sent, only 10 were returned
A

Draw conclusion

Refer to senior colleague

Extend sample

In a sample of 30 supplier invoices out of approximately 300, representing 5% of the payables balances,
errors were found on the payables ledger concerning the recording of liabilities from 8 invoices
totalling CU200

25

26

Draw conclusion

Refer to senior colleague

Extend sample

Which THREE of the following are the more significant risks in relation to a non-current asset balance
in the financial statements?
A

Non-current assets exist and have been included in the financial statements but belong to a third
party

Non-current assets have not been depreciated

Expenses unrelated to non-current assets have been included in the non-current asset balance

Non-current assets have not been disclosed properly in the financial statements

For each of the following circumstances in respect of inventory, select which financial statement
assertion would be affected.
Differences identified at the inventory count have not been adjusted in the inventory records
A

Completeness

Valuation

Cut-off

Inventory in transit at the end of the year has not been taken into account

27

Completeness

Existence

Cut-off

The auditor of Ilford Ltd carried out a receivables circularisation at the year end to confirm the
accuracy of total trade receivables in the balance sheet at that date. Two of the replies to the
circularisation disagreed the balance.
For each of these two disagreements, select whether the disagreement would be considered an error
or would not be considered an error for the purposes of evaluating the accuracy of total trade
receivables in the balance sheet at the year end.

The Institute of Chartered Accountants in England and Wales, March 2009

65

Chapter 13: Substantive procedures key financial statement figures


Colchester Ltd disagreed the balance stating that the amount owed was CU11,100 and not CU15,600
as was written on the confirmation letter. On investigation, the auditor discovered that invoice
number SI 8976 for a total of CU1,600 had been recorded by Ilford Ltd as CU6,100
A

Error

Not error

Rainham Ltd disagreed the balance because their records had cancelled invoice number SI 11493. This
was because Rainham Ltd had returned some goods three days prior to the year end. The auditor has
verified that the goods have been returned and that cut-off with inventory is correct

28

Error

Not error

Marianne has obtained a list of items which make up the cash balance CU15,350 in the financial
statements of Browns Ltd. Materiality has been set at CU7,000.
For each item select whether or not Marianne should test the item.
Current account balance CU14,100
A

Test

Not test

Petty cash float CU250


C

Test

Not test

Special directors cash account CU1,000

29

Test

Not test

Two types of procedures used in gathering evidence are tests of controls and substantive procedures.
For each of the following examples select the type of procedure illustrated.
Carrying out analytical procedures on the income statement
A

Test of control

Substantive procedure

Reviewing board minutes for evidence of authorisation of major additions to non-current assets
C

Test of control

Substantive procedure

Reperforming only the year-end bank reconciliation

66

Test of control

Substantive procedure

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 14: Codes of professional ethics


1

For each of the following statements in relation to guidance on professional ethics select whether they
are true or false.
It is in the public interest for accountants to follow a professional ethics framework
A

True

False

Ethical guidance from the ICAB is in the form of rules rather than principles
C

True

False

Rules-based codes offer a more straightforward ethical framework, as they cover specific situations

True

False

Select which of the following statements are true or false.


A principles-based ethical framework encourages auditors to apply general principles to their specific
situation
A

True

False

A principles-based ethical framework takes the form of a checklist of forbidden items which auditors
can efficiently check off
C

True

False

A principles-based ethical framework can more effectively accommodate a fast-changing environment

True

False

Which of the following is not one of the stated fundamental principles of the IFAC code?
A

Integrity

Courtesy

Objectivity

Confidentiality

The Institute of Chartered Accountants in England and Wales, March 2009

67

Chapter 14: Codes of professional ethics


4

Smith & Co audit firm has been approached to audit Tube Ltd, a listed company. A partner in Smith &
Co has shares in Tube Ltd and another partners sister is the managing director of Tube Ltd.
What types of threats would taking on the audit of Tube Ltd present?

Advocacy and intimidation threats

Advocacy and self-interest threats

Self-review and self-interest threats

Familiarity and self-interest threats

Marr & Co are the auditors of Dreams Ltd. Dreams Ltd, a listed company, has approached Marr & Co
to help it design and implement a new IT system.
Which of the following threats is created if Marr & Co accept this assignment?

Intimidation threat

Advocacy threat

Familiarity threat

Management threat

Bubbles Ltd, an audit client of Johnson & Co, is unhappy with the way the audit is being carried out
and has threatened to replace Johnson & Co if the firm does not issue the opinion Bubbles Ltd wants.
Which of the following threats is created by this situation?

Intimidation

Advocacy

Familiarity

Management

Whitely & Co are the auditors of East Ltd. East Ltd has approached Whitely & Co to carry out share
dealings on its behalf.
Which threat to independence is created by this?

68

Intimidation

Advocacy

Familiarity

Self-interest

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 15: Integrity, objectivity and independence


1

Flyby Ltd is a publicly listed airline. Because Flyby Ltd are so happy with their audit firm, March & Co,
they have offered two free flights for every member of the audit team.
What should the response to this offer be from March & Co?

Accept the offer as it is part of auditor-client relations

Request that the offer be directed to all the staff of the assurance firm and not just the audit
team

Accept the offer but emphasise to the management of Flyby Ltd that this will not prejudice any
future audits

Reject the offer as it is not of insignificant value

Jude & Co is about to commence the audit of its client, Merry Ltd. However, Merry Ltd still owes fees
to Jude & Co for last years audit.
Which of the following should be Jude & Cos course of action?

Continue to act with safeguards

Threaten to issue a qualified audit opinion if Merry Ltd do not pay

Consider whether it is necessary to resign

Accept shares in Merry Ltd to the value of the audit fee

A partner in Estelle & Co has just inherited a large number of shares in one of the firms audit clients.
What course of action should Estelle & Co take?

The partner should dispose immediately of the shares

The partner does not need to dispose of the shares but can transfer them to his wife

The partner can transfer the shares into the name of the audit firm

The partner may keep the shares but must have no involvement in the audit of that particular
client

James Smith is a partner at the assurance firm of Jones & Co. His clients include Purple Ltd, a global
listed company. Purple Ltd have been very impressed with James Smiths abilities and have offered him
employment as part of their senior management team.
What action should James Smith take, assuming that he wishes to accept the offer if at all possible?
A

Accept the offer provided Jones & Co apply appropriate safeguards to the audit

Reject the offer

Accept the offer on the condition that he is placed in a different country

Accept the offer with the condition that an amount is paid to Jones & Co by way of
compensation

The Institute of Chartered Accountants in England and Wales, March 2009

69

Chapter 15: Integrity, objectivity and independence


5

Harry Price has been offered a loan at a commercial rate of interest from a high street bank that
happens to be his audit client.
What action should Harry take?

Accept the offer

Reject the offer

Accept the offer after two years have elapsed from the conclusion of the audit

Accept the offer with the condition that this transaction is disclosed in the audit report

Duncan & Co regularly receives a large proportion of its fee income from the audit of Lilac Ltd.
Which two measures might Duncan & Co take with regards to the audit of Lilac Ltd?

Obtain an external quality control review

Involve others in the audit, such as independent experts

Resign from the audit of Lilac Ltd

Discuss the matter with the audit committee

Patricia & Co regularly receives large amount of its fee income from the audit of Karen Ltd.
What two measures might Patricia Smith & Co take with regards to the audits of Karen Ltd?

Monitor and implement quality control of assurance

Rotate the partner

Involve an additional professional accountant to review the work

Obtain an external quality control review

For each of the following situations involving an auditor and his clients select the action the auditor
should take: accept the offer/request with no safeguards, accept with safeguards or reject the
offer/request.
A client has offered the auditor an audit fee based on a percentage of reported profits
A

Accept with no safeguards

Accept with safeguards

Reject

An audit client has requested that the audit partner serve on the board of directors

70

Accept with no safeguards

Accept with safeguards

Reject

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

For each of the following situations involving an auditor and his clients, select the action the auditor
should take: accept the offer with no safeguards, accept the offer with safeguards or reject the offer.
A listed company audit client requests that the auditor prepare its accounts on an ongoing basis
A

Accept with no safeguards

Accept with safeguards

Reject

A private company audit client requests that the auditor prepares its accounts on an ongoing basis

10

Accept with no safeguards

Accept with safeguards

Reject

A client has requested that its auditor prepares a valuation for a material portfolio of shares included
in the balance sheet.
Which set of threats may arise if the auditor agrees to take on this assignment?

11

12

Self-review and advocacy threats

Advocacy and familiarity threats

Advocacy and management threats

Self-review and management threats

What are the key threats to an external auditor who also provides internal audit services?
A

Self-review and management

Management and advocacy

Management and familiarity

Self-review and familiarity

Julie & Cos client, Beige Ltd, a listed company, has asked the firm, in its capacity as an accountant and
external auditor, to act as an expert witness in a court case.
What should Julie & Cos response be?
A

Accept the appointment without implementing safeguards

Accept the appointment but consult the audit committee throughout the course of the
appointment

Seek the permission of the audit committee and then accept or refuse the appointment

Refuse the appointment

The Institute of Chartered Accountants in England and Wales, March 2009

71

Chapter 15: Integrity, objectivity and independence


13

14

15

Which THREE of the following are examples of when a familiarity threat might arise?
A

The auditor is being sued by the client

There are family relationships between the auditor and the client

There are personal relationships between the auditor and the client

The auditor is involved in making recruitment decisions on behalf of his client

In order to address the familiarity threat that arises from the long association of the key audit partner
with a client which is a listed company, what action, if any, is required?
A

The key audit partner should serve for no longer than five continuous years before being rotated
off the client

The key audit partner should serve for no longer than six continuous years before being rotated
off the client

The key audit partner should serve for no longer than seven continuous years before being
rotated off the client

There are no restrictions as to the number of years the key audit partner can serve on his audit
client

Verity is a trainee in the audit department of Jones & Co. For her first client, she has been assigned the
audit of cash and part of the work is to review the year-end bank reconciliation. Verity has never
carried out this review before but she has last years file and has covered bank reconciliations in her
studies. Although Verity is currently alone at the client, she can call the audit manager at any time.
What action should Verity take?

16

Perform the work, consulting the audit manager with any queries

Refer the matter to her engagement partner

Contact ICAB technical department

Take legal advice

Geoff is a trainee in the audit department of Dickens & Co. For his first client, he has been sent
unsupervised to a small investment bank. He has been assigned the planning and performance of the
audit of the bank and has a deadline to report to the partner in two weeks time. Geoffs only guidance
is the prior year audit files.
What initial action should Geoff take?

72

Perform the work

Refer the matter to his training partner

Contact ICAB technical department

Take legal advice

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

17

Alison is a qualified accountant working for Harry Ltd, a listed company. Harry Ltd has set some
ambitious profit targets for the current year. The board of directors of Harry Ltd has asked Alison to
find creative ways so that the company can meet its targets. Alison is aware that she will need to
window dress the financial statements in order for the targets to be met.
What action should Alison initially take?

18

Seek advice from the ICAB technical department

Report her concerns to Harry Ltds audit committee

Consult the stock exchange

Take legal advice

Long association with an audit client could lead to which of the following threats?
A

Self-review

Intimidation

Familiarity

Advocacy

19
The following are examples of situations in which Meryll & Co, an audit firm with over 200 listed and
non-listed clients in a wide range of industries, might need to implement safeguards in order to protect its
independence.
For each situation select the most appropriate safeguard or state that there are no safeguards which could
reduce the risk to an acceptable level.
One of Meryll & Cos clients has requested that the audit firm provide additional tax services on an
ongoing basis
A

Separate personnel

Fee threshold not exceeded

No safeguards possible

Meryll & Co has been asked to step in and prepare the financial statements of a listed client as the
financial controller has been taken ill
D

Separate personnel

Fee threshold not exceeded

No safeguards possible

The Institute of Chartered Accountants in England and Wales, March 2009

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Chapter 15: Integrity, objectivity and independence

74

The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

Chapter 16: Confidentiality


1

Which TWO of the following are correct with regard to the disclosure of confidential client
information?
A

Disclosure can be made to third parties at the discretion of the auditor

Disclosure can be made to third parties only where the client has provided consent

Disclosure can be made to third parties where there is a public duty to disclose

Disclosure can be made to third parties where there is a legal duty to disclose

In certain circumstances, auditors have a legal duty to disclose confidential client information to third
parties.
Which TWO of the following describe such circumstances?

When the client is involved in terrorist activities

When the auditor is corresponding with tax authorities

When the client has breached regulations of the Companies Act 1994

When there is a suspicion of corruption

During the audit of Turquoise Ltd, the auditor comes across a number of unusual transactions that
leads him to suspect that the client is involved in money laundering.
What should the auditors next course of action be?

Consult with his firms Lawyer

Contact the Anti-corruption commission

Consult the client and inform them of his suspicion

Contact the local police for immediate arrest of the client

Meek & Co has recently been approached to carry out the audit of Yellow Ltd. Yellow Ltd is the
major competitor of Meek & Cos existing client, Green Ltd.
What should Meek & Cos initial course of action be?
A

Resign from Green Ltd

Resign from both Green Ltd and Yellow Ltd

Inform both Green Ltd and Yellow Ltd about the situation

Do nothing

The Institute of Chartered Accountants in England and Wales, March 2009

75

Chapter 16: Confidentiality


5

Within an audit firm, a number of security measures should be put into place to ensure that accidental
disclosure of confidential client information is prevented.
Which THREE of the following would be appropriate measures?

Not discussing client matters in public places

Not discussing client matters at the assurance firms premises

Not discussing client matters with any party outside the assurance firm

Not leaving working papers unattended at the clients premises

Not taking working papers off the assurance firms premises

Auditors need to take particular care in the steps taken where conflicts of interest arise. For each of
the following cases select whether they constitute a conflict of interest or not.
The auditor has been approached to provide audit services to a key competitor of an existing client
A

Conflict of interest

Not a conflict of interest

The auditor has been asked to advise a company wishing to acquire a client company
C

Conflict of interest

Not a conflict of interest

The auditor has been approached to carry out a review assignment on the interim financial statements
of an existing client

76

Conflict of interest

Not a conflict of interest

The Institute of Chartered Accountants in England and Wales, March 2009

Answer Bank

The Institute of Chartered Accountants in England and Wales, March 2009

77

78

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 1: Concept of and need for assurance


1

A,B,C
BAS constitutes possible criteria whereas the remaining three are subject matter.

A,D The practitioner is responsible for gathering evidence and issuing an opinion on the subject matter.

A,C,D

For reasonable assurance, the assurance provided is high (never absolute nor is it low). The
opinion provided is also positive. A negative opinion is provided in a limited assurance
engagement.
That the accounts have been correctly extracted from the companys books and records forms
part of the definition of true, whereas options A, C and D form part of the definition of fair.

A,D It is RSBs that offer professional qualifications and RSBs that are responsible for monitoring their
members.

A,D,E
The principle objective of assurance is to provide an opinion on specific subject matter against
predetermined criteria, which will then be reported on to the users. The principle objective
hence is not the detection and correction of fraud. Assurance engagements may take many forms
from reviews of financial statements to reviews of internal control systems.

A,D,E
Reducing the audit fee will not close the expectations gap as it is not part of the problem that
constitutes the expectations gap. However, issuing an engagement letter and including a caveat in
an assurance report do go some way to address the expectations gap.

B,C The statutory audit does not lead to a certification of financial statement correctness, but
reasonable assurance is provided as to the truth and fairness of the financial statements. The
statutory audit can only be carried out by external auditors, which preserves the independence
of the process.

A,C,F
The fact that auditors are involved on the client for the first time, and hence may initially lack
client-specific knowledge constitutes a detection risk which the auditors will need to address as
part of their overall audit strategy. The remaining cases do constitute limitations of the provision
of assurance as sampling is inherently risky (there is a risk that the sample does not represent the
population tested) and judgment is used in the audit process. Judgment is subjective and one
auditors judgment may differ from another auditors.

10

A,D,E
The subject matter which is under review is the branchs inventory system, which is to be
assessed against the company policy (hence the suitable criteria). The party responsible is the
client, Ilford Ltd, with Smith & Co being the practitioners.

11

The assurance provided is not absolute given the limitations of an audit. However, the assurance
provided is high and not limited due to the auditors obligation to gather sufficient appropriate
audit evidence. The external audit leads to a positive opinion where a high level of assurance is
provided.

The Institute of Chartered Accountants in England and Wales, March 2009

79

Chapter 1: Concept of and need for assurance

80

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 2: Process of assurance: obtaining an engagement


1

B,D,E
Strong internal controls and few unusual transactions would not indicate a high risk prospective
audit client.

No communication should be made with the previous auditor without the potential clients
permission, therefore Marnie & Co should decline the appointment immediately. The fact that
Opportunity Ltd has denied permission to communicate is suspicious and a reason not to
continue the business relationship.

A,B,D
The above options are situations where a firm must decline appointment as auditor. The answer
is not C as, although this might be a valid business reason for declining the appointment, the firm
is not required to decline in this situation.

According to Companies Act 1994, The books of accounts of every company should be retained
for at least twelve years.

B,C,F,H
It is the management representation letter (see later chapter) that provides an opportunity to
management to provide in writing their judgments on subjective areas in the financial statements.
It is the planning documentation that will contain the preliminary risk assessment. It is the
auditors report that contains the audit opinion.

The right to publicly disclose confidential information in every circumstance without the
permission of the client is not an auditors right under the Companies Act 1994. It is only in
particular circumstances where the auditor has a legal duty to disclose confidential information,
e.g. where terrorist or corruption activities are suspected. Options A, B and C represent the
rights that an auditor does have under the Companies Act 1994.

A,B,C
The auditor is not absolved from his audit responsibilities with the inclusion of the statement, but
the statement does emphasise the role and responsibilities of management which may help with
an understanding of the auditors role (which is to audit the financial statements and provide
reasonable assurance that they are free from material misstatement).

A,C,F
If the client is experiencing financial difficulties, this is a high risk indicator as the client has an
incentive to present healthier financial statements than actually exist. In the case where three
firms of auditors have resigned from a particular client in the past five years, this is also a high risk
factor as it may indicate problems in the client-auditor relationship. Where a company carries
out very few unusual transactions, this is a low risk indicator as the auditor will be in a better
position to identify material fraud and error than if the number of unusual transactions is
significant.

The Institute of Chartered Accountants in England and Wales, March 2009

81

Chapter 2: Process of assurance: obtaining an engagement

82

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 3: Process of assurance: planning the assignment


1

B,C,D
The detailed plain of audit procedures will be found in the more detailed audit plan and not in the
audit strategy document.

A,B,C
Obtaining information for other future assignments with the same client (option D) is not a
reason provided by BSA 315 for understanding an entity and its environment. BSA 315 provides
guidance as to how an understanding of the entity and its environment should be obtained for the
purposes of the external audit process.

B,C,D
Option A describes the preparation of a bank reconciliation. This does not constitute analytical
procedures but is an internal control procedure carried out by the company. Options B, C and D
describe analytical procedures, where balances and ratios are compared in order to gain an
insight into the reasonableness of the balances.

B,D,E
Revenue and salaries do not appear to have had significant year on year fluctuations and
therefore are less likely to warrant further investigation. However, cost of sales appears to have
decreased whilst sales have increased. Furthermore, there appears to be the possibility of a
misposting of expenses between cost of sales and distribution cost/insurance expenses.

B,D,F
Materiality is a measure that may change throughout the audit depending on the ongoing
assessment of audit risk.
Materiality relates to qualitative matters (such as the absolute accuracy of directors emoluments)
and is not restricted to being a monetary measure.
A monetary materiality measure may be calculated in different ways for different clients (for
example, for a loss-making company, a percentage of revenues may be appropriate as opposed to
a percentage of profits (i.e. losses)).

Even where control and inherent risks are low, some substantive procedures should still be
carried out and cannot be avoided altogether.

Purchase invoices not being authorised has implications for the payments made and does not
affect the ordering stage of the purchases cycle.

Auditors usually test assets for overstatement and liabilities for understatement.

C,D,E
Computation and verification are procedures used in substantive procedures.

10

C,E,G
The first year of the audit presents a detection risk to the auditors as they will need to invest the
appropriate amount of time and effort gaining knowledge on the entity.
The internal audit function has a positive effect on control risk.
The clients intention to list on the stock exchange presents inherent risks as the company is
more susceptible to fraud or error at the company level.

The Institute of Chartered Accountants in England and Wales, March 2009

83

Chapter 3: Process of assurance: planning the assignment


11

C,E,G
No prior knowledge of a specific industry creates a detection risk to the auditor.
No authorisation of purchase invoices presents a control risk.
The existence of a profit-related scheme for management presents inherent risks as the company
is more susceptible to fraud or error at the company level.

84

12

A is the definition of an inherent risk, B describes detection risk, and D is another aspect of
inherent risk.

13

Forming a critical assessment and bringing into question the reliability of audit evidence is the
most appropriate description. The others go too far.

14

B,C For the current ratio (the ratio of current assets to current liabilities) to decease either current
assets must have decreased or current liabilities must have increased. By shifting its reliance from
long-term to short-term debt, the current ratio is decreased as current liabilities increase. By
adopting a just-in-time inventory policy inventory levels will fall, causing a decrease in current
assets and hence a decease in the current ratio. The answer is not A, as if customer credit is
extended, then trade receivables increase but cash decreases accordingly (i.e. there is a change in
the mix of current assets). The answer is not D, as an increase in sales will cause an increase in
trade receivables causing the current ratio to increase instead.

15

A,D A reduction in the discounts given to customers increases the selling price causing an increase in
the gross margin. A significant change in the sales mix towards more profitable items being sold
would also cause an increase in the gross margin. The answer is not B, as if the increased cost of
raw materials is passed on to customers, this will not affect the gross margin. The answer is not
C as sales prices being reduced will decrease the gross margin.

16

A,D The fact that the company operates in a fast moving industry makes it more susceptible to
material error (e.g. from miscalculating the extent of inventory obsolescence). If the companys
future is threatened as described in D, this fact causes the financial statements as a whole to be
susceptible to material error (as management may try to present a healthier picture than is the
case). Options B and C would increase control risk.

17

C,E A mix of tests of control and substantive procedures would be most appropriate in an audit of a
client where some reliance could be placed on the internal control systems. Option A would
never be a viable solution even if the perfect internal control system were in place some
substantive procedures, even if limited, should always be carried out. For the limited assurance
engagement, substantive procedures only are used, usually in the form of analytical procedures.

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 4: Process of assurance: evidence and reporting


1

A,D,E
Written forms of evidence are more reliable than oral forms. The other two statements are true.

Sufficiency relates to the quantity of evidence. Reliability, quality and relevance relate to the
appropriateness of audit evidence.

C,E,G
External documents obtained from external sources are more reliable than when obtained from
client sources. External documents are more reliable than documents prepared internally by the
client.

B,C,D
Occurrence and accuracy relate to classes of transactions.

A,B,E
Existence and valuation relate to account balances at the year end.

Financial statement assertions are those assertions made by management that are embodied in
the financial statements. These assertions are then audited by the auditor as part of the audit
process.

B,C The auditor could use substantive procedures only (where no reliance can be placed on internal
controls). Both tests of control and substantive procedures are used as means of gathering audit
evidence where some reliance can be placed on internal control systems. Option A is not
acceptable because some substantive procedures must always be carried out. Option D is not
acceptable as some tests of detail (such as agreeing the financial statements to the underlying
accounting records and examining material year-end journal entries) must always be carried out.

A,D,E
Analytical procedures and computation are used in carrying out substantive procedures.

A,D,E
Substantive procedures are made up of tests of detail and analytical procedures. Analytical
procedures (a type of substantive procedure) are carried out at the overall review of the financial
statements stage, so as to ensure that the final accounts are reasonable and make sense.

10

The audit opinion is qualified, but positive assurance is still provided.

11

B,C,D
Opinions as to whether the directors report is consistent with the financial statements and
whether the profit or loss of the period gives a true and fair view are given explicitly.

12

Existence is the key financial statement assertion supported by attendance at the inventory count.
Although some insight may gained as to the condition of the inventory, it is not enough to
support the valuation assertion. Attendance at the count cannot be a means of verifying rights
and obligations as although the auditor can ascertain the physical existence of the inventory he
cannot be sure who it belongs to.

13

Sending confirmations to receivables will not provide evidence as to the collectability of the
receivables balance as the customers will confirm whether or not they owe the amounts, not
whether they will/are able to pay them.

14

A,D,E
Reviewing supplier statements from a reciprocal population (purchases turnover) will help to
support the completeness assertion.

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Recalculating the depreciation charge will support the valuation and accuracy assertions in relation
to non-current assets, not the rights and obligations assertion. Reviewing post balance sheet
inventory movements will help to provide evidence as to the valuation of the inventory at balance
sheet date (i.e. whether it is stated at the lower of cost and net realisable value).

86

15

C,F Both cases relate to classes of transactions and not to account balances. As such the answers
cannot be options B, D or E. Option A is also incorrect as cut-off testing is specific to ensuring
that transactions and events have been recorded in the proper accounting period and testing will
therefore be focused around the year-end, not throughout the year.

16

C,E Reviewing the year-end bank reconciliation is both a substantive procedure (as it confirms the
year-end balance in the balance sheet) and a test of control. Analytical procedures are a form of
substantive procedure.

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Chapter 5: Introduction to internal control


1

As the statement is to ensure a certain outcome, it constitutes a control objective

B,C,E
Both small and large companies have a need for internal control systems, however basic they may
be for small companies. Small companies can use less sophisticated methods for compensating
controls like greater management intervention and some limited segregation of duties controls in
key areas of the business. Given the limited number of employees, the extent to which
segregation of duties controls can practically be implemented is limited.

B,D,F
Preparing monthly bank reconciliations, reviewing accounts against budget and reconciling
supplier statements are all detective controls, as they take place after the transactions have taken
place.

B,C,D
The audit committees role is to act in a monitoring capacity over the entitys audit activities and
make recommendations to the board with regards to audit matters. The audit committee would
not review the external auditors working papers as these are the external auditors property.

C,E
Securing access to the storeroom is a physical control. Agreement of key documents within a
cycle is part of the information processing.

A,C,F
Both staff training and password protection are general controls, relating to all applications. The
final case will relate to a single application and hence is an application control.

B,C,E
Cyclical review of master files will relate to a single application and hence is an application
control.
Having backup power sources and computer maintenance agreements and insurance are general
controls, as they affect policies and procedures that support the effective function of all
applications.

Flowcharting is regarded as the most effective way of recording internal controls as the user can
visually evaluate the system in operation and see which controls are carried out at which stages.

A,C,D
The entitys strategy-devising process is not a function of the internal control system but would
be a function of the board of directors.

10

C,F Both are control activities (of different types). The authorising of the credit notes is a specific
authorisation control activity and the preparation of the reconciliation between the payables
ledger and the payables ledger control account is an information processing control activity.

11

A,D,E
Should staff collude to override internal controls, those controls are rendered ineffective.
Internal controls are largely designed to deal with routine transactions. Senior management may
be in a position to ignore internal controls should they wish to do so.

12

C,D Duties are segregated at the inventory count to ensure the count is carried out as accurately as
possible. Reviewing the inventory ageing list is part of the performance review of the company.

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Chapter 5: Introduction to internal control


13

A,D,E
Inherent and control risk are the two components of audit risk. Auditors are not obliged to
provide suggestions to overcome all business risks. However, if controls are tested, a
management letter is usually issued, which will highlight the key control risks and measures that
should be taken to address them.

14

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B,C Segregation of duties helps to ensure that fraud and error are prevented, detected and
corrected. Options A and D are not the reasons for the existence of segregation of duties in the
context of an internal control system.

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Chapter 6: Revenue system


1

A,F Credit checks not being made increases the risk of bad debts. Where invoices are not matched
to the sales order and dispatch note prior to being raised could lead to invoice being incorrectly
calculated and therefore errors being made in the entries to the receivables ledger.

B,D Sales discounts not being authorised may lead to sales being made at a loss to the company.
Invoices not being checked for arithmetic accuracy may lead to customer dissatisfaction.

Goods being dispatched does not relate to the ordering stage but to the dispatch stage.

An investigation into shortages and surpluses is least likely to ensure that monies received on a
day to day basis are banked.

B,D,E
Where customers are not requested to sign as evidence of delivery, then the company cannot be
certain that the customer has received the order. Sales orders should be confirmed with the
customer, the customer checked for ability to pay and the storeroom checked for the availability
of goods. The fact that sales orders are sequentially numbered means that there is a control on
the completeness of these orders recorded, which will in turn prevent orders being missed.

Where dispatch notes are matched with sales orders, then the company can ascertain that only
goods ordered have been dispatched.

Matching invoices with dispatch notes will ensure that the customer is invoiced for goods
delivered (which is part of ensuring that invoices are correctly and accurately prepared).

A,D Not authorising sales discounts and customers generally delaying payment will not lead directly
to the misstatement of trade receivables. The other two options could.

B,C It is the dispatch notes and the sales invoices that are the key documents in determining correct
cut-off. Remittance advices are slips received together with payments from customers and, as
such, would not play a role in determining the cut-off of sales (which are accounted for on an
accrual and not on a cash basis).

10

A,C The debt/equity ratio and inventory days relate to balance sheet items and will not help in the
audit of revenue.

11

A,D Where suppliers are not pre-approved, this may lead to an unsatisfactory quality of goods being
ordered. Where goods received are not checked against the order made, it is possible that the
wrong goods are delivered, not satisfying the internal purchasing requirements.

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Chapter 7: Purchases system


1

Prenumbering assists in ensuring that all orders authorised are processed.

B,F Purchase orders not being authorised prior to being made may lead to purchases that are not on
the most advantageous terms. Not recording invoices may lead to errors in the financial
statements.

C,D Copies of the signed goods received notes should be sent to the accounts and buying
departments for acknowledgment that the order has been processed (buying) and for future
matching with the supplier invoice (accounts).

C,E Limited access to a secure storeroom as a physical control. The payables ledger being reconciled
to the payables ledger control account is an information processing control.

B,C There is no control over the orders going from the production department to suppliers. This is a
problem as the production department may make inappropriate orders which will go unchecked
as orders are not authorized first. Where there is a matching of documents in the purchases
cycle, this helps to ensure the completeness and accuracy of the balances recorded.

C,D Mary should not be involved with making orders and handling supplier payments as she is in a
position to commit a fraud making an order for own personal purposes and then organising
payment. Mary is also more susceptible to making errors as by making the order and then
organising the payment, any error made at the order stage may continue to the payment stage.

A,C Goods received notes and supplier invoices assist in testing for cut-off of purchases as they show
when goods have been received (and so a liability has been automatically created).

10

B,C Reducing the number of days credit and offering early settlement discounts will help to explain
the reasons for the fall in the number of trade receivable days. A decrease in the volume of sales
will not help to explain this change nor will a change in mix towards more expensive items being
sold.

11

A,B Checking the accuracy of sales invoices and matching signed despatch notes to sales invoices, will
not prevent computers being stolen/taken for private use (though the latter might detect this).

12

In order to avoid suppliers dumping their goods and then invoicing for them the entity should
check goods received against orders made to ensure that the goods were in fact ordered.

The supplier statement does not necessarily need to be a pre-numbered document, unlike the
other documents which created internally or usually received (supplier invoices) in the purchases
cycle. Documents are pre-numbered to enable them to be easily identified and to be checked for
completeness. Given that supplier statements are not always sent by the supplier, there would
not be much point creating a pre-numbering system.

Duties should be segregated in the sales department with regards to the recording and approval
of sales orders. However, it is not necessary for the managing director to be involved in the
approval of daily routine transactions.

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Chapter 8: Employee costs


1

Employees clocking in and out without supervision could lead to their being paid more hours
than worked e.g. if staff clock each other in and out. Option A is not correct as the rate of pay
is found on staff contracts and so it is a matter for the payroll and HR department to ensure
these rates are correctly transferred. Option B is also incorrect as deductions are calculated by
the payroll department. Option D is incorrect as the question states that there is a control in
place ensuring that only current employees have a swipecard in their possession.

An increase in the number of highly-skilled staff is likely to have created this significant increase
per head. Option A will not have lead to a relative increase in salaries per head and option B is
unlikely to have caused such a significant rise. Option C would have had a downward effect on
the salaries per head figure.

A,D Not having a separate personnel department to act as a check on payroll (and vice versa) may
lead to fictitious employees being created and any changes in employee circumstances not being
updated on the payroll. The other two risks are risks in any payroll system but they do not arise
from the joint responsibility for both processing salaries and for maintaining all staff records and
contracts.

A,C,D
The acts of requesting each employee to sign the wage packets and requesting verification of
employees identity are not critical duties that require segregation in the process of cash wages
being paid. The other three are.

B,C,E
There being no separate personnel department is a weakness in the wages system as there is no
independent source of personnel information which can be used as an internal check on the
payroll. Limiting access to standing payroll information and having all changes in salary rates
approved are strengths in the system.

B,D Payroll information being agreed to personnel files and then being processed is part of
information processing.
Comparing actual to budgeted salaries is part of the performance review process.

Maintaining staff records per se would not prevent leavers remaining on the payroll (option A).
Staff submitting work schedules directly to the payroll department would also not avoid this
eventuality as there is no evidence of review or authorisation of these work schedules prior to
being processed (option B). The fact that staff are paid directly into their bank accounts would
also not avert leavers being paid (option D).

B,C Reperforming some of the calculations on the payroll and the review of the autopay list by the
chief accountant against the payroll prior to payment are controls that will help ensure accurate
payments are made to employees. Option A is not correct as authorisation of overtime is the
authorisation of specific hours worked and, as such, will not ensure that accurate payments are
made. Option D is also not correct, as by agreeing the autopay list to the bank print out, there is
no check that the autopay list itself is correct. This can only be done by checking the autopay list
against the underlying payroll records.

A,D,E
With the human resources manager updating the payroll department for any changes as they
occur, errors are prevented from taking place. Comparing payroll costs against budget on a
monthly basis is a detective control as it takes place after the related transactions have occurred.
By seeking evidence of identification, employees are prevented from taking another employees
wage packet.

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Chapter 9: Internal audit


1

A,B,C
Internal audit should not be involved with operations. Authorising transactions is an operational
activity.

B, C, E
It is expected and often constructive for internal auditors to cooperate with external auditors on
many levels. The existence of a well-resourced and effective internal audit department
contributes positively to an entitys internal control system.

A,B,C
Internal audit should not participate in the voting of (option D) and the execution of decisions
although may help in making recommendations on the decision-making process, on
improvements in operations (option C) and advising on how to implement standards (option A).
Internal audit constitutes a support function to the business. There is often scope for liaison and
cooperation between internal and external auditors which may lead to a more efficient external
audit and may contribute towards the internal audit process (via the recommendations made by
the external auditors).

Internal auditors do not get involved with operations to preserve their independence. The others
reasons cited are not valid.

Reporting directly to the audit committee/board of directors will help to preserve the
independence of the internal audit function.

A,C,D
Option B would not be acceptable as it involves the internal auditor in operational matters.
Option C appears to be a special assignment and therefore not operational.

C,F Both internal and external auditors could prepare a report on the effectiveness of internal
controls as part of their work (the external auditors report is the management letter). Both
internal and external auditors would be interested in investigating a material fraud (though an
immaterial fraud may not be relevant to the external auditors).

C,D Options A and B are operational in nature and should not have the involvement of internal audit.

Communicating recommendations on the overall operational effectiveness of the entity is not


usually carried out by the external auditor for the purposes of his external audit. Where tests of
control are carried out by the external auditor, some internal control issues may be picked up
and communicated via a management letter but this differs from recommendations on overall
effectiveness. The remaining options are activities that are carried out by both types of auditors
in their separate work.

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Chapter 10: Documentation


1

B, C, E
Documentation preparation in the form required by BSA 230 is a professional, not a legal,
requirement.

B, C, D
An accounts checklist would be found on a current file.

A, B, C
The engagement letter would be found on the permanent file.

According to BSA 230, Para 13, auditors should retain working papers for a period sufficient to
meet the needs of the practice..

Care must be taken to show only those documents that will not prejudice the audit. The working
papers belong to the auditor and, as such, are shown only at the auditors discretion (unless
there is a legal or public duty to do so otherwise).

A, C, E
All statements are true with regards to the preparation of audit documentation: for effective
quality control, adequate documentation is required; in case of a legal dispute, documentation
provides evidence of the work carried out and the approach taken and finally, documentation
provides an opportunity to retain a record of matters that may be of continuing significance (e.g.
details of assets held under lease arrangements).

A, D, F
It is not on a voluntary basis that working papers are prepared, but it is a professional
requirement of BSA 230. The final statement is also false, as there are particular circumstances
where the auditor has a legal obligation to disclose information about his client without the
clients permission (e.g. if the client is involved in terrorist or corruption activities).

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Chapter 11: Evidence and sampling


1

B,C,E
The first statement is false as test data does not use the auditors software but is data that is used
to test the clients system/software.

B,C,F
Analytical procedures are only as helpful as the integrity of the underlying data. Analytical
procedures do not need necessarily to be carried out by senior audit personnel. However, as
with all audit work carried out, it should be supervised and reviewed by a more senior member.

A,C,D
The materiality of items involved (as per option B) is a suitability factor when deciding to use
analytical procedures.

The risk the sample chosen is not representative of the population is a definition of sampling risk,
which in itself is an element of detection risk.

The company is now more efficient, reducing its production cost and therefore increasing its
gross margin. Option A is not correct as an increase in sales volume will see cost of sales rise
proportionately. Option B does not apply as administrative expenses are not part of the gross
margin calculation. Option C would cause the gross margin to fall.

The direction of testing when testing the completeness assertion will be from the physical item
to the accounting records (i.e. the non-current asset register). (The answer is not B as the
financial statements will not contain the analysis required for this test.)

Trade receivables confirmations would assist in confirming their existence. Options C and D
would assist in verifying the valuation assertion. Option B would have no bearing necessarily on
the trade receivables balance, as some sales orders may have been sales for cash, others may
have led to goods being returned, and others may have been cancelled prior to delivery.

A,B,D
Bank statements would not assist in testing for completeness of liabilities. The other sources
mentioned may provide insights as to liabilities that have been omitted.

A,C,D
The bank letter issued by the bank should agree to the bank statement so the bank letter will be
no more accurate (so Option B is not a reason) but the bank letter may contain more
information (Option C).

10

B,C Reperforming the calculation of the provision is not a testing directed towards understatement
but may equally pick up any overstatement. Testing the process used by management to estimate
the process is not a substantive procedure and contributes less to the detection of
understatement than options B and C do.

11

12

A,C,E

A random sample is less than 100% and represents the characteristics of the population.

Subjectivity is involved with non-statistical sampling as the choice of the sample is made via a
series of decisions taken by the auditor. Statistical sampling requires the auditor to input a
number of sampling parameters of which the required confidence level is one.

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13

B,F,G
An increase in the level of tolerable error will cause a decrease in the sample size as the number
of errors the auditor regards as acceptable has increased and therefore he needs to test less
items. An increase in the number of sampling units will have no effect on sample size. An increase
in detection risk will lead to an increase in sample size to address the additional risk faced.

14

A,D Increases in both expected error and the auditors required confidence level will lead to an
increase in sample size.

15

B,E Both an increase in the use of other substantive procedures and stratifying the population will
lead to a decrease in sample size.

16

B,D An increase in the level of the error that is tolerable will decrease sample size, whereas an
increase in the assessment of audit risk will lead to an increase in the work required, and hence
the sample size.

17

B,D,F
Tolerable is the maximum acceptable error that an auditor (and not management) can accept and
still conclude that the financial statements show a true and fair view. Sampling risk is the risk that
the sample chosen does not represent the population under examination.

18

A,F The use of the computerised generator will ensure the random selection of the sample.

19

A,B,D
Sundry and utility expenses are unlikely to be mentioned in the board minutes.

20

Block sampling may be appropriate for cut-off testing which is what option B describes.

21

Monetary unit sampling tends to focus on high value items in a population. As such it is most
helpful for testing the overstatement of assets.

22

Auditor-generated evidence (per option A) is more reliable than the clients presentations hence
option C provides the least persuasive evidence. Third party evidence (options B and D:
suppliers invoice or third party correspondence) is more reliable than internally/client-generated
evidence.

23

B, C, F
Analytical procedures are limited by the integrity of the underlying accounting system.
Observation of a procedure is limited to the point in time it takes place as what takes place
under the observation of the auditor may not take place any other time. Direct confirmation of a
payables balance is limited by the fact that should the payables balance be overstated, it might still
be agreed as it favours the supplier (the respondent).

24

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A,E A title deed is inspected for the purpose of checking ownership details. By being present for part
of the sales cycle, the assurance provider is taking the opportunity to observe the process and
the controls applied.

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Chapter 12: Management representations


1

A,B,D
The answer is not option C as acknowledgement as to the terms of engagement is sought in the
engagement letter.

B,C,E
Management representation letters can not act as a substitute for other audit evidence where it
is expected to be available. The representation letter contains a statement of managements belief
that the financial statements are free from material error.

A,F Details of the occurrence of any frauds or the confirmation of no such occurrence is found in the
management representation letter. Any weaknesses in the internal control system found in the
course of the audit are reported to management in the management letter.

The management representation letter should be signed by management just prior to the signing
of the audit report to ensure all areas are covered up to that point.

It is usually the auditor who drafts (then discusses with management) and senior management
who sign off the representation letter.

Knowledge of completeness of liabilities is an area that rests with management and other
evidence may not be available.

Option A refers to the engagement letter. Option B refers to the management letter. There is no
particular letter as is referred to in option D, although some of these issues could possibly
covered in the management letter.

B,C Matters where knowledge is confined to management are amongst the representations made by
management. Option A is not correct as this would constitute a limitation of scope and would be
referred to in the audit report. Option D is not correct as a more general statement is made by
management with regards to fraud and irregularities (not one that covers management frauds
only).

A,C Options B and D are not required in a representation letter.

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Chapter 13: Substantive procedures key financial


statement figures
1

A,E Tracing items from the non-current asset register to the schedule of non-current assets is a test
supporting the completeness assertion, as all balances should be carried over. Confirming the
casts on the schedule are correct will support the valuation assertion.

B,F Checking against invoices is one procedure that supports the valuation assertion (by checking
original cost). Confirming recorded assets are physically present supports the existence
assertion.

B,E Lack of impairment testing means that potentially the intangibles are overvalued. Where
expenses are inappropriately capitalised, the same threat of overvaluation exists.

B,F Enquiries of possible obsolete or slow-moving inventory is a test of the valuation of inventory.
Testing the allocation of transactions around the period end supports the cut-off assertion.

A,B,D

For the rights and obligations assertion evidence is needed that the plant belongs to the client
entity. The purchase invoice should have the client entitys name on it.

Attending the inventory count does not support the rights and obligations assertion as the
auditor cannot be sure to whom the inventory belongs.
7

Having the count supervised by the stores manager constitutes a lack of independence in the
inventory counting process and is therefore a weakness which would be of concern to the
auditor.

B,C,E
Where there are perpetual counts, management should ensure that inventory lines are counted
at least once a year.

A,C,E
Increasing the selling price or offering small discounts during a sale period do not indicate that
NRV is lower than cost (provided there was already a large enough profit margin to cover the
small discounts). With newer models being available, existing inventory is likely to be obsolete.
The significant unforeseen increase in production costs which cannot be passed on to the
customer is likely to push the product cost over the NRV.

10

B,C Corresponding with suppliers and sending receivables confirmations are not means of testing
whether inventories are stated at the lower of cost and NRV.

11

A,B,D
Receivables confirmations do not assist in confirming the collectability of the amounts owed.

12

B,C,F
Under the negative method, the customer is requested to respond only in cases of disagreement.
The third statement is false as there is no such requirement to use positive confirmations where
there are a large number of balances. Further, it is more appropriate in this situation to use
negative rather than positive confirmations.

13

C,D Where the assessed risk of material misstatement is high or there are a small number of large
balances involved, then the positive method should be used.

14

Refusal to cooperate with the auditor would lead to a limitation of scope on the audit.

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15

B,C,F
The sample of trade receivables circulated should include unusual accounts also e.g. nil balances,
credit balances. Customers who are difficult to find should not be avoided but special efforts
should be made to locate them in order to get the confirmation required.

16

B,E Comparing provision methods against industry and reviewing the trade receivables ageing analysis
help to support the valuation assertion.

17

18

A,F Non-disclosure of bank balances affects the completeness assertion as assets/liabilities are
understated. Unresolved errors in the bank reconciliation will affect the valuation assertion.

19

20

B,C,D

Outstanding responses should be passed on to an independent company official for chasing as all
positive (which this seems to be) requests must be followed up.

Checking the paying in slips to ensure that remittances relate to before the year end will address
the risk that credit is taken for remittances received after the year end. Cheque slips for payment
(per option A) would not lead to increased remittances being recognised. Confirming dates of
payments with customers would also not assist in addressing the risk as there is a timing
difference between the time the customer pays and the time the client receives the payment
(option C). The same applies to confirming with suppliers date of receipt from the client (option
D).
Standing order details (option A) will not be included in the bank letter.

21

C,D Supplier confirmations are recommended where supplier statements are incomplete or
unavailable. Where the purchases cycle contains all the documentation and there is no particular
suspicion that management are trying to understate payables, then supplier confirmations are not
necessary (option A). Option B is not correct as the process surrounding supplier confirmations
is likely to be more time consuming than the alternative procedures available.

22

Reconciling payables ledger accounts with supplier statements most supports the completeness
assertion.

23

Share certificates support investments (assets) not non-current liabilities.

24

B,D Supplier confirmations not being returned should be referred to a senior colleague so that
further action may be planned. With regards to the second test, given the extrapolated error is
well below the materiality threshold (CU200 X 10 is CU2,000), the assurance provider should
draw a conclusion.

25

A,B,C
The disclosure requirements that relate to non-current assets are not so onerous as to
constitute as great a risk as those presented in options A, B and C.

26

B,F
Unadjusted inventory differences identified at the inventory count affect the valuation assertion.
Not taking into account inventory in transit at the year end affects the cut-off assertion.

27

A,D
The difference found constitutes an error (of transposition) which, if material, will need to be
adjusted in the financial statements. The second case is a timing difference, not an error, which
does not require an adjustment to the financial statements, provided that cut-off is correct.

28

A,D,E
Whereas the current account is tested as it is over the materiality threshold (hence the reason
why the petty cash balance is not tested), the special directors cash account is also tested
despite the fact that it is below the quantitative materiality threshold. This is because the
disclosure of directors emoluments is a legal requirement to which no monetary materiality
threshold is applied.

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29

B,C,F
Analytical procedures are a type of substantive procedure. Reviewing board minutes for evidence
of authorisation tests an authorisation control. Reperforming the year-end bank reconciliation is
a substantive procedure, performed as part of the process to verify the year-end bank balance.

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Chapter 14: Codes of professional ethics


1

A,C,E
Guidance from the ICAB is in the form of rules. Although rules-based codes are more
straightforward, they are more open to manipulation.

A,D,E
A framework does not take the form of a checklist of forbidden items to tick off that smacks
more of a rules-based approach.

Courtesy is not one of the stated fundamental principles of the IFAC code.

A familiarity threat is created due to the fact that a partners sister is the MD of Tube Ltd.
Independence could be threatened by the MDs influence over the sister and, in turn, her
influence over the partner. A self-interest threat is created by the fact that another partner has
shares in Tube Ltd. This partner could be motivated to influence the outcome of the audit if
there might otherwise be a detrimental affect on the value of Tube Ltd (and hence the shares).

Helping Dreams Ltd design and implement a new IT system constitutes a management threat as
the auditor may be taking on a management role.

Threatening to replace Johnson & Co if it does not deliver the desirable outcome constitutes an
intimidation threat.

An advocacy threat is created as Whitely & Co will be promoting the clients position in its
investment dealings.

The Institute of Chartered Accountants in England and Wales, March 2009

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Chapter 14: Codes of professional ethics

108

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 15: Integrity, objectivity and independence


1

The offer must be rejected as it is not of insignificant value.

If the client does not pay overdue fees then a loan relationship is automatically created which is a
threat to independence. As such, where the overdue fees involve an amount that cannot be
regarded as trivial, the audit engagement partner, in consultation with another partner or
partners, should consider whether the firm can continue to act as auditors or whether it is
necessary to resign.

On inheriting the shares, the partner should dispose of them at the first available opportunity.

As per IFAC Ethics, where a partner leaves a firm and is appointed as director or in a key
management position in a company where he had acted as key engagement partner, the firm
should apply safeguards, such as using different audit methods, approach and using a different
audit team, partner for the audit.

Taking a loan from a high street bank at a commercial rate is not prohibited as there is no
favourable treatment.

A,D Safeguards should be implemented. The firm might discuss the matter with the audit committee,
and also use external quality control review.

A,C Safeguards should be implemented. Which might include monitoring and implementing quality
control of assurance and also involve an additional professional accountant to review the work.

C,F The auditor must reject a proposition of contingent fees and also reject the offer to serve on the
board of directors. Both are prohibited.

C,E The auditor must not prepare the accounts of a listed company, unless it is an emergency
situation. The auditor may prepare the accounts of a private company, provided safeguards are
implemented (e.g. allocating different teams to accounts preparation and the audit).

10

Valuing a portfolio of shares leads to self-review and management threats. This is because the
auditor will then come to audit the valuation of the same portfolio. Also the responsibility for the
valuation should be taken by management.

11

In providing both the internal and external audits, there are both self-review and management
threats. The auditor is carrying out work which should be the responsibility of management
(management threat) and he will then audit own his work (self-review threat).

12

Acting as an expert witness constitutes an insurmountable advocacy threat.

13

B,C,D
A familiarity threat relates to a threat coming from a family, close personal relationship or long
association with the client. The threat also arises where the auditor is making recruitment
decisions on behalf of his clients. The answer is not option A as this would give rise to an
intimidation threat.

14

The Code of Ethics requires that rotation should take place after seven years of continuous
service.

15

Perform the work as support is available and the level of work is appropriate.

16

In this case, Geoff is unsupervised with a task in excess of his capabilities. The most appropriate
course of action would be to refer to the Dickens & Co engagement partner. If this proves
ineffective then option C would be the next step.

17

Alison should initially report her concerns to the audit committee. Other options may then
prove necessary.

18

Long client association would lead to a familiarity threat being created.

The Institute of Chartered Accountants in England and Wales, March 2009

109

Chapter 15: Integrity, objectivity and independence


19

110

A,D Providing additional taxation services on an ongoing basis should involve an additional team to
avoid the threat of self-review. Stepping in to prepare the financial statements in an emergency
situation for a listed client is acceptable provided safeguards are taken, of which separate
personnel is one (to avoid the self-review threat).

The Institute of Chartered Accountants in England and Wales, March 2009

ANSWER BANK

Chapter 16: Confidentiality


1

C,D It is not the case that disclosure of client confidential information can be made to third parties
solely at the discretion of the auditor (option A), and there are occasions where the auditor does
not need client consent to make disclosure (option B), as is the case where a public or legal duty
exists.

A,D There is no legal duty when corresponding with tax authorities (option B), or to disclose the
non-compliance of CA 94 to third parties other than including that in the report.

The first course of action should be to consult the firm lawyer.

Where two clients are in direct competition with each other, they should both be made aware of
the fact and informed consent obtained.

A,C,D
Not discussing client matters at the assurance firms premises and not being allowed to take
working papers off the premises would be unreasonable (and impracticable) measures.

A,C,F
Auditing competing clients creates a conflict of interest but is permissible provided both clients
are aware and accept the situation and safeguards are in place (e.g. separate teams are placed on
each client). The second case also presents a conflict of interest there is a threat to
independence arising from the conflict between acting as advisor to one client company possibly
against the interests of another client company (quite apart from the advocacy threat presented).
Carrying out a limited assurance engagement should not create a conflict of interest with the
external audit assignment.

The Institute of Chartered Accountants in England and Wales, March 2009

111

Chapter 16: Confidentiality

112

The Institute of Chartered Accountants in England and Wales, March 2009

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