Test of Competence

Principles of Auditing and Reporting

Sample Paper

2017/2018

Notes to Candidates:

This paper consists of 40 objective test questions.

©ICAS 2017
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SAMPLE PAPER
Question 1
Q1. Identify which ONE of the following tests would be a relevant test of the classification
assertion:

(A) Select a sample of sales on the sales listing and agree to the sales invoice to agree
the VAT is calculated correctly
(B) Review an analysis of the monthly rental costs incurred by the organisation,
identifying and investigating any unusually high or low total monthly costs
(C) Select a sample of purchase invoices and agree they have been included on the
purchases listing at the correct value
(D) For a sample of employee timesheets from before and after the year end, agree that
the payroll cost has been recorded in the correct period

Question 2
Q2. The payroll cycle is a key accounting cycle as, for a number of organisations, the payroll
expense will be a significant expense for the organisation.

Identify which of the following are areas that the payroll cycle will encompass:

1. The recording of work done

2. The engagement and termination of personnel
3. The recognition of payroll liabilities
4. The recording of payroll journals in the nominal ledgers

(A) 1 and 2 only

(B) 3 and 4 only
(C) 1, 3 and 4 only
(D) All of the above

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Question 3

Q3. Identify which of the following statements is/are TRUE in relation to money laundering:

(1) An auditor may inadvertently ‘tip off’ a client by issuing a modified audit report due to
suspicion of money laundering
(2) Practice Note 12 requires a Money Laundering Reporting Officer to be appointed for
each audit engagement undertaken by an audit firm
(3) The Money Laundering Regulations 2007 require customer due diligence procedures
to be implemented in an audit firm

Question 4
Q4. The substantive procedures due to be performed on a particular financial statement
account are documented in an audit work programme.

Identify which TWO of the following are commonly included in a typical audit work
programme:

(A) The name of the client staff member responsible for the financial statement account
(B) Name of the audit firm
(C) The assertions met by each substantive procedure
(D) A work paper reference to where the substantive procedure work was completed

Question 5
Q5. Lizzie Stobie has worked as the tax partner on the audit of Wedding Booths plc (‘WB’), a
listed company, for the last 7 years and is concerned that this may result in a threat to her
independence from WB.

Identify which of the following statements is the most appropriate course of action, based
on the Financial Reporting Council Ethical Standard, for Lizzie:

(A) Lizzie should not be involved with WB for any future engagements
(B) Lizzie is not required to take any action, as there is no threat to independence
(C) Lizzie should be rotated off the engagement, and must not return for five years
(D) Lizzie should be rotated off the engagement, and must not return for two years

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Question 6
Q6. Identify which of the following is/are balances assertions:

1. Rights and Obligations

2. Cut-off

(A) 1 only
(B) 2 only
(C) Both of the above
(D) Neither of the above

Question 7
Q7. There are a number of possible scenarios when the auditor is considering going concern
at the completion stage of the audit.

Identify which ONE of the following is the impact on the audit if the auditor judges that the
entity has not applied the going concern principle correctly:

(A) The auditor should resign from the audit engagement

(B) The financial statements do not show a true and fair view, and this will be reflected in
the auditor’s opinion
(C) This should be disclosed in the financial statements by the directors so that the
shareholders are made aware
(D) Providing that there have been no other issues and no material misstatements
detected during the audit, the financial statements give a true and fair view and an
unmodified audit opinion can be issued

Question 8
Q8. As part of the monthly financial reporting process, reconciliations should be performed for
all control accounts.

Identify which ONE of the following is NOT a relevant control in relation to reconciliations:

(A) Maintain a formal checklist and timetable of reconciliations to be performed

(B) Staff completing reconciliations should be fully trained and reconciliations should be
subject to review
(C) Only reconciliation differences arising due to timing differences should be
investigated
(D) A reconciliation pro-forma should be used each month

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Question 9
An individual must become a member of one of the Recognised Supervisory Bodies
(‘RSBs’) if they wish to obtain statutory auditor status. However, membership of a RSB is
not sufficient to obtain statutory audit status.

Q9. Identify which of the following conditions must also be met:

1. The individual must hold an audit qualification

2. The individual must hold a practising certificate
3. The individual must have applied to the Audit Registration Committee of the RSB

(A) 1 only
(B) 1 and 2 only
(C) 2 and 3 only
(D) All of the above

Question 10

When testing fixed assets, an example test performed by the external auditor is to ‘select a
sample of additions from the fixed asset register and trace to purchase invoice and cash
book to agree the cost of the asset’.

Q10. Identify which assertion(s) is/are tested by this audit procedure:

1. Classification
2. Accuracy, Valuation and Allocation

(A) 1 only
(B) 2 only
(C) Both of the above
(D) Neither of the above

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Question 11

Q11. Identify which ONE of the following statements best describes the work of the Corporate
Reporting Council, one of the subcommittees of the Financial Reporting Council:

(A) Advising the FRC board on accounting matters including the production of Financial
Reporting Standards
(B) Advising the FRC board on the development of the UK Corporate Governance Code
(C) Developing and maintaining auditing and assurance standards and guidance for
engagements that are performed within the United Kingdom
(D) Reviewing interim reports of all listed issuers and annual reports of certain other non-
corporate listed entities on behalf of the FRC board

Question 12
Q12. An audit firm may find itself being threatened by a client with litigation when providing audit
services. Identify which ONE of the following would NOT be a threat to independence in
this situation:

(A) Self-interest
(B) Intimidation
(C) Self-review
(D) Advocacy

Question 13
Q13. Identify which of the following statements regarding materiality is/are TRUE:

(1) A financial statement balance may be material because it is comparatively very large
(2) A financial statement balance may be material because the controls put in place by
the client to prevent, detect and correct material misstatements are poor
(3) A financial statement balance may be material due to limitations imposed by the
client on the auditor from obtaining sufficient appropriate evidence

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Question 14
An auditor can be removed by shareholders at any time by passing an ordinary resolution.

Q14. Identify which of the following is/are rights of the auditor to protect against unwarranted
dismissal:

1. A copy of any motion to remove the auditors by the shareholders must be sent to
the auditor
2. The auditor has a right to make verbal statements to the press regarding their
removal
3. The auditor retains the right to attend the normal AGM of the company in the year in
which they are removed

(A) 1 only
(B) 1 and 3 only
(C) 2 and 3 only
(D) All of the above

Question 15
Q15. Identify which ONE of the following entities could NOT be exempt from a statutory audit:

(A) Antiflood Plumbers Limited with a balance sheet total of £5m, turnover of £9.2m and
total employees of 95
(B) The Hedgehog Heritage Trust, a Scottish-registered charity with gross income of
£450,000 and gross assets of £3.2m
(C) Horror Destinations plc with a balance sheet total of £7m, turnover of £9m and total
employees of 49
(D) The Hamster Rescue Society, an English-registered charity with gross income of
£240,000 and gross assets of £5m

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Question 16
Q16. Identify which of the following is/are circumstances where an auditor would be required to
issue a new engagement letter for an existing client:

1. There has been a significant change to the level of overall materiality applied by the
auditor
2. There have been significant changes in senior management in the audit firm
3. There have been significant changes in the client’s regulatory requirements
4. The client has misunderstood the objective or scope of the audit

(A) 1 only
(B) 3 and 4 only
(C) 1, 2 and 3 only
(D) All of the above

Question 17
Q17. Identify which ONE of the following statements concerning the International Accounting
Standards Board (‘IASB’) is INCORRECT:

(A) The IASB directly enforces the adoption of International Financial Reporting
Standards (‘IFRS’) through the International Federation of Accountants
(B) The IASB is an independent group of experts with responsibility for the development
and publication of IFRS
(C) The IASB is the independent standard-setting body of the IFRS Foundation
(D) The IFRS’s are required to be adopted by EU listed companies

Question 18
Q18. Identify which ONE of the following statements concerning the calculation of materiality is
CORRECT:

(A) Performance materiality is set above overall materiality to provide the auditor with an
additional safety threshold in order to reduce audit risk
(B) The appropriate thresholds for different types of entities are set out in the
International Standards on Auditing
(C) Overall materiality is set at the planning stage of the audit and is fixed for the duration
of the audit process
(D) Individual accounts may have their own materiality levels

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Question 19
Q19. In 2002, in response to high profile corporate scandals, the Financial Reporting Council
commissioned committees to review UK corporate governance.

Identify which of the following topics was reported on by Derek Higgs:

1. The role and effectiveness of non-executive directors

2. The role and effectiveness of the audit committee
3. The role and effectiveness of the remuneration committee

(A) 1 only
(B) 2 only
(C) 1 and 2 only
(D) 1 and 3 only

Question 20
Q20. Identify which ONE of the below is NOT a key substantive procedure performed on stock:

(A) Cut-off testing

(B) Cost vs. NRV testing
(C) Perform a full stock count
(D) Test the stock provision

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Question 21
Q21. Identify which ONE of the following lists limitations of internal control systems:

(A) Relevancy, Cost, Management Override, System Error

(B) Obsolescence, Unusual Transactions, Human Error, Persuasion
(C) Relevancy, Cost, Unusual Transactions, Collusion
(D) Cost, Shareholder Override, Infrequent Transactions, Collusion

Question 22
Q22. During an audit an auditor must ensure that they obtain sufficient appropriate evidence.
The reliability of audit evidence will be impacted by its ‘nature’.

Identify which of the following is/are terms used to describe the ‘nature’ of audit evidence:

1. Created
2. Natural
3. Third Party
4. Rational argument

(A) 2 only
(B) 1 and 2 only
(C) 3 and 4 only
(D) 1, 2 and 4 only

Question 23
Q23. Identify which of ONE of the following statements is CORRECT in relation to substantive
analytical procedures:

(A) When performing analytical procedures, all deviations from the expectation must be
investigated and substantiated
(B) Substantive analytical procedures include reasonableness tests and unusual and
trend analysis only
(C) Trend analysis involves the auditor looking at changes in an account balance over a
number of periods
(D) The auditor must use analytical procedures when performing substantive testing

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Question 24

You are completing the audit of your client Penelope Pastries Limited for the year ended
30 September 20X6. During the audit fieldwork you were unable to obtain evidence to
support trade debtors totalling £120,000 out of a total balance of £200,000. This was a
result of number of documents being damaged during a flood just after the year end.

The net assets of the client are £1.2m and the company made a profit of £420,000 during
the current year.

Q24. Identify which of the following audit opinions would be issued in these circumstances:

(A) Qualified ‘except for’ opinion

(B) Disclaimer of opinion
(C) Adverse opinion
(D) Unmodified opinion

Question 25
Q25. Identify which of the following is/are examples of IT application controls:

1. Batch controls
2. Programmed editing
3. Segregation of duties

(A) 1 only
(B) 1 and 2 only
(C) 2 and 3 only
(D) All of the above

Question 26
Q26. To allow auditors to identify the specific risk factors relating to a particular engagement
and ensure compliance with the requirements of relevant standards and legislation an
auditor will perform a number of acceptance procedures.

Identify which of ONE of the following is NOT a main acceptance procedure for an audit:

(A) Assess the integrity of those charged with governance

(B) Assess the client’s ethical stability
(C) Identify the users and nature of the engagement
(D) Perform client identification procedures

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Question 27
The auditor uses a range of techniques to gather information and evidence during the
audit process.

Q27. Identify which of the following is/are techniques that would be used by the auditor during
the planning stage of the audit process in order to gather information needed to identify
inherent risks as part of understanding the entity:

1. Observation
2. Recalculation
3. Confirmation
4. Inspection

(A) 1 only
(B) 1 and 4 only
(C) 3 and 4 only
(D) All of the above

Question 28
Q28. You are conducting analytical procedures as part of your audit planning process at Lagan
Ltd. You have found that the gross profit margin on their ‘Stone Chute’ product line has
risen significantly, improving since the prior financial reporting period.

Identify which ONE of the following would NOT be a valid possible interpretation of this
finding:

(A) Lagan has been able to sell Stone Chutes at a higher price due to changes in the
market in the current year
(B) Lagan’s management may be fraudulently recognising unearned income relating to
Stone Chute in the current year
(C) Lagan’s accountants may have posted, in error, the cost of sales relating to Stone
Chute to the records for another product line in the current year
(D) Lagan’s management may have been increasingly successful in controlling their
administrative expenses in the current year

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Question 29
During the audit process the auditor will consider other information included in an entity’s
annual report.

Q29. Identify which TWO of the following statements are CORRECT in relation to the auditor’s
responsibilities for other information included in the annual report:

(A) Auditors should agree any preliminary announcements with their client
(B) The chairman’s report does not have to be reviewed by the auditor unless material
inconsistencies are found in other disclosures in the annual report
(C) The auditor must attest to any disclosures by the directors in relation to internal
controls for all UK company audits
(D) The Financial Reporting Council does not require the auditor to audit the narrative
statement concerning the application of the principles of the UK Corporate
Governance Code

Question 30
The auditor will perform tests of control to confirm that an entity’s control activities are
designed and operating effectively. One example of a control is a bank reconciliation.

Q30. Identify which ONE of the following would provide the most reliable evidence that a client’s
bank reconciliation control is operating effectively:

(A) Enquiry with management as to the experience and qualifications of the individual
responsible for preparing the bank reconciliation
(B) Inspection of the guidance manual issued to the individual responsible for preparing
the bank reconciliation
(C) Re-performance of the bank reconciliation by the auditor
(D) Inspection of the bank reconciliation to confirm that it has been subject to a
secondary review by a senior member of management

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Question 31
An auditor must have engagement and client management procedures in place which
ensure quality control during the audit process.

Q31. Identify which of the following statements is/are requirements that auditors should have in
place for quality control:

1. The audit firm should have adequate recruitment and training procedures
2. All audit working papers should be initialled and dated by the reviewer once
reviewed
3. An Engagement Quality Control Reviewer must be appointed for all audit
engagements

(A) 2 only
(B) 3 only
(C) 1 and 2 only
(D) All of the above

Question 32
Q32. Identify which TWO of the following are required elements of an assurance engagement:

(A) A three party relationship

(B) A recommendation
(C) Sufficient appropriate evidence
(D) A fee

Question 33
Q33. Identify which of the following controls would be classified under the ‘Access to Programs
and Data’ category of IT general controls:

1. Disaster recovery planning

2. User acceptance testing

(A) 1 only
(B) 2 only
(C) Both of the above
(D) Neither of the above

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Question 34
Q34. There are a number of aspects that could contribute to the effectiveness of an internal
audit function (‘IAF’) in a business. Identify which ONE of the following is an aspect that
could contribute to an effective IAF:

(A) IAF should be staffed from members of other departments within the organisation
(B) IAF should have appropriate standing in the organisation
(C) IAF should report to and be overseen by the company’s remuneration committee
(D) IAF should have an internal audit plan prepared by the internal audit manager and
approved by the shareholders

Question 35
Q35. Which of the below is/are example(s) of analytical procedures which are more commonly
used at the planning stage of the audit?

1. Trend Analysis
2. Large and Unusual Items Review

(A) 1 only
(B) 2 only
(C) Both of the above
(D) Neither of the above

Question 36
Q36. Identify which ONE of the following statements best describes the purpose of a
‘walkthrough’ test:

(A) A walkthrough test is a test of control to ensure that the controls described by the
client are operating effectively
(B) A walkthrough test is a procedure used to assess whether the design of a control
activity is appropriate
(C) A walkthrough test is a procedure to confirm whether the materiality level set by the
auditor is appropriate for selecting a sample of items representative of the population
under review
(D) A walkthrough test is a procedure to verify that the client’s systems are operating as
described by the entity and to confirm the auditor’s understanding of the system

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Question 37
Q37. Identify which TWO of the following are basic elements of the audit report:

(A) Confirmation of auditor independence

(B) Signature of the auditor
(C) Date of the audit report
(D) Details of substantive procedures performed

Question 38
The objective of a statutory audit is to obtain reasonable assurance about whether the
financial statements are free from material misstatement.

Q38. Identify which of the following are outcomes of adequate planning which help the auditor to
achieve this objective:

1. Ensuring that sufficient and appropriate attention is directed to the important areas
of the audit
2. Ensuring that potential problems are identified and resolved early
3. Facilitating the direction and supervision of the audit
4. Helping to complete work effectively and efficiently

(A) 1, 2 and 3 only

(B) 1, 3 and 4 only
(C) 2, 3 and 4 only
(D) All of the above

Question 39
Q39. Non-executive directors are an important part of the corporate governance structure of an
entity. Identify which ONE of the following is NOT a key principle or provision of the UK
Corporate Governance Code concerning non-executive directors:

(A) The board should establish an audit committee of at least three independent non-
executive directors
(B) At least one third of the board should consist of independent non-executive directors
(C) Remuneration for independent non-executive directors should not include a
performance related element
(D) All non-executive directors should receive a formal induction on joining the board

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Question 40
Q40. The Companies Act 2006 imposes a number of requirements where a client agrees a
Liability Limitation Agreement with its auditor. Identify which ONE of the following
statements is a requirement of LLA’s under the Companies Act 2006:

(A) Details of a LLA must be disclosed in the annual accounts

(B) The LLA must be authorised by the company’s directors
(C) The LLA remains active for up to 5 years of a continuing audit engagement, unless
otherwise stated in the audit engagement letter
(D) The limit imposed by the LLA must be calculated using the prescribed methodology
within the Companies Act 2006

End of Paper

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