Level 3 – Page 2

AAA – L3 – SA – Q5.2 – Rules of professional conduct

Which statement about auditor independence is incorrect?

Question

Which of the following statements is INCORRECT?

A An auditor may serve on the board of directors of an audit client.

B An auditor who is an immediate family member of the director of an audit client must not be assigned to the audit team.

C Purchasing goods from an audit client on normal commercial terms does not create a threat to the auditor’s independence.

D An auditor who was recently a director of an audit client must not be assigned to the audit team for that client.

Answer

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Tags: Auditor Independence, Board of Directors, Commercial Transactions, Family members
Level: Level 3

Topic: Rules of Professional Conduct

AAA – L3 – SA – Q5.1 – The regulatory environment

What are the functions of an audit committee?

Question

Which of the following are functions of the audit committee?

1 Policy on giving non-audit work to the audit firm

2 Review of the performance of the external auditor

3 Review of the external auditor’s working papers

4 Review with the external auditors their report on the financial statements

A 1,2 and 3 only

B 1,3 and 4 only

C 2,3 and 4 only

D 1,2 and 4 only

Answer

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Tags: Audit committee, Auditor performance, Financial Statements, Governance, Non-Audit Work
Level: Level 3

Topic: The regulatory environment

AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

Question

A company prepares its financial statements on a going concern basis, but a material uncertainty exists about the ability of the company to continue as a going concern which is fully disclosed by management in the financial statements. In this situation, what shall the auditor do?

A The auditor’s report shall contain a ‘Material Uncertainty Related to Going Concern’ paragraph

B The auditor’s report shall state an adverse opinion

C The auditor’s report shall state a disclaimer of opinion

D The auditor’s report shall contain an ’emphasis of matter’ paragraph

Answer

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Tags: Auditor’s Report, Disclosure, Financial Statements, Going Concern, Material Uncertainty
Level: Level 3

Topic: Reporting

AAA – L3 – SA – Q4.9 – Assurance services

What is true about assurance engagements?

Question

Which of the following is true about assurance engagements?

A They are an alternative to an audit

B The subject matter is the responsibility of the professional accountant

C Assurance engagements can either have reasonable (high) or limited (moderate) levels of assurance

D There is no risk for the professional accountant

Answer

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Tags: Assurance engagements, Limited assurance, Professional Responsibility, Reasonable assurance
Level: Level 3

Topic: Assurance Services

AAA – L3 – SA – Q4.8 – Group audits

What must a group auditor communicate to group management?

Question

Which of the following items shall be communicated by a group auditor to the group management?

1 an overview of the planned scope and timing of the audit

2 an overview of the work to be performed at the components of the group

3 component performance materiality

4 Any fraud or suspected fraud

A 1,2,3 and 4

B 1 only

C 1 and 4 only

D 1,2 and 4 only

Answer

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Tags: Audit Scope, Communication, Component audit, Fraud, Group auditor
Level: Level 3

Topic: Group audits

AAA – L3 – SA – Q4.7 – Audit evidence

When are analytical procedures most reliable in an audit?

Question

Analytical procedures are most reliable when applied to:

A estimates

B non-recurring transactions

C revenue and expenditure

D asset and liability balances

Answer

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Tags: Analytical Procedures, Audit reliability, Expenditure, Financial analysis, Revenue
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

Question

Which of the following may be factors contributing to inherent risk?

1 Number of customers

2 Strength of internal controls

3 Number of products

4 Rate of staff turnover

A 1,2 and 3 only

B 1,3 and 4 only

C 2,3 and 4 only

D 1,2 and 4 only

Answer

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Tags: Customers, Inherent Risk, Internal controls, Products, Risk Assessment, Staff turnover
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q4.5 – Audit evidence

How does an auditor verify understanding of a transaction process and its controls?

Question

An auditor checks his understanding of a transaction process and its internal controls by means of:

A ATTs

B tests of controls

C substantive tests

D walk-through tests

Answer

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Tags: Audit Procedures, Evidence collection, Internal controls, Transaction process, Walk-through tests
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q4.4 – Practice management

What is the definition of low-balling in the context of auditing?

Question

What is low-balling?

A Giving an unqualified audit opinion to preserve retention as the auditor

B Ignoring requests from the secondary auditor

C Ignoring reporting by exception

D Attempting to win the audit by submitting an unrealistically low fee

Answer

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Tags: Audit Appointment, Audit fees, Client acquisition, Low-balling, Professional Ethics
Level: Level 3

Topic: Practice management

AAA – L3 – SA – Q4.3 – Professional responsibility and liability

Who is primarily responsible for detecting fraud in a company?

Question

Who has the main responsibility for detecting fraud in a company?

A Senior management

B The external auditors

C The police authorities

D The internal auditors

Answer

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Tags: Auditors, External Audit, Fraud Detection, Internal Audit, Management, Professional Ethics, Responsibility
Level: Level 3

Topic: Professional responsibility and liability

Level (SQ): Level 3

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AAA – L3 – SA – Q5.2 – Rules of professional conduct

Which statement about auditor independence is incorrect?

AAA – L3 – SA – Q5.1 – The regulatory environment

What are the functions of an audit committee?

AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

AAA – L3 – SA – Q4.9 – Assurance services

What is true about assurance engagements?

AAA – L3 – SA – Q4.8 – Group audits

What must a group auditor communicate to group management?

AAA – L3 – SA – Q4.7 – Audit evidence

When are analytical procedures most reliable in an audit?

AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

AAA – L3 – SA – Q4.5 – Audit evidence

How does an auditor verify understanding of a transaction process and its controls?

AAA – L3 – SA – Q4.4 – Practice management

What is the definition of low-balling in the context of auditing?

AAA – L3 – SA – Q4.3 – Professional responsibility and liability

Who is primarily responsible for detecting fraud in a company?

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