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AAA – L3 – SA – Q5.7 – Audit evidence

Which statements about related party transactions are correct?

Question

Which of the following statements are correct?

1 With related party transactions, there is some risk of collusion and fraud.

2 A focus of audit attention with regard to related party transactions shall be on significant non-routine transactions.

A Statement 1 only is correct.

B Statement 2 only is correct.

C Both statements are correct.

D Neither statement is correct.

Answer

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Tags: Disclosures, Fraud Risk, Non-routine transactions, Related Party Transactions
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q5.6 – Audit evidence

What factors influence an auditor’s materiality decision?

Question

Which of the following will influence an auditor’s decision as to whether a matter is material?

1 Degree of approximation

2 Losses or low profits

3 Time of occurrence during the year

4 Offset and aggregation

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: Aggregation, Approximation, Audit judgment, Materiality, Profitability
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

Question

What is the main justification for the use of a business risk approach to an audit of large companies?

A A systems-based approach and a substantive testing approach are unlikely to detect material misstatements in the financial statements of large companies.

B This approach forces the auditors to understand the client’s business in depth.

C It is more effective than other approaches to audit in detecting deficiencies in internal control.

D Major audit problems in large companies are more likely to result from business-related problems than from deficiencies in internal control.

Answer

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Tags: Business Risk Approach, Financial Statements, Internal controls, Large Companies
Level: Level 3

Topic: The audit approach

AAA – L3 – SA – Q5.4 – Evaluation and review

What is the key objective of an engagement quality review?

Question

The key objective of an engagement quality review is to:

A monitor the firm’s system of quality management

B ensure the audit procedures were carried out in accordance with professional standards

C ensure the auditor’s report issued is appropriate in the circumstances

D perform an objective evaluation of the significant judgments made by the audit team and the conclusions reached

Answer

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Tags: Audit Standards, Auditor judgments, Engagement quality review, Quality management
Level: Level 3

Topic: Evaluation and review

AAA – L3 – SA – Q5.3 – Professional responsibility and liability

What should an auditor do upon suspecting fraudulent activity by a director?

Question

An audit engagement partner suspects that a director of a client company has been carrying out fraudulent activity. What would be the most appropriate immediate course of action?

A Challenge the suspected individual

B Report the suspicions to the audit committee of the client company

C Report the suspicions to the chairman of the board of the client company

D Seek legal advice

Answer

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Tags: Audit committee, Auditor Response, Fraud suspicion, Governance, Legal advice
Level: Level 3

Topic: Professional responsibility and liability

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 – 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

Program (SQ): PROFESSIONAL PROGRAM

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AAA – L3 – SA – Q5.7 – Audit evidence

Which statements about related party transactions are correct?

AAA – L3 – SA – Q5.6 – Audit evidence

What factors influence an auditor’s materiality decision?

AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

AAA – L3 – SA – Q5.4 – Evaluation and review

What is the key objective of an engagement quality review?

AAA – L3 – SA – Q5.3 – Professional responsibility and liability

What should an auditor do upon suspecting fraudulent activity by a director?

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

Which statement about auditor independence is incorrect?

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?

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