ICAG – Page 3 – Knowsia

AAA – L3 – SA – Q2.1 – Agency Theory

Directors as agents in agency theory.

Question

In the context of agency theory, the directors of a company are the agents of:

A The auditors

B The audit committee

C The institutional shareholders

D All shareholders

Answer

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Tags: Agency Theory, Corporate Governance, Directors, ICAG, Shareholders
Level: Level 3

Topic: The regulatory environment

AAA – L3 – SA – Q1.10 – Audit Opinion

Audit opinion for disclosed zero-interest loan.

Question

If a client has a loan from another group company at zero rate of interest and discloses it in a note to the financial statements, what is the correct audit opinion?

A It depends whether the item is material

B Qualified opinion, ‘except for’

C Qualified opinion, ‘adverse’

D Unqualified

Answer

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Tags: Audit opinion, Financial Statement Disclosure, Going Concern, ICAG
Level: Level 3

Topic: Reporting

AAA – L3 – SA – Q1.9 – Negative Assurance

Definition of negative assurance.

Question

What is meant by negative assurance?

A The auditor cannot give an opinion due to lack of evidence.

B The client’s financial statements were found to be materially misstated.

C The auditor could not conduct any tests due to lack of controls.

D The auditor did not find anything to indicate that a material misstatement exists.

Answer

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Tags: Assurance engagements, Audit opinion, ICAG, Negative Assurance
Level: Level 3

Topic: Assurance Services

AAA – L3 – SA – Q1.8 – Going Concern Audit

Incorrect statement about going concern audit.

Question

Which of the following is NOT true about audit of the appropriateness of management’s use of the going concern basis of accounting?

A The auditor must assess the appropriateness of the going concern basis of accounting.

B Auditing the cash flow forecast is a good source of audit evidence.

C Written representations are usually sufficient on their own.

D If there a material uncertainty exists with regards to going concern, an unmodified audit opinion is possible if a Material Uncertainty Related to Going Concern paragraph is included.

Answer

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Tags: Audit Evidence, Audit opinion, Going Concern, ICAG
Level: Level 3

Topic: Evaluation and review

AAA – L3 – SA – Q1.7 – Impairment

Incorrect statement about impairment.

Question

Which of the following statements is INCORRECT?

A Goodwill must be reviewed annually for impairment

B There is impairment when the recoverable amount is above the carrying amount

C The recoverable amount is the higher of fair value less costs to sell and value in use

D Value in use essentially involves discounted cash flow forecasts

Answer

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Tags: Goodwill, ICAG, Impairment, Recoverable Amount
Level: Level 3

Topic: Evaluation and review

AAA – L3 – SA – Q1.6 – Business Risks

Identifying external business risk.

Question

The following are all business risks. Which is the odd one out?

A High financial gearing

B The rate of inflation

C Overtrading

D A dominant chief executive

Answer

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Tags: Business Risks, External Risk, ICAG, Internal Risk
Level: Level 3

Topic: The audit approach

AAA – L3 – SA – Q1.5 – Business Risk Approach

Disadvantage of business risk audit approach.

Question

One of the disadvantages with a business risk approach to the audit is:

A A perceived conflict with auditor independence

B Increase in knowledge of the client’s business

C A reduced focus on processing errors

D More senior staff are involved

Answer

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Tags: Audit Strategy, Auditor Independence, Business Risk Approach, ICAG
Level: Level 3

Topic: The audit approach

AAA – L3 – SA – Q1.4 – Engagement Letter

Contents of a statutory audit engagement letter.

Question

Matters covered in an engagement letter for a statutory audit will normally include:

1 Use of internal audit

2 Use of experts

3 Number of audit personnel who will be involved in the audit

4 Basis of fees

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 Procedures, Engagement Letter, ICAG, Statutory Audit
Level: Level 3

Topic: Practice management

AAA – L3 – SA – Q1.3 – IESBA Code

Correct statement about IESBA Code.

Question

Which of the following statements is correct with regards to the IESBA Code?

A A key audit partner of a listed company shall be rotated after seven years serving as the key audit partner.

B non-audit work from a client must not exceed in amount 100% of the income obtained from audit work for the client.

C Accountancy work shall not be carried out for an unlisted company client.

D Overdue fees from a client are permissible provided that this arrangement has been agreed between the audit firm and the client.

Answer

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Tags: Auditor Rotation, ICAG, IESBA Code, Non-Audit Work
Level: Level 3

Topic: Rules of Professional Conduct

AAA – L3 – SA – Q1.2 – Audit Committee Advantages

Advantages of having an audit committee.

Question

Which of the following are potential advantages of having an audit committee?

1 Conflict between the auditor and the executive directors is reduced

2 Responsibility for internal control is given to independent non-executive directors and so becomes more effective

3 Costs of internal control and the external audit are reduced

4 It provides additional reassurance to shareholders about the reliability of the financial statements

A 1 and 4 only

B 2 and 3 only

C 1 and 3 only

D 2 and 4 only

Answer

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Tags: Audit committee, Auditor Independence, Corporate Governance, ICAG

Topic: The regulatory environment

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AAA – L3 – SA – Q2.1 – Agency Theory

Directors as agents in agency theory.

AAA – L3 – SA – Q1.10 – Audit Opinion

Audit opinion for disclosed zero-interest loan.

AAA – L3 – SA – Q1.9 – Negative Assurance

Definition of negative assurance.

AAA – L3 – SA – Q1.8 – Going Concern Audit

Incorrect statement about going concern audit.

AAA – L3 – SA – Q1.7 – Impairment

Incorrect statement about impairment.

AAA – L3 – SA – Q1.6 – Business Risks

Identifying external business risk.

AAA – L3 – SA – Q1.5 – Business Risk Approach

Disadvantage of business risk audit approach.

AAA – L3 – SA – Q1.4 – Engagement Letter

Contents of a statutory audit engagement letter.

AAA – L3 – SA – Q1.3 – IESBA Code

Correct statement about IESBA Code.

AAA – L3 – SA – Q1.2 – Audit Committee Advantages

Advantages of having an audit committee.

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Directors as agents in agency theory.

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Audit opinion for disclosed zero-interest loan.

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Definition of negative assurance.

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Incorrect statement about going concern audit.

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Incorrect statement about impairment.

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Identifying external business risk.

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Disadvantage of business risk audit approach.

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Contents of a statutory audit engagement letter.

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Correct statement about IESBA Code.

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Advantages of having an audit committee.

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