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Free ACCA Advanced Audit and Assurance Practice Questions & Answers
300 exam-style Advanced Audit and Assurance questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 61
What is 'business risk' and how does it affect audit risk?
Select an option first.
Correct answer: B — Business risk is the risk that events or circumstances might adversely affect the entity's ability to achieve its objectives — business risks that affect financial reporting increase the risk of material misstatement. For example, rapid technological change creates inventory obsolescence risk; economic downturn increases going concern risk; regulatory change creates compliance risk
Explanation: B is correct. Business risk → audit risk connection: the auditor considers business risks when assessing the risk of material misstatement. Examples: a company relying on a single major customer (business risk) → completeness and going concern risk (audit risk); management under pressure to meet loan covenants (business risk) → revenue recognition and impairment risk (audit risk). A defines business risk incorrectly. C and D are wrong.
Question 62
What is 'management's risk assessment process' and why does the auditor care about it?
Select an option first.
Correct answer: B — The process by which management identifies and responds to risks that might prevent achievement of the entity's objectives — the auditor evaluates this process to understand whether management has identified the same risks the auditor has, and whether the entity's response to risks includes adequate controls
Explanation: B is correct. ISA 315: understanding management's risk assessment process is part of understanding the entity's internal control. If management has a robust risk identification process, risks are more likely to be addressed. If management's process is weak (or non-existent), the auditor increases risk assessments. A: management's process involves business risks, not audit risks. C: the auditor still performs their own independent assessment. D is wrong.
Question 63
What is the difference between 'statistical' and 'non-statistical' sampling?
Select an option first.
Correct answer: B — Statistical sampling uses probability theory to: select items randomly, measure sampling risk, and project results to the population using mathematical formulae. Non-statistical sampling uses the auditor's judgement for selection and does not allow statistical projection — both are valid under ISA 530 when properly applied
Explanation: B is correct. ISA 530: both statistical and non-statistical sampling are acceptable. Statistical advantages: can quantify sampling risk, results can be statistically projected, defensible selection. Non-statistical advantages: flexibility, uses auditor knowledge (e.g., high-value items), quicker to implement. Both require: representative samples and evaluation of misstatements. A: statistical is more rigorous but not always 'better' for every situation. C is wrong. D: statistical sampling can be done manually.
Question 64
What is 'haphazard sampling' and how does it differ from random sampling?
Select an option first.
Correct answer: B — Haphazard sampling: items selected by the auditor without following a structured technique, trying to avoid bias without using random number tables — the auditor picks items that appear to be representative. Random sampling uses random number tables or computer software to ensure every item has an equal chance of selection
Explanation: B is correct. Haphazard vs random: random sampling provides an equal chance for every item and allows statistical projection. Haphazard reduces bias without guaranteeing equal probability — it is a pragmatic non-statistical approach. Haphazard is not statistical because: items don't have a known probability of selection. A: haphazard is non-statistical. C: haphazard relies on the auditor avoiding bias; random uses mathematics. D: random sampling is more reliable for statistical purposes.
Question 65
What is 'monetary unit sampling' (MUS) and why is it particularly useful in auditing?
Select an option first.
Correct answer: B — A statistical sampling method that selects individual monetary units (e.g., individual pounds) within a population, with the probability of selection proportional to the size of the item — larger items are more likely to be selected. Particularly useful for testing overstatement of assets (e.g., debtors, inventory) where high-value items carry more risk
Explanation: B is correct. MUS (also called probability proportional to size / PPS sampling): each monetary unit has an equal probability of selection, but this means larger balances are more likely to be selected (a £100,000 balance is 10x more likely to be selected than a £10,000 balance). Used when: debtors, inventory, or other assets where overstatement is the key risk. Provides efficient coverage of large items while still reaching smaller ones. A, C and D are wrong.
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Question 66
What is 'third-party confirmations' for non-trade receivable items?
Select an option first.
Correct answer: B — Requests for written confirmation of information from independent third parties — used for: bank balances and overdrafts (bank letter), loans (confirmation from lenders), investments held by brokers (broker confirmation), legal claims (solicitor's letter), and goods held by third parties (confirmation from warehouses). Each type addresses different assertions
Explanation: B is correct. Third-party confirmations (ISA 505): applicable to many audit areas beyond just debtors. Bank letter: confirms balances, overdrafts, loans, charges over assets, contingent liabilities. Solicitor's letter: pending litigation, legal advice given. Inventory held by third parties: existence and ownership. These all provide highly reliable independent evidence for existence and rights and obligations assertions. A and C are too narrow. D: method of sending may vary.
Question 67
What are the five stages of the audit process in sequence?
Select an option first.
Correct answer: B — Client acceptance/continuance → planning → risk assessment → gathering evidence (fieldwork) → completion and reporting
Explanation: B is correct. Logical sequence: (1) Accept or continue with the client (independence, ethics, competence check). (2) Plan the audit (strategy, understand the entity, set materiality). (3) Assess risks (identify RoMM at FS and assertion levels). (4) Gather evidence (tests of controls, substantive procedures). (5) Complete and report (final review, form opinion, issue report, communicate with TCWG). A, C and D are in the wrong order.
Question 68
What is 'component materiality' in a group audit?
Select an option first.
Correct answer: B — A lower materiality threshold set for individual components (subsidiaries) of a group audit — it must be lower than group materiality to ensure that the aggregate of undetected component misstatements does not exceed group overall materiality. Different components may have different component materiality levels based on their size and risk
Explanation: B is correct. Group audit materiality cascade (ISA 600): group overall materiality → group performance materiality → component materiality. Component materiality < overall group materiality. Rationale: if 10 subsidiaries each have a misstatement equal to group materiality, the aggregate would vastly exceed the group level. A: lower, not higher. C reverses the relationship. D: the group engagement team sets component materiality and communicates it to the component auditor.
Question 69
What is the difference between 'significant components' and 'non-significant components' in a group audit?
Select an option first.
Correct answer: B — A significant component is one that is individually financially significant to the group, or that due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements. Non-significant components can be subjected to analytical procedures only at the group level
Explanation: B is correct. ISA 600: significant components require either: a full audit, an audit of specific balances, or targeted audit procedures for specific risks. Non-significant: the group auditor performs analytical procedures on the financial information. The group auditor decides which components are significant. A: size is one factor but not the only one. C and D are wrong.
Question 70
What is the purpose of 'group audit instructions'?
Select an option first.
Correct answer: B — A communication from the group engagement team to component auditors outlining: scope of work required, applicable financial reporting framework, component materiality, significant risks identified by the group team, reporting requirements, and the schedule for completing the work and reporting to the group team
Explanation: B is correct. Group audit instructions (ISA 600): the group team sends these to each component auditor. They cover: the component's scope (full audit, specified procedures, or analytics), materiality, significant risks identified centrally, format of the component auditor's report back to the group team, and the timeline. The group team must actively direct the component auditors, not passively receive their reports. A reverses the direction. C and D are wrong.
Question 71
What is the 'overall response' to financial statement level risks?
Select an option first.
Correct answer: B — General strategies applied across the audit as a whole when pervasive risks exist — includes: assigning more experienced staff, increasing unpredictability of procedures, incorporating more professional scepticism, performing more work at year-end rather than at interim, and modifying the overall audit approach
Explanation: B is correct. ISA 330 — responses at FS level: pervasive risks (e.g., poor control environment, management override) require overall responses rather than targeted procedures. Examples: assign a partner or senior manager to high-risk areas, change the nature and timing of planned procedures, or increase the extent of supervision. These are in addition to (not instead of) assertion-level responses. A is a quantitative change, not an overall response. C and D are different documents.
Question 72
What is 'the auditor's report on summary financial statements'?
Select an option first.
Correct answer: B — A report where the auditor indicates whether the summary financial statements (condensed versions of full financial statements) are consistent with the full audited financial statements from which they were derived — this is not a full audit opinion on the summary statements themselves
Explanation: B is correct. Summary financial statements (ISA 810): many listed companies produce abbreviated financial statements for shareholders. The auditor reports whether the summary statements are consistent with the full audited financial statements. This is not a new audit — it is a comparison. A: unrelated to company size. C: required when entities publish summary financial statements. D: the auditor, not management, provides this conclusion.
Question 73
What are 'predecessor auditor communications' and why are they important in a new engagement?
Select an option first.
Correct answer: B — When a new auditor takes on a client, they should (with client consent) contact the predecessor auditor to: obtain information about why the previous auditor left (professional reasons for resignation or removal), identify any significant risks or issues, and obtain access to prior working papers for opening balance purposes
Explanation: B is correct. Predecessor communication: before accepting, the incoming auditor requests client permission to communicate with the predecessor. The predecessor auditor: should cooperate (professional duty) and disclose material information relevant to the new engagement (e.g., disagreements over accounting, management integrity issues). If the client refuses permission to contact the predecessor, this itself may be a red flag. A, C and D are wrong.
Question 74
What are 'recurring audit' considerations different from a first-year audit?
Select an option first.
Correct answer: B — In a recurring audit, the auditor already has knowledge of the entity, reducing some planning effort — however, the auditor must: update the understanding of the entity (changes in strategy, controls, risk), reassess prior risks that may have changed, consider whether the prior auditor's opening balance documentation is sufficient, and guard against complacency from familiarity
Explanation: B is correct. Recurring audit: efficiency gains from knowledge carry-over BUT risks of: complacency (assuming things haven't changed), outdated risk assessments, familiarity threat. The auditor must: review and update the prior year's understanding, evaluate whether changes in the entity or standards require updated procedures, and not simply 'roll forward' prior year work uncritically. A: more efficient, not necessarily less work. C and D: the plan should be updated based on current risk.
Question 75
What is 'ISQM 2' and how does it relate to engagement quality?
Select an option first.
Correct answer: B — International Standard on Quality Management 2: specifically addresses the engagement quality review — establishing the criteria for when an EQR is required, who can perform it, and what it must cover. It supplements ISQM 1 (firm-level quality management) by providing detailed requirements for the EQR process
Explanation: B is correct. ISQM 2: effective from December 2022 (alongside ISQM 1). It specifies: when an EQR is required (listed entities, other engagements as determined by the firm's quality management system), who qualifies as an EQR reviewer (suitably qualified, not involved in the engagement), and the nature and extent of the EQR (review of significant judgements, risks, evidence for key areas, and proposed opinion). A: it provides requirements for EQR, not a replacement. C and D are wrong.
Question 76
What is 'hot review' (pre-issuance review) and how does it work?
Select an option first.
Correct answer: B — An independent review of the completed audit file by a partner not involved in the engagement before the audit report is signed — similar to an EQR but focused on quality assurance rather than the regulatory requirement. The reviewing partner evaluates whether conclusions are appropriate and working papers are complete
Explanation: B is correct. Hot review / pre-issuance review: conducted before the audit report is released to ensure all work is properly documented and conclusions are supportable. Distinct from EQR (which has specific regulatory triggers): a hot review may be applied to higher-risk or more complex engagements as part of the firm's quality management system. A: applicable to any complex engagement. C: must be before, not after, the report is signed. D describes a different stage.
Question 77
What is the 'three Es' in public sector auditing?
Select an option first.
Correct answer: B — Economy (minimising costs while maintaining quality), Efficiency (maximising output for given inputs), and Effectiveness (achieving policy objectives or intended outcomes) — the framework used in value for money (VFM) audits of public sector entities
Explanation: B is correct. Three Es: Economy — purchasing at the lowest cost for the appropriate quality (value for money in procurement). Efficiency — productive use of resources (e.g., NHS beds occupied vs available). Effectiveness — actual impact of spending on intended outcomes (e.g., reduction in crime rate after police funding). Together, these form the basis for VFM audit conclusions. A and C are invented. D is wrong.
Question 78
What is 'joint audit' and what are the arguments for and against it?
Select an option first.
Correct answer: B — An audit conducted by two separate audit firms jointly, each sharing responsibility for the audit opinion — arguments for: promotes competition, reduces dominance of large firms, knowledge sharing, potentially better quality. Arguments against: cost (two firms' fees), coordination challenges, potential for diffusion of responsibility, and unclear liability between firms
Explanation: B is correct. Joint audit: required in France for large listed companies (since 1966). Debated globally as a solution to audit market concentration. Pros: access to multiple skill sets, market access for mid-tier firms. Cons: higher costs, coordination challenges, risk of 'free rider' effect where each firm assumes the other checked a given area. Currently optional in most jurisdictions. A: the cost is shared or split by the client. C and D are wrong.
Question 79
What is 'Audit Quality Indicators' (AQIs) and how are they used?
Select an option first.
Correct answer: B — Metrics designed to provide meaningful information about audit quality — used by regulators, audit committees, and investors to assess the quality of specific audit engagements or audit firms. Examples: partner and manager hours as a percentage of total hours (partner involvement), proportion of staff with industry expertise, turnover of audit team members
Explanation: B is correct. AQIs (developed by PCAOB and others): external indicators of audit quality include: restatement rates, regulatory inspection results, partner involvement ratios, staff experience levels, and fee transparency. Some regulators require disclosure of certain AQIs (e.g., hours by seniority, fees for audit vs non-audit services). A: they are not just about fees. C: not yet mandatory across all jurisdictions. D: intended for external stakeholders too.
Question 80
What is 'opening balance misstatement' risk in an initial engagement?
Select an option first.
Correct answer: B — The risk that opening balances (prior period closing balances carried forward) contain misstatements that could materially affect the current period financial statements — this risk is higher in initial engagements because the incoming auditor has not previously audited those balances
Explanation: B is correct. ISA 510: opening balances may contain misstatements from: prior year errors not corrected, changes in accounting policy not properly adjusted, or manipulation in a prior period. The incoming auditor must gather sufficient evidence about opening balances — reviewing prior audit report/working papers, performing current year procedures that provide evidence about opening positions. A: prior auditors may have missed misstatements. C and D are wrong.
Question 81
What is the 'concept of reasonable assurance' and its limitations?
Select an option first.
Correct answer: B — A high but not absolute level of confidence that the financial statements are free from material misstatement — limitations that prevent absolute assurance: auditors use sampling (not 100% testing), financial reporting involves estimates (inherently uncertain), auditors depend on management representations, and the cost-benefit principle limits the extent of procedures
Explanation: B is correct. Reasonable assurance: defined qualitatively (high, but not absolute). It acknowledges the inherent limitations of audit: sampling risk, estimation uncertainty, reliance on management's representations, and the practical constraint that testing every transaction would be cost-prohibitive and still not guarantee accuracy. A: no specific percentage is defined. C: also wrong. D: some misstatements may not be detected (below performance materiality, or concealed by fraud).
Question 82
What is 'negative confirmation' and when is it appropriate?
Select an option first.
Correct answer: B — A confirmation where the recipient is asked to respond only if they disagree — appropriate when: population risk is low, balances are numerous and small, recipients are unlikely to intentionally ignore incorrect confirmations. Less reliable than positive confirmation because non-response may indicate inattention rather than agreement
Explanation: B is correct. Negative vs positive confirmations: positive (must reply whether agree or disagree) is more reliable. Negative is used when individual balances are small and numerous and risk is low. A reverses the definition. C: positive confirmation is more reliable. D: used for receivables, not just banks.
Question 83
What is the 'audit of digitally created contracts and electronic records'?
Select an option first.
Correct answer: B — As businesses increasingly use electronic contracts, emails, and digital records, the auditor must consider: the authenticity of electronic signatures (legally binding in most jurisdictions), access controls over electronic records (who can create, modify, or delete them), audit trail integrity, and whether electronic records are backed up and retrievable
Explanation: B is correct. Digital evidence: e-contracts and electronic records can be high-quality audit evidence if appropriate controls exist. The auditor evaluates: the e-signature platform (DocuSign, Adobe Sign provide certified audit trails), IT access controls over document management systems, and system-generated audit trails. A: electronic records are widely accepted. C: reliability depends on controls, not the medium. D: not required — electronic files can be saved to the audit file.
Question 84
What is a 'walk-through test' and what does it achieve?
Select an option first.
Correct answer: B — A procedure where the auditor traces one or a few transactions from initiation through the entire accounting system to the financial statements — confirming that the auditor's understanding of the system is correct and that controls identified during planning are actually in place
Explanation: B is correct. Walk-through (ISA 315): confirms the auditor's documented understanding of the system. Achieves: verification that controls described by management actually exist, identification of where breakdowns occur, and confirmation that IT-automated controls are actually functioning. A is a site visit. C: walk-throughs confirm understanding but do not test whether controls operate effectively throughout the period. D: performed during planning, not at year-end.
Question 85
What is 'substantive analytical procedure' vs 'analytical procedure for planning'?
Select an option first.
Correct answer: B — Planning analytical procedures: high-level, used to understand the entity and identify risk areas (no direct evidence gathered). Substantive analytical procedures: used as actual audit evidence to test account balances — the auditor develops a precise expectation and compares it to the recorded amount. If the difference is within an acceptable threshold, the balance is accepted without further testing
Explanation: B is correct. ISA 520 distinction: planning analytics = risk identification. Substantive analytics = audit evidence. Substantive analytics are most effective when: the relationship is predictable, the data is reliable, and the expected amount can be calculated precisely (e.g., expected rent expense = floor area × rate per sq ft). A: different purposes and different quality of evidence. C: can provide sufficient evidence for some lower-risk balances. D: used for all accounts where relationships are predictable.
Question 86
What is 'bank reconciliation review' as an audit procedure?
Select an option first.
Correct answer: B — Reviewing the client-prepared bank reconciliation to: confirm that it agrees the cash book balance to the bank statement balance, check that outstanding items (unpresented cheques, deposits in transit) are reasonable (old unpresented cheques may indicate fraud), verify that the bank reconciliation is signed off by an appropriate manager, and confirm that the closing cash balance agrees to the balance sheet
Explanation: B is correct. Bank reconciliation: a key internal control. The auditor reviews (not prepares) the reconciliation. Risk areas: fictitious outstanding deposits (to inflate cash), old unpresented cheques (bank balance is lower than cash book — possible teeming and lading), or items reconciled incorrectly. The auditor also independently confirms the bank balance through the bank letter. A: the client prepares it. C and D are wrong.
Question 87
What is 'sampling for tests of controls' and how does the auditor evaluate deviations?
Select an option first.
Correct answer: B — When testing controls by sampling, the auditor selects a sample of instances where the control should have operated and checks whether it did — a 'deviation' is when the control failed to operate. The auditor compares the sample deviation rate to the tolerable deviation rate (pre-set). If the sample rate exceeds the tolerable rate: the control cannot be relied upon and more substantive testing is required
Explanation: B is correct. Control testing sample evaluation (ISA 530): the auditor pre-sets the tolerable deviation rate (the maximum rate of control failures they can accept while still relying on the control). If the sample deviation rate (failures found / sample size) < tolerable deviation rate: control can be relied upon. If it exceeds the tolerable rate: control is ineffective — more substantive work required. A: sampling is used for controls. C: deviation affects reliance on controls, not directly the opinion. D: both statistical and non-statistical sampling are permitted.
Question 88
What is the concept of 'accounting estimates — management bias detection'?
Select an option first.
Correct answer: B — The auditor evaluates all accounting estimates for indicators of management bias — looking for: estimates consistently at one extreme of a reasonable range, changes in estimation methodology that improve results without a valid reason, assumptions that are inconsistent with other available information, or estimates in the current year that are significantly different from prior years without explanation
Explanation: B is correct. ISA 540 — bias detection: the auditor considers whether management's estimates, taken individually, appear reasonable, and whether the aggregate effect of biased estimates is material. A consistently optimistic management may not be committing fraud but may be introducing a material bias. Audit response: challenge assumptions, develop an independent estimate, and assess whether the estimate is within a reasonable range. A: bias can be unintentional. C: external specialists' work still requires evaluation.
Question 89
What is the audit of 'investment property' under IAS 40?
Select an option first.
Correct answer: B — Investment property is measured at either the cost model or the fair value model under IAS 40. The audit of fair value investment property: obtain an independent valuer's report (management's expert), evaluate the valuer's competence and independence, assess the reasonableness of key assumptions (yield, market conditions, comparable transactions), and check that fair value changes are correctly recognised in profit or loss
Explanation: B is correct. IAS 40 audit: the auditor's key challenge is evaluating the fair value. If using the fair value model: the auditor must assess whether the valuation is appropriate (RICS-qualified valuers, current market evidence, appropriate yield rates). Changes in fair value go through profit or loss (unlike IAS 16 revaluations which go through OCI). A: both models exist under IAS 40. C: usually Level 2 or Level 3 (observable market data or unobservable assumptions). D: held by various types of entities (REITs, pension funds, diversified companies).
Question 90
What is 'audit planning memorandum' and what does it contain?
Select an option first.
Correct answer: B — A comprehensive planning document prepared by the audit team, typically reviewed and approved by the engagement partner — it summarises: understanding of the entity and its environment, assessment of inherent and control risk at the financial statement and assertion levels, materiality calculations (overall, performance, and specific), the planned audit approach (reliance on controls or fully substantive), key audit areas and planned procedures, team composition and timing
Explanation: B is correct. Audit planning memorandum (or audit strategy document): the central planning document. It records all key decisions made at the start of the audit and is updated as the audit progresses. An experienced auditor reviewing this document should understand: what risks were identified, why certain materiality levels were chosen, why the audit approach was designed as it was, and what the team planned to do. A and C are wrong. D: prepared by the auditor, not the client.
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