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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 151
What is an 'engagement quality reviewer' (EQR) and when must one be appointed?
Select an option first.
Correct answer: B — An experienced professional from outside the engagement team who reviews significant judgements made by the engagement partner and team and the related conclusions reached in the audit report — mandatory for audits of listed entities and other high-risk engagements as determined by the firm's quality management system
Explanation: B is correct. EQR (ISQM 2): the reviewer must be a partner or suitably qualified person not involved in the engagement. Reviews: significant risks and responses, independence, materiality, going concern assessment, key judgements, and the proposed audit opinion. The audit report cannot be signed before the EQR is complete. A is a normal working paper review. C is a management function. D is a client governance role.
Question 152
What is the difference between a 'qualified opinion' issued because of a material misstatement and one issued due to a limitation of scope?
Select an option first.
Correct answer: B — Both result in a 'qualified opinion' with an 'except for' paragraph, but the reason differs: a misstatement-based qualification is due to a matter that the auditor disagrees with (the financial statements are wrong in a specific area); a scope limitation qualification arises because the auditor could not obtain sufficient appropriate evidence to form a complete opinion
Explanation: B is correct. ISA 705: qualified opinion — 'except for'. Misstatement: 'except for the inventory overstatement described in Note X, the financial statements present fairly...' Scope limitation: 'except for the effects of the matter described in the Basis for Qualified Opinion section, the financial statements present fairly...' The distinction matters because users understand whether the auditor disagrees with a specific accounting or couldn't verify something. A conflates the reasons. C: scope limitation → qualified if material but not pervasive; disclaimer if material AND pervasive. D is wrong.
Question 153
What is the 'direction of testing' concept and why does it matter?
Select an option first.
Correct answer: B — The choice of starting point for an audit test — testing from records to source documents checks existence (are recorded items real?); testing from source documents to records checks completeness (have all items been recorded?). The choice depends on whether the key risk is overstatement (existence) or understatement (completeness)
Explanation: B is correct. Direction of testing: completeness risk (e.g., unrecorded liabilities) → test from source documents (goods received notes) to records. Existence risk (e.g., fictitious debtors) → test from records to source documents (trace each debtor to supporting invoice). Many audit tests use both directions to cover both risks. A: it is a fundamental concept affecting what the test proves. C and D are wrong.
Question 154
What is 'lapping' fraud in accounts receivable and how might an auditor detect it?
Select an option first.
Correct answer: B — A fraud where an employee delays posting customer payments, using later customers' payments to cover earlier misappropriations — detection procedures include: performing a surprise cash count, comparing check/wire receipts to the customer accounts they are posted to, circularising debtors (who may report payments that haven't been posted), and reconciling the debtors ledger to the control account
Explanation: B is correct. Lapping: the employee takes customer payment A, uses customer B's payment to cover A's account, then uses C's payment to cover B's account — creating a perpetual lag. Detected by: surprise counts, debtor circularisation (customers report payments not credited), comparing dates of receipts to dates of posting, and reviewing the aged receivables for unusual patterns. A and C are other fraud types. D is wrong.
Question 155
What is 'teeming and lading' and how is it related to lapping?
Select an option first.
Correct answer: B — Another name for lapping fraud — it specifically refers to the practice of borrowing funds by manipulating cash receipts and the posting of amounts to customers' accounts to conceal the theft. The employee 'teems' (takes) from one account and 'lades' (puts back) using another customer's payment
Explanation: B is correct. Teeming and lading = lapping: a UK/Commonwealth terminology for the same concept. Key features: access to cash receipts, ability to post entries to customer accounts, delayed posting that creates a perpetual mismatch. Prevention: segregate the functions of collecting cash and posting to accounts, require immediate banking of receipts, and perform regular surprise counts. A and C are different fraud types. D is wrong.
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Question 156
What is a 'journal entry test' and why is it important in detecting fraud?
Select an option first.
Correct answer: B — A procedure where the auditor reviews all journal entries — especially unusual or manual entries, entries made outside normal business hours, entries with non-standard descriptions, entries near period-end, and entries to unusual account combinations — to identify potential management override of controls or fraudulent financial reporting
Explanation: B is correct. Journal entry testing (ISA 240): management can manipulate financial statements through journal entries that bypass normal controls (posting directly to the ledger). Auditors must: obtain a complete list of all journal entries (including automated), apply risk-based selection criteria, trace selected entries to supporting documentation, and investigate anomalies. A and C are wrong. D: journal entry testing is required in all audits as part of fraud risk assessment.
Question 157
What are 'post balance sheet events' of the adjusting type and give an example?
Select an option first.
Correct answer: B — Events that occur after the reporting date that provide evidence of conditions that existed at that date — they require the financial statements to be adjusted. Example: a customer whose debt was included in debtors at year-end subsequently goes into administration after the reporting date, confirming that the debt was irrecoverable at year-end (impairment existed at year-end)
Explanation: B is correct. Adjusting events (ISA 560): these events confirm conditions existing at the reporting date. The financial statements must be adjusted. Examples: settlement of a lawsuit at an amount different from the provision at year-end; discovery of fraud or error that shows the financial statements were incorrect; bankruptcy of a debtor after year-end (confirming year-end impairment). A: adjusting events must be reflected in the numbers, not just notes. C and D are wrong.
Question 158
What are 'post balance sheet events' of the non-adjusting type and give an example?
Select an option first.
Correct answer: B — Events that occur after the reporting date that indicate conditions arising after that date — they do not require adjustment to financial statements (since the condition didn't exist at year-end) but may require disclosure if material. Example: a major acquisition completed after year-end that significantly changes the nature of the business
Explanation: B is correct. Non-adjusting events (ISA 560): new conditions arose after year-end — the financial statements reflect conditions at the year-end date. If material (could influence users' decisions), disclose in the notes. Examples: announcement of a restructuring plan, a major fire destroying significant assets, a significant fall in the market price of investments. A: material non-adjusting events require disclosure. C and D are wrong.
Question 159
What is the difference between a 'misstatement' and a 'difference' in audit terminology?
Select an option first.
Correct answer: B — A misstatement is an error or omission in the financial statements that is incorrect — either the amounts are wrong, or a disclosure is inadequate. A 'difference' arises in sampling when the auditor's assessment of an item differs from the recorded amount — a difference that is a misstatement must be accumulated; a difference that is a 'deviation' (in tests of controls) relates to a control that failed to operate as expected
Explanation: B is correct. ISA 450/530: in substantive sampling, the auditor records 'misstatements' found in the sample and projects them to the population. In control testing, 'deviations' (control failures) are tracked. Aggregate misstatements → evaluated against materiality. Aggregate deviations → evaluated against the planned deviation rate. A: they are related but different concepts. C and D are wrong.
Question 160
What are 'trivial misstatements' and how are they treated in the audit?
Select an option first.
Correct answer: B — Misstatements that are clearly inconsequential — below a de minimis threshold set by the auditor (often around 5% of performance materiality). They are not accumulated or reported individually. However, if many trivial misstatements are found, they may collectively become material and require accumulation and reporting
Explanation: B is correct. Trivial misstatements: below the de minimis threshold — individually inconsequential. However, ISA 450: the auditor should consider whether the aggregate of misstatements that are individually trivial could be material. If a pattern emerges (e.g., many small errors all in one direction = management bias), this may signal a significant risk. A: trivial is below performance materiality, not just below it — there is a lower threshold. C: even trivial errors can accumulate. D: it's the auditor's evaluation, not management's choice.
Question 161
What is 'sufficiency' of audit evidence and what factors affect it?
Select an option first.
Correct answer: B — The quantity of audit evidence — affected by: the assessed risk (higher risk → more evidence needed), the quality of evidence obtained (lower quality evidence → more needed), the nature of the item (complex estimates require more evidence), the materiality of the item, and the auditor's experience and professional judgement
Explanation: B is correct. ISA 500 — sufficiency vs appropriateness: sufficiency (quantity) is interrelated with appropriateness (quality). More reliable evidence may reduce the quantity needed (e.g., one bank confirmation may provide sufficient evidence of a bank balance). Less reliable evidence (e.g., inquiry alone) requires more corroboration. The auditor balances cost and benefit when determining how much evidence to gather. A is appropriateness. C: not just number of items. D: applies to all evidence, not just confirmations.
Question 162
What is the impact of a 'modified opinion' on subsequent audits?
Select an option first.
Correct answer: B — The auditor must consider: whether the matter that led to the prior year modification has been resolved (fully, partially, or not at all); if resolved — unmodified opinion (no reference to prior year modification unless comparative figures are affected); if unresolved and still material — continue to modify; if it affects the comparatives — refer to the prior year modification in the basis for qualified opinion
Explanation: B is correct. Continuing effect of prior modifications (ISA 710): if the prior year matter is resolved, the current year report is clean. If the prior year figure is now comparative in the current year report and was previously modified, the current year report must describe this. The auditor must evaluate: is the prior issue now fixed? Is the comparative figure reliable? A, C and D are wrong.
Question 163
What are 'going concern' audit procedures in detail?
Select an option first.
Correct answer: B — Procedures include: reviewing cash flow forecasts for at least 12 months, assessing the appropriateness of management's going concern assessment, reviewing bank facility letters and loan covenants, examining subsequent events that may affect going concern, inquiring of management about any known threats, reviewing minutes of board meetings for discussion of financial difficulties, and assessing whether disclosures are adequate
Explanation: B is correct. ISA 570 procedures: obtain management's going concern assessment document, review cash flow forecasts (assess reasonableness of assumptions), review correspondence with bankers (facility renewals, covenant compliance), review board and management accounts for evidence of difficulties, examine subsequent events (has a major customer been lost?), review long-term contracts for cancellation risk. A, C and D are too narrow.
Question 164
What does the auditor do when a 'material uncertainty related to going concern' is identified?
Select an option first.
Correct answer: B — If management discloses the material uncertainty adequately in the financial statements: the auditor adds a 'Material Uncertainty Related to Going Concern' (MUGC) section to the audit report (not a modification — the opinion remains unmodified). If management does not adequately disclose: the auditor modifies the opinion (qualified or adverse depending on pervasiveness)
Explanation: B is correct. ISA 570 outcomes: (1) Management discloses appropriately → auditor confirms the going concern basis is appropriate, adds MUGC paragraph (highlighted, prominent section) — opinion remains unmodified. (2) Management does not disclose → misstatement → qualified or adverse opinion. (3) Going concern basis not appropriate → adverse opinion (financial statements wrong in total). A: adverse is the last resort. C: disclaimer only for scope limitation. D: must be in the audit report.
Question 165
What is the significance of the 'basis for modified opinion' paragraph in an audit report?
Select an option first.
Correct answer: B — An explanatory paragraph added immediately before the modified opinion paragraph (for qualified, adverse, or disclaimer opinions) — it describes the specific matter that has led to the modification: the nature of the issue, the financial significance, and the effect on the financial statements
Explanation: B is correct. ISA 705: the basis for modification paragraph: placed immediately before the modified opinion. For misstatements: describes the account affected, the nature of the error, and the financial effect. For scope limitations: describes the procedures the auditor could not perform and why. For disclaimers: describes the pervasive nature of the limitation. A describes the basis for opinion (different). C and D are wrong.
Question 166
What is an 'other matter' paragraph in an audit report (ISA 706)?
Select an option first.
Correct answer: B — A paragraph added to draw users' attention to matters not presented or disclosed in the financial statements but that the auditor believes are relevant to users' understanding of the audit — example: restricting distribution of the report, or explaining that prior year financial statements were audited by a different auditor
Explanation: B is correct. Other matter paragraph (ISA 706): distinct from emphasis of matter (which refers to what IS in the financial statements). Other matter paragraphs address what is NOT in the financial statements but is relevant to understanding the audit. Examples: the audit report is intended for a specific audience; prior year was not audited or was audited by another firm. A is an emphasis of matter. C is a subsequent event. D: other matter paragraphs do not modify the opinion.
Question 167
What is 'deferred tax' as an audit challenge?
Select an option first.
Correct answer: B — Deferred tax arises from temporary differences between the carrying amount of assets/liabilities in the financial statements and their tax base — audit challenges: calculating the correct amount, assessing the probability of sufficient future taxable profits (for deferred tax assets), and ensuring that deferred tax is correctly classified (current vs non-current). IAS 12 governs
Explanation: B is correct. Deferred tax audit: DTLs (deferred tax liabilities) arise when the carrying amount > tax base. DTAs arise when carrying amount < tax base — only recognised if it is probable that future taxable profit will be available. The auditor: agrees calculations to accounting records and tax computations, assesses the probability of future taxable profits for DTA recognition, reviews the tax rate used (enacted rate), and checks for correct classification. A is a cash flow concept. C is wrong. D is wrong.
Question 168
What is a 'subsequent auditor' and what considerations arise when a former client is picked up by a competitor firm?
Select an option first.
Correct answer: B — The firm taking over an audit from a predecessor — they must communicate with the predecessor (with client consent), understand the reasons for the change, review prior audit reports and, if available, prior working papers to establish opening balances. Red flags: if the client refuses to give consent for the predecessor communication, or if the predecessor has concerns about management integrity
Explanation: B is correct. ISA 510/ISA 210: the new auditor performs client acceptance procedures (ethical clearance from predecessor), obtains sufficient opening balance evidence, and evaluates any issues disclosed by the predecessor. The change of auditor may be for legitimate reasons (e.g., rotation) or red flags (e.g., disagreement with the prior auditor over accounting). A, C and D are wrong.
Question 169
What is the 'standard of care' expected of auditors in relation to legal liability?
Select an option first.
Correct answer: B — Auditors are expected to exercise the skill and care of a reasonably competent, experienced auditor — not perfection. Failure to apply this standard may constitute professional negligence. Key principle from Bolam v Friern Hospital (UK): a professional is not negligent if they follow a practice accepted as proper by a responsible body of professionals
Explanation: B is correct. Professional negligence in audit: the claimant must prove: (1) a duty of care existed, (2) the auditor breached that duty (fell below the standard of a reasonably competent auditor), and (3) loss was suffered as a result of that breach. Following ISAs, conducting thorough evidence gathering, and exercising sound professional judgement provides a strong defence. A sets too high a bar. C: negligence can be unintentional. D: liability is limited through LLP structures and engagement letters.
Question 170
What is 'goodwill impairment testing' and the audit challenges it presents?
Select an option first.
Correct answer: B — Under IFRS, purchased goodwill is not amortised but must be tested annually for impairment (IAS 36) — audit challenges include: valuation of cash-generating units (CGUs) requires discounted cash flow projections based on management's assumptions (highly judgemental), sensitivity of the test to growth rates and discount rates, and the risk that management uses optimistic assumptions to avoid an impairment charge
Explanation: B is correct. Goodwill impairment audit: the auditor must: evaluate the CGU allocation of goodwill, assess the reasonableness of the cash flow projections (compare to historical performance, budgets, industry data), challenge the discount rate and terminal growth rate assumptions, perform sensitivity analysis, and evaluate the disclosure adequacy. A: IFRS prohibits goodwill amortisation for public companies. C is wrong. D: goodwill arises from any business combination, not only cash.
Question 171
What is 'share-based payment' accounting and the audit issues it presents?
Select an option first.
Correct answer: B — Share-based payments (IFRS 2) are transactions where a company pays employees or suppliers with equity instruments (shares or options) or cash based on share price — audit issues: complex fair value calculation of options (Black-Scholes model), estimating the number of options expected to vest (requires assumptions about staff turnover and performance conditions), and verifying the expense recognised over the vesting period
Explanation: B is correct. IFRS 2 audit: the auditor must: evaluate the valuation model and its inputs (share price, volatility, risk-free rate, expected term), assess the vesting conditions (performance-based conditions increase complexity), verify the number of unvested options outstanding, and confirm the IFRS 2 charge is correctly calculated and disclosed. A and C are wrong. D: the expense is recognised over the vesting period, typically 3+ years.
Question 172
What is 'pension scheme' auditing (defined benefit) and the key risks?
Select an option first.
Correct answer: B — For a defined benefit pension scheme, the employer must recognise a net liability (or asset) equal to the present value of the defined benefit obligation minus the fair value of plan assets — key audit risks: actuarial assumptions (discount rate, mortality rates, salary growth) are highly judgemental; the auditor typically needs an actuarial expert to evaluate the scheme's valuation
Explanation: B is correct. IAS 19 defined benefit: the auditor must: obtain the actuary's report (management's expert), evaluate the actuary's competence and objectivity, challenge key assumptions (discount rate from high-quality corporate bond yields, mortality tables, inflation), review the plan assets valuation, confirm that current service cost, interest cost, and remeasurements are correctly calculated and presented (OCI for remeasurements). A is too narrow. C and D are wrong.
Question 173
What is 'convertible debt' and the audit issues it presents?
Select an option first.
Correct answer: B — A financial instrument with both debt and equity characteristics — the holder has the option to convert into ordinary shares at a specified price. Under IAS 32, the instrument must be split into its debt component (present value of cash flows if not converted) and equity component (the conversion option). Audit risk: incorrect split between debt and equity, misstated fair value of the liability component
Explanation: B is correct. Convertible bond split (IAS 32): the equity component = total proceeds minus the fair value of the liability component (calculated at the market rate for non-convertible equivalent debt). Audit procedures: review the original instrument, check the calculation of the liability component (discount rate used), verify the equity component is correctly presented in equity (not reclassified), and check interest expense is calculated at the effective rate. A and D are wrong. C is wrong.
Question 174
What is 'going concern' assessment for a company that has breached a bank covenant?
Select an option first.
Correct answer: B — A covenant breach is a significant going concern indicator — the auditor must assess: whether the bank has waived the breach (formal written waiver from the bank before the audit report is signed?), whether the company can renegotiate the terms, the likelihood of the bank demanding immediate repayment, and whether the going concern basis is still appropriate. If the debt becomes immediately repayable and cannot be refinanced, going concern may be inappropriate
Explanation: B is correct. Covenant breach → going concern risk: if a loan becomes repayable on demand due to a breach, the company may not be able to continue. The auditor must: obtain the bank's formal written confirmation of any waiver, review revised covenant terms, assess the company's ability to refinance if the bank demands repayment, and evaluate whether the going concern disclosure is adequate. A is too drastic. C and D are wrong.
Question 175
What is 'related party disclosure' and what audit procedures verify its completeness?
Select an option first.
Correct answer: B — Under IAS 24, companies must disclose transactions with related parties — audit procedures to verify completeness: review the register of directors' interests, enquire of management about related party relationships and transactions, review board minutes for identification of related party transactions, send confirmation letters to known related parties, and review legal contracts for related party involvement
Explanation: B is correct. Related party completeness (ISA 550): the key risk is undisclosed related parties or transactions. Procedures: obtain a comprehensive list of related parties, review contracts and invoices for parties not on the list, look for unusual terms in transactions (prices or conditions not at arm's length), review management expense claims (potential payments to related individuals), and confirm with legal advisors. A: no materiality exemption for related party disclosures. C and D are wrong.
Question 176
What is the audit of 'borrowings and finance costs' and the key assertions tested?
Select an option first.
Correct answer: B — Confirming that all borrowings are: real (existence — confirmed directly with lenders via bank letters), complete (completeness — look for unrecorded loans in bank statements), accurately stated (accuracy — agree to loan agreements), properly classified (current vs non-current — based on repayment terms), and appropriately disclosed (including interest rates, security, covenants, and repayment schedules)
Explanation: B is correct. Borrowings audit: the bank letter confirms: balances, interest rates, security provided, covenants in place, and any defaults. The auditor: checks that all facility agreements are on file, verifies interest expense using effective interest rate calculations, confirms correct classification (any breach of covenants that makes debt immediately repayable → current), and checks that all disclosures are complete (IFRS 7 disclosures for financial instruments). A and C are too narrow. D is only one assertion.
Question 177
What is the audit of 'revalued non-current assets' (IAS 16 revaluation model)?
Select an option first.
Correct answer: B — When a company uses the revaluation model for PPE, the auditor: evaluates the independence and competence of the valuer, assesses the valuation methodology (market approach, income approach, cost approach), confirms that the revaluation surplus is correctly recorded in OCI and the revaluation reserve, verifies that entire classes of assets are revalued (not cherry-picking), and checks that revaluations are performed with sufficient regularity
Explanation: B is correct. IAS 16 revaluation audit: the auditor obtains the valuer's report (management's expert), evaluates their credentials and independence, challenges key assumptions, and confirms the accounting entries. Revaluation increases: OCI (not P&L) → revaluation reserve in equity. Revaluation decreases: OCI to the extent of any previous surplus, then P&L for the excess. A: the client commissions an independent valuer. C: revaluation decrements below original cost go to P&L. D: the revaluation reserve is a capital reserve — not distributable.
Question 178
What is the audit of 'leases' under IFRS 16 and the main risks?
Select an option first.
Correct answer: B — The main audit risks under IFRS 16: (1) Lease term: management judgement about lease term (including renewal options) affects the right-of-use asset and liability significantly. (2) Discount rate: incremental borrowing rate used to discount future lease payments — can significantly affect the liability balance. (3) Completeness: all leases correctly identified and recognised (especially those previously off-balance-sheet). (4) Short-term and low-value exemptions: correctly applied and disclosed
Explanation: B is correct. IFRS 16 audit: significant judgement areas — lease term (if the entity is 'reasonably certain' to exercise a renewal option, the full extended term must be used, increasing the liability significantly) and discount rate (different entities use different incremental borrowing rates — the auditor must evaluate the reasonableness). A: significant judgement required. C: the discount rate is management's estimate, not given. D: they differ due to depreciation of the ROU asset vs the unwinding of the lease liability.
Question 179
What is the 'audit of pension scheme assets' in a defined benefit plan?
Select an option first.
Correct answer: B — The auditor verifies the fair value of plan assets: for quoted investments (equities, bonds) — agree to quoted market prices at year-end; for unquoted assets (property, private equity) — evaluate the valuation methodology using the auditor's own valuation expert; confirm total assets with the pension fund trustees and/or custodian; and check that the split between asset classes is correctly disclosed in the notes
Explanation: B is correct. IAS 19 plan asset audit: the auditor obtains a breakdown of plan assets from the actuary/trustees. Quoted assets: agree to closing market prices (highly reliable). Unquoted (alternative investments, property): higher risk, may need auditor's valuation specialist. Custodian confirmation: third-party confirmation of assets held. A: trustees manage assets but the auditor verifies their values. C: diverse asset classes (equities, bonds, property, alternatives). D: the company's auditor audits the pension liability in the financial statements — the pension fund's separate auditor audits the fund's own statements.
Question 180
What is 'audit of revenue from contracts with customers' — the completeness assertion?
Select an option first.
Correct answer: B — Testing revenue completeness ensures that all revenue that should have been recognised has been recognised — procedures: check that all sales orders in the period have progressed through to invoicing (trace from order to invoice), review post year-end invoices for items that should have been recognised in the current period (accrued revenue), review unbilled work-in-progress (for professional services), and perform analytical procedures (revenue lower than expected may indicate omission)
Explanation: B is correct. Revenue completeness: often overlooked compared to existence (overstatement). Risks: cut-off errors (revenue dispatched but not invoiced at year-end), unbilled services (professional services firms), or under-recognised contract revenue. Procedures include: (1) Trace a sample of dispatch notes to sales invoices. (2) Check accrued revenue for services performed but not yet billed. (3) Analytical review — compare revenue/units delivered ratio. A is too narrow. C: completeness is always relevant. D: both point-in-time and over-time recognition have completeness risks.
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