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Free Questions › ACCA › Audit and Assurance
Free ACCA Audit and Assurance Practice Questions & Answers
300 exam-style 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 1
What is the primary objective of an external audit of financial statements?
Select an option first.
Correct answer: B — To enable the auditor to express an opinion on whether the financial statements give a true and fair view
Explanation: B is correct. The external auditor's objective is to form and express an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework and give a true and fair view. A is management's role. C overstates the auditor's responsibility — only reasonable assurance is provided. D is not an audit objective.
Question 2
What is 'reasonable assurance' in the context of an external audit?
Select an option first.
Correct answer: B — A high, but not absolute, level of assurance that the financial statements as a whole are free from material misstatement
Explanation: B is correct. Reasonable assurance is high but not absolute — it cannot be absolute due to inherent limitations of audit (sampling, management estimates, fraud). A overstates the level. C describes limited/negative assurance from a review. D goes beyond the audit's scope.
Question 3
Why can an auditor not provide absolute assurance on financial statements?
Select an option first.
Correct answer: B — Due to inherent limitations such as use of sampling, reliance on estimates, the possibility of management override, and limitations on audit evidence
Explanation: B is correct. Inherent limitations include: use of sampling (not 100% testing), the judgemental nature of accounting estimates, the possibility of collusion/sophisticated fraud that bypasses controls, and reliance on persuasive rather than conclusive evidence. A is wrong — auditors are responsible for the opinion. C and D are incorrect.
Question 4
What is the 'expectation gap' in auditing?
Select an option first.
Correct answer: B — The difference between what the public believes auditors do and what auditors are actually required to do
Explanation: B is correct. The expectation gap arises because the public often believes auditors provide absolute assurance, detect all fraud, prepare accounts, and guarantee solvency — none of which are audit objectives. Reducing this gap requires better communication of the auditor's role. A, C and D are unrelated concepts.
Question 5
What are the three parties in an assurance engagement?
Select an option first.
Correct answer: B — The practitioner, the responsible party, and the intended users
Explanation: B is correct. Every assurance engagement has three parties: (1) the practitioner who provides the assurance, (2) the responsible party who prepares the subject matter, and (3) the intended users who rely on the assurance report. A, C and D confuse or conflate these distinct roles.
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Question 6
What is the difference between 'positive assurance' and 'negative assurance'?
Select an option first.
Correct answer: B — Positive assurance is expressed as a conclusion that the subject matter IS in accordance with criteria; negative assurance states nothing has come to the practitioner's attention to suggest it is NOT in accordance
Explanation: B is correct. Positive (reasonable) assurance: 'In our opinion, the financial statements present fairly...' Negative (limited) assurance: 'Nothing has come to our attention that causes us to believe the financial statements are not presented fairly...' The negative form reflects lower evidence gathering. A, C and D are incorrect.
Question 7
What is a 'statutory audit' and why is it required?
Select an option first.
Correct answer: B — An audit required by law to provide shareholders and other stakeholders with independent assurance on a company's financial statements
Explanation: B is correct. A statutory audit is mandated by law (e.g., the Companies Act) to protect shareholders and other stakeholders. It addresses the agency problem — shareholders cannot always directly monitor managers. A is a voluntary audit. C and D mischaracterise statutory audits.
Question 8
What is the 'agency problem' and how does it relate to the need for an audit?
Select an option first.
Correct answer: B — The conflict of interest arising because managers (agents) run the business on behalf of owners (shareholders/principals) who cannot directly monitor management — audits provide independent verification of management's financial reporting
Explanation: B is correct. Agency theory: shareholders (principals) delegate management to directors (agents). Agents may act in their own interests. An audit by an independent third party reduces this information asymmetry and provides comfort that financial statements fairly represent the position. A, C and D are unrelated.
Question 9
What is the role of the International Auditing and Assurance Standards Board (IAASB)?
Select an option first.
Correct answer: B — It develops and issues International Standards on Auditing (ISAs) and related standards for assurance and related services
Explanation: B is correct. The IAASB (a board of IFAC) develops ISAs, ISAEs, ISREs, and ISRSs. These standards are adopted by national standard-setters. A describes the IASB (accounting standards). C is done by professional bodies. D is the role of professional accounting bodies.
Question 10
What is the key purpose of an audit engagement letter?
Select an option first.
Correct answer: B — To define and confirm the agreed terms of the engagement — scope, responsibilities, timing, and reporting — reducing the risk of misunderstanding between auditor and client
Explanation: B is correct. The engagement letter is a contract documenting the agreed terms. ISA 210 requires it to be agreed before the audit begins. It sets expectations, clarifies responsibilities, and protects both parties. A is only one element. C and D are not the primary purpose.
Question 11
What are 'preconditions for an audit' under ISA 210?
Select an option first.
Correct answer: B — The applicable financial reporting framework must be acceptable, and management must acknowledge and agree its responsibilities for the financial statements, internal controls, and providing information
Explanation: B is correct. ISA 210 requires the auditor to check: (1) an acceptable financial reporting framework is used, and (2) management agrees to its responsibilities (preparation of statements, internal control, providing access). Without these, the auditor should not accept the engagement. A, C and D are not preconditions.
Question 12
What is 'audit risk' and what is its formula?
Select an option first.
Correct answer: B — The risk that the auditor expresses an inappropriate opinion when financial statements are materially misstated — Audit Risk = Risk of Material Misstatement × Detection Risk
Explanation: B is correct. Audit Risk = Risk of Material Misstatement (RMM) × Detection Risk. RMM = Inherent Risk × Control Risk. The auditor cannot control inherent or control risk — only detection risk, by adjusting the nature, timing, and extent of procedures. A, C and D mischaracterise audit risk.
Question 13
What is 'inherent risk' in audit risk assessment?
Select an option first.
Correct answer: B — The susceptibility of an account balance, class of transaction, or disclosure to material misstatement before considering the effects of any related internal controls
Explanation: B is correct. Inherent risk is the natural riskiness of an account or assertion, driven by factors like complexity, subjectivity, susceptibility to theft, or industry conditions. It exists before any controls are considered. A is control risk. C is detection risk. D is engagement risk.
Question 14
What is 'control risk'?
Select an option first.
Correct answer: B — The risk that a material misstatement will not be prevented or detected and corrected by the entity's internal control system on a timely basis
Explanation: B is correct. Control risk reflects the effectiveness of the client's internal controls in preventing or detecting misstatements. High control risk means controls cannot be relied upon. A is detection risk. C is not a formal audit risk component. D is a specific type of inherent risk (fraud risk).
Question 15
What is 'detection risk' and who controls it?
Select an option first.
Correct answer: B — The risk that the auditor's procedures will not detect a material misstatement that exists — controlled by the auditor through the nature, timing, and extent of audit procedures
Explanation: B is correct. Detection risk is the only component of audit risk that the auditor can influence directly. If RMM is assessed as high, the auditor reduces detection risk by performing more extensive and targeted procedures, using more experienced staff, and testing at year-end rather than interim. A and C describe RMM. D is unrelated.
Question 16
If inherent risk and control risk are both assessed as high, what should the auditor do about detection risk?
Select an option first.
Correct answer: B — Set detection risk as low as possible by increasing the extent and rigour of substantive procedures
Explanation: B is correct. The audit risk model requires overall audit risk to remain at an acceptably low level. If RMM (IR × CR) is high, detection risk must be set low to compensate — meaning more and better audit work. A increases overall audit risk. C is management's role. D is premature — the auditor first performs more work.
Question 17
What is 'materiality' and why is it important in audit planning?
Select an option first.
Correct answer: B — The threshold above which misstatements, individually or in aggregate, could reasonably be expected to influence the economic decisions of users — it determines the scope and focus of the audit
Explanation: B is correct. Materiality guides what the auditor tests — immaterial items need not receive the same attention. It affects planning (which areas to focus on), the nature and extent of testing, and the evaluation of identified misstatements. A overstates it. C is incorrect. D — no fixed percentage is mandated; benchmarks are starting points.
Question 18
What is 'performance materiality' and how does it differ from overall materiality?
Select an option first.
Correct answer: B — Performance materiality is set at a level lower than overall materiality to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality
Explanation: B is correct. ISA 320: performance materiality is set lower than overall materiality for financial statement items. It ensures that the combined effect of individually immaterial errors does not add up to a material misstatement. A reverses the relationship. C and D are incorrect.
Question 19
What factors influence the level of materiality set by an auditor?
Select an option first.
Correct answer: B — The nature of the entity, the financial reporting framework, the level of risk, and the needs of the financial statement users
Explanation: B is correct. Materiality is a matter of professional judgement influenced by: the size of the entity, the risk level, the nature of potential misstatements, and who uses the financial statements. Common benchmarks (5% of pre-tax profit, 1% of revenue, 2% of total assets) are starting points, not rules. A, C and D are not relevant factors.
Question 20
What is the difference between 'quantitative' and 'qualitative' materiality?
Select an option first.
Correct answer: B — Quantitative materiality relates to the size/amount of a misstatement; qualitative materiality relates to the nature of a misstatement that may influence users regardless of its monetary amount
Explanation: B is correct. A small-value misstatement may still be material if it relates to: related-party transactions, directors' remuneration, or a breach of contract. Conversely, a large error in a non-critical area may be immaterial. Both dimensions must be considered. A, C and D are incorrect.
Question 21
What is an 'audit strategy' and what does it contain?
Select an option first.
Correct answer: B — A high-level document setting out the scope, timing, and overall direction of the audit — addressing the nature and extent of resources and the team's approach
Explanation: B is correct. ISA 300: the audit strategy sets the overall approach before developing the detailed audit plan. It covers: scope (financial reporting framework, locations), timing (interim vs final), team composition, and key risk areas. C describes the audit plan. A and D are unrelated.
Question 22
What is an 'audit plan' and how does it differ from an audit strategy?
Select an option first.
Correct answer: B — The audit plan is more detailed than the strategy — it contains the specific nature, timing, and extent of procedures to be performed for each area, based on the assessed risks
Explanation: B is correct. The strategy sets the overall direction; the plan translates it into specific procedures for each financial statement area. The plan evolves as the auditor learns more during the audit. A confuses the two. C reverses the sequence. D is incorrect — all audits require planning.
Question 23
What are the benefits of planning an audit?
Select an option first.
Correct answer: B — Proper planning ensures appropriate attention to important areas, helps identify risks early, enables efficient use of resources, and facilitates supervision and review of the audit team
Explanation: B is correct. ISA 300: planning benefits include: focusing on high-risk areas, timely problem identification, efficient team management, proper resource allocation, and effective supervision. A, C and D are not benefits of planning.
Question 24
What is the purpose of 'analytical procedures' at the planning stage of an audit?
Select an option first.
Correct answer: B — To help the auditor understand the entity and its environment, identify areas of potential risk, and determine the nature and extent of further audit procedures
Explanation: B is correct. ISA 315: analytical procedures at planning are used as risk assessment procedures — identifying unusual fluctuations, unexpected relationships, or unexpected changes that may indicate risk of material misstatement. They guide where to focus audit effort. A would be substantive procedures. C and D mischaracterise the planning role.
Question 25
What is a 'significant risk' in auditing?
Select an option first.
Correct answer: B — An identified and assessed risk of material misstatement that, in the auditor's judgement, requires special audit consideration
Explanation: B is correct. ISA 315: significant risks are those requiring particular attention — often involving fraud, complex accounting judgements, unusual one-off transactions, or related-party matters. For significant risks, the auditor must understand and test the related controls, and design specific substantive procedures. A is too broad. C and D are too narrow.
Question 26
What factors should the auditor consider when assessing inherent risk at the assertion level?
Select an option first.
Correct answer: B — The complexity of the underlying transactions, the degree of subjectivity, the susceptibility of assets to misappropriation, and industry-specific risk factors
Explanation: B is correct. Inherent risk is assessed based on: complexity, estimation uncertainty, degree of subjectivity, susceptibility to fraud, prior-period misstatements, and external factors (economic conditions, industry risks). A and D focus on single factors. C is relevant but far from complete.
Question 27
What is 'professional scepticism' and why is it important in auditing?
Select an option first.
Correct answer: B — An attitude of critical assessment and questioning mind, being alert to conditions that may indicate possible misstatement, without assuming management is dishonest or honest a priori
Explanation: B is correct. Professional scepticism (ISA 200) involves neither accepting everything at face value nor assuming the worst — it requires critical evaluation of evidence and alertness to red flags. It does not mean suspecting everyone (A). C would be impractical. D is too narrow.
Question 28
What is 'professional judgement' in auditing?
Select an option first.
Correct answer: B — The application of relevant training, knowledge, and experience in making informed decisions about audit procedures, evidence evaluation, and conclusions
Explanation: B is correct. Professional judgement (ISA 200) is applied throughout the audit — in setting materiality, assessing risk, designing procedures, evaluating evidence, and forming the opinion. It is grounded in standards and experience, not personal preference. A and C are incorrect. D is not required.
Question 29
What is the purpose of the auditor understanding the entity and its environment?
Select an option first.
Correct answer: B — To identify and assess risks of material misstatement at the financial statement and assertion level, enabling the design of appropriate audit responses
Explanation: B is correct. ISA 315: understanding the entity (business, industry, regulatory environment, internal controls, accounting policies) allows the auditor to identify where misstatements are most likely to occur and to design targeted procedures. A, C and D are not the primary purpose.
Question 30
What are 'financial statement assertions' and why do auditors use them?
Select an option first.
Correct answer: B — Representations embodied in financial statements by management — they are used by auditors as a framework to identify what could go wrong (the risk) and to design procedures testing whether those representations are valid
Explanation: B is correct. Assertions (ISA 315) cover: completeness, occurrence/existence, accuracy/valuation, cut-off, classification, and rights/obligations. Each assertion represents a potential type of misstatement. Audit procedures are designed to test specific assertions. A, C and D mischaracterise assertions.
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