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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 61
What is the 'spectrum of inherent risk' introduced in ISA 315 Revised?
Select an option first.
Correct answer: B — A conceptual model recognising that inherent risk exists on a continuum rather than being simply high or low — enabling more granular risk assessment and targeted responses
Explanation: B is correct. ISA 315 (Revised) replaced binary 'higher/lower' with a spectrum — risks near the lower end need less attention; those at the higher end (significant risks) need more. This encourages nuanced, tailored audit responses. A, C and D are incorrect.
Question 62
What is 'business risk' and how does it relate to audit risk?
Select an option first.
Correct answer: B — Business risk is the risk the entity fails to achieve its objectives; audit risk is the risk the auditor expresses a wrong opinion — high business risk may create audit risk if it motivates management to manipulate figures
Explanation: B is correct. Business risk (strategy, operations, compliance) is the entity's concern. However, high business risk can translate into heightened inherent risk — financial pressure may incentivise manipulation; operational failures may cause unrecorded losses. A and D conflate concepts. C is incorrect.
Question 63
What is 'preliminary analytical review' at the planning stage?
Select an option first.
Correct answer: B — High-level comparison of draft figures against prior year, budget, and industry data to identify unexpected changes that may indicate areas of higher risk requiring special attention
Explanation: B is correct. Preliminary analytical review at planning is a risk assessment tool — comparing year-on-year changes, computing gross margin, comparing to budget. Unexpected fluctuations signal areas for further investigation. It guides where to focus audit effort. A and C describe other stages. D is management activity.
Question 64
What is 'journal entry testing' and why is it required for fraud risk?
Select an option first.
Correct answer: B — A procedure required by ISA 240 to address management override — testing unusual or inappropriate journal entries (especially at period-end) that may have been used to manipulate financial results
Explanation: B is correct. ISA 240 presumes management override is a significant risk. Journal entries can be used to manipulate results — posting false revenues, suppressing expenses, smoothing income. The auditor identifies criteria for unusual journals and tests a targeted sample. A is authorisation testing. C and D are too broad.
Question 65
What is a 'significant accounting estimate' and why is it high risk?
Select an option first.
Correct answer: B — A measurement requiring management judgement about uncertain future outcomes — susceptible to both honest error and intentional bias, making it one of the highest-risk areas in any audit
Explanation: B is correct. ISA 540: estimates (impairment, provisions, fair values, pension liabilities) involve assumptions about the future. They are high risk because there is no single correct answer, the range of acceptable outcomes may be wide, and management may bias estimates to meet targets. A and D are too narrow. C is a symptom, not the definition.
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Question 66
What is 'stratified sampling' in audit testing?
Select an option first.
Correct answer: B — Dividing a population into subgroups with similar characteristics, then sampling separately from each — allowing greater emphasis on higher-value or higher-risk items while achieving complete population coverage
Explanation: B is correct. Stratification improves sampling efficiency — e.g., dividing receivables into large balances tested at a higher rate and small balances at lower rate. This ensures material items are covered without testing excessive numbers of trivial items. A, C and D are not stratification.
Question 67
What is 'monetary unit sampling' (MUS) and what is its primary advantage?
Select an option first.
Correct answer: B — A statistical sampling technique where each currency unit is a sampling unit — larger monetary values have a proportionally higher chance of selection, automatically directing testing toward higher-value items without separate stratification
Explanation: B is correct. MUS gives each monetary unit an equal selection probability — a transaction of £10,000 is 100 times more likely to be selected than a £100 transaction. This is particularly effective for testing overstatement of assets. A, C and D are incorrect.
Question 68
What is 'haphazard sampling' and is it acceptable for audit purposes?
Select an option first.
Correct answer: B — Selection without a structured method but without conscious bias — acceptable in non-statistical sampling where the auditor believes the selection is sufficiently representative
Explanation: B is correct. Haphazard sampling is an informal non-statistical technique — the auditor picks items without following a rigid system but consciously avoids bias. It is less rigorous than systematic or random sampling but is accepted by ISA 530 for non-statistical approaches. A is random sampling. C is targeted selection (not sampling). D is incorrect.
Question 69
What is a 'high inherent risk assertion' and how does the auditor respond?
Select an option first.
Correct answer: B — An assertion where the auditor judges that misstatement is more likely given the nature of the account (e.g., cash, complex estimates, inventory susceptible to theft) — requiring more targeted, extensive, or year-end substantive procedures
Explanation: B is correct. High inherent risk assertions require greater audit attention. Responses: perform more substantive procedures at year-end (rather than interim), use more experienced staff, increase sample sizes, and apply less reliance on analytical procedures. A and D are other risk considerations. C is not the definition.
Question 70
What is the 'audit risk model' and what does it show?
Select an option first.
Correct answer: B — Audit Risk = Risk of Material Misstatement (inherent risk × control risk) × Detection Risk — showing how the risk of an incorrect audit opinion depends on the risk of misstatements existing and the risk of the auditor failing to find them
Explanation: B is correct. AR = RMM × DR. The auditor cannot control IR or CR (both are characteristics of the client and its controls). The auditor can only control DR — by adjusting the nature, timing, and extent of audit procedures. High RMM → must set low DR → more/better procedures. A, C and D misuse the model.
Question 71
What is the 'risk of material misstatement' (RMM) and what two sub-components make it up?
Select an option first.
Correct answer: B — The combined risk that a misstatement exists in the financial statements before the auditor begins testing — comprising inherent risk (natural susceptibility to misstatement) and control risk (the entity's controls may not catch it)
Explanation: B is correct. RMM = Inherent Risk × Control Risk. Both IR and CR are characteristics of the entity and its environment — they exist regardless of the audit. The auditor assesses them to determine how much audit work is needed (i.e., how low to set DR). A, C and D mischaracterise RMM.
Question 72
What is 'systems-based auditing' and what is its advantage?
Select an option first.
Correct answer: B — An approach where the auditor first understands and tests the client's internal control system — if controls are effective, substantive testing can be reduced, making the audit more efficient
Explanation: B is correct. Systems-based auditing starts with understanding and testing controls. If controls are effective (low CR), DR can be set higher → less substantive testing needed. This is efficient for entities with strong, well-documented controls. A and C mischaracterise the method. D is incorrect — any client with controls can use this approach.
Question 73
What is a 'walkthrough' and why is it more than just reviewing documentation?
Select an option first.
Correct answer: B — Tracing a single transaction from initiation through the entire accounting system to the financial statements — confirming the auditor's documented understanding of how the system works and identifying where controls actually operate
Explanation: B is correct. A walkthrough (ISA 315) confirms the system works as documented — the auditor physically follows one transaction, verifying controls exist at each described step. Simply reading process documentation (A) or relying on management's descriptions is insufficient confirmation. C and D are different procedures.
Question 74
What does 'tolerable misstatement' mean in the context of audit sampling?
Select an option first.
Correct answer: B — The maximum monetary error in a population that the auditor is willing to accept before concluding that the audit objective has not been achieved — it is set at or below performance materiality
Explanation: B is correct. Tolerable misstatement (ISA 530) guides sample size — a lower tolerable misstatement requires a larger sample. It is set at or below performance materiality to ensure that sampling risk does not push total errors above overall materiality. A, C and D mischaracterise the concept.
Question 75
What is an 'audit completion checklist' and what purpose does it serve?
Select an option first.
Correct answer: B — A structured list of items the audit team reviews before finalising the audit report — ensuring that all required procedures have been completed, all outstanding matters resolved, and the working papers are complete
Explanation: B is correct. The completion checklist ensures thoroughness before sign-off: all areas planned have been addressed, unadjusted errors have been evaluated, going concern has been assessed, subsequent events reviewed, and management representations obtained. A, C and D are not the purpose of a completion checklist.
Question 76
What is the 'audit cycle' and why do auditors refer to prior year working papers?
Select an option first.
Correct answer: B — The ongoing process of planning, executing, and completing audits year after year — prior year working papers provide: risk indicators, comparative figures, audit approach history, known issues, and management letter points to guide the current year audit
Explanation: B is correct. Prior year files are essential starting points: they identify known issues, prior year errors, audit approach that was effective, and misstatements from the prior year that inform current year risk assessment. The auditor carries forward and updates permanent file information (entity understanding) and refers to last year's procedures when planning current year work. A, C and D are incorrect.
Question 77
What is 'permanent file' information and how does it differ from the 'current year file'?
Select an option first.
Correct answer: B — Long-term information about the client that remains relevant across multiple audits — such as the entity's constitution, key contracts, history of control weaknesses, and regulatory framework. Current year file contains evidence specific to the year being audited
Explanation: B is correct. Permanent file: entity background, legal structure, key agreements, history of significant accounting policies, and prior year issues. Current year file: specific to the period under audit — planning documents, risk assessments, test results, and the final opinion. Together they form the complete audit documentation. A, C and D are incorrect.
Question 78
What is 'disaggregation' in data analytics for audit purposes?
Select an option first.
Correct answer: B — Breaking down aggregate financial data into individual transactions, categories, or components — enabling more granular analysis, identification of patterns, and anomaly detection than is possible at the aggregate level
Explanation: B is correct. Disaggregation is a key principle in data analytics — instead of testing the total payroll figure, the auditor analyses individual payments; instead of testing total revenue, the auditor analyses individual sales transactions by customer, product, date. This enables detection of unusual items invisible at the aggregate level. A, C and D are incorrect.
Question 79
What is 'significant risk' at the assertion level and how does it differ from other assessed risks?
Select an option first.
Correct answer: B — An identified risk of material misstatement that, in the auditor's professional judgement, requires special audit consideration — at the assertion level, it affects specific accounts or disclosures; it requires the auditor to understand relevant controls and design specific substantive procedures to address it
Explanation: B is correct. ISA 315: significant risks at assertion level (e.g., revenue recognition, management bias in estimates, fraud risks) require specific attention beyond routine procedures. The auditor must: (1) understand related controls; (2) test those controls if relying on them; (3) design tailored substantive procedures. Standard procedures may be insufficient for significant risks. A and D are too broad. C is too narrow.
Question 80
What is an 'assurance engagement on prospective financial information' and what challenges does it present?
Select an option first.
Correct answer: B — An assurance engagement on financial projections or forecasts — challenging because: the subject matter is inherently uncertain (future events), there are no historical benchmarks to compare against, and the assurance conclusion is inherently qualified by the uncertainty of the future
Explanation: B is correct. Assurance on prospective information (ISA 3400 or similar standards): the practitioner can only provide limited assurance that the assumptions are reasonable and the projections are properly prepared on that basis — not that the projections will actually be achieved. This fundamental uncertainty limits the level and nature of assurance possible. A, C and D are incorrect.
Question 81
What is the 'concept of sufficient appropriate evidence' applied to digital data?
Select an option first.
Correct answer: B — Digital evidence must still meet the sufficiency and appropriateness criteria — however, appropriateness may be affected by: the reliability of the IT environment that generated the data (GITCs must be strong), the susceptibility of electronic data to manipulation, and whether the data source is internal or external
Explanation: B is correct. ISA 500 reliability principles apply to digital evidence: external digital confirmations (direct from bank systems) are more reliable than internally generated data. The reliability of system-generated data depends entirely on the strength of GITCs — if access controls are weak, data may have been manipulated. The auditor must assess the IT environment's reliability before relying on digital evidence. A, C and D are incorrect.
Question 82
What is 'risk-based auditing' and why is it the modern approach to planning?
Select an option first.
Correct answer: B — An approach where audit resources are directed toward areas of highest assessed risk of material misstatement — allocating more testing to high-risk areas and less to low-risk areas, making the audit more efficient and effective
Explanation: B is correct. Risk-based auditing replaced the old 'tick and bash' (test everything) approach. By identifying and focusing on where misstatements are most likely (high inherent or control risk areas), the auditor provides better assurance more efficiently. This approach drives the entire audit process: risk assessment → risk response → evaluation. A, C and D are too narrow or incorrect.
Question 83
What is 'block selection' in audit sampling and when should it be avoided?
Select an option first.
Correct answer: B — Selecting a continuous block of items (e.g., all invoices in one month) — it should be avoided as the primary sampling method because items within a block share similar characteristics, making the sample unrepresentative of the whole population
Explanation: B is correct. Block selection lacks representativeness — a block from one month may share seasonal, economic, or operational characteristics not present in other periods. For most audit sampling, random or systematic selection is preferred to ensure the sample represents the entire population. A, C and D are incorrect.
Question 84
What is 'negative assurance' and provide an example of the wording?
Select an option first.
Correct answer: B — A conclusion expressed in negative form used in review engagements: 'Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not prepared, in all material respects, in accordance with [applicable framework]'
Explanation: B is correct. Negative assurance is characteristic of limited assurance/review engagements. The conclusion states what has NOT been found rather than positively asserting what IS true. This reflects the lower level of evidence gathered in a review compared to an audit. A, C and D mischaracterise negative assurance.
Question 85
What is the difference between 'engagement acceptance' and 'continuance' decisions?
Select an option first.
Correct answer: B — Acceptance is the decision to take on a new audit engagement (first time); continuance is the annual decision whether to continue with an existing client — both require evaluation of client integrity, the firm's ability to serve the client competently, and ethical requirements
Explanation: B is correct. Both require similar assessments but differ in context: acceptance involves no prior relationship (more information needed); continuance leverages knowledge from prior years but must be re-evaluated annually, considering new information (changes in client management, new risks, ethical issues, fee disputes). A, C and D are incorrect.
Question 86
What is a 'forensic audit' and how does it differ from a statutory audit?
Select an option first.
Correct answer: B — A focused investigation audit commissioned to investigate specific allegations — such as suspected fraud, financial irregularities, or legal disputes — using forensic techniques, producing evidence suitable for legal proceedings. It differs from a statutory audit in scope, purpose, and the legal standard of evidence required
Explanation: B is correct. Forensic audits: specific purpose (investigate an allegation), adversarial context (results may be used in court), higher evidence standard (chain of custody, admissibility), and unrestricted scope (follow the evidence). Statutory audits: general purpose, standard evidence requirements, specific year-end scope. A, C and D are incorrect.
Question 87
What is 'audit efficiency' versus 'audit effectiveness' and why must both be achieved?
Select an option first.
Correct answer: B — Efficiency means achieving audit objectives with minimum resource use; effectiveness means achieving the right level of assurance. Both must be achieved: an inefficient audit may be effective but unprofitable; an efficient but ineffective audit provides insufficient assurance. Professional standards require effectiveness — clients and economics require efficiency
Explanation: B is correct. The tension between efficiency and effectiveness is a constant challenge. Cutting corners (pursuing efficiency at the cost of effectiveness) risks an inadequate audit and potential liability. Over-auditing (excessive testing beyond what is needed) satisfies effectiveness but is inefficient and commercially unsustainable. Professional standards set the minimum effectiveness threshold. A, C and D are incorrect.
Question 88
What is an 'agreed engagement timeline' and why does it matter to audit quality?
Select an option first.
Correct answer: B — A jointly agreed schedule between the audit team and client specifying key dates — including when documentation will be provided, the inventory count date, draft accounts date, completion meetings, and the report signing date. Adequate timeline supports quality by giving the auditor sufficient time to properly plan and execute procedures
Explanation: B is correct. A realistic timeline is essential for audit quality — insufficient time forces shortcuts. Agreeing timing upfront ensures: management understands deadlines for providing information, the team can be properly resourced, sufficient time exists for review and quality checks, and the report is not signed without adequate evidence. A, C and D are incorrect.
Question 89
What is 'inherent risk at the financial statement level' and how does the auditor respond?
Select an option first.
Correct answer: B — Risk that affects the financial statements as a whole and potentially many assertions simultaneously — e.g., risk of management fraud, new senior management unfamiliar with accounting, or operating in a highly regulated unstable environment. The auditor responds with an overall approach: heightened scepticism, more experienced staff, year-end rather than interim testing, and reduced reliance on management explanations
Explanation: B is correct. Financial statement level risk is pervasive — it cannot be addressed by testing one account more. Overall responses (ISA 330): assign more experienced staff, increase supervision, be less predictable in testing, do more work at year-end, and generally apply more scepticism. A and D are too narrow. C is incorrect.
Question 90
What is 'the going concern assessment period' and why is it 12 months from the reporting date?
Select an option first.
Correct answer: B — The period during which the auditor evaluates whether the entity can continue as a going concern — ISA 570 specifies at least 12 months from the financial statement date, reflecting that management must look at least this far forward when preparing statements on the going concern basis
Explanation: B is correct. ISA 570 / IAS 1: the 12-month period from the reporting date is the minimum assessment period for going concern. If management's assessment period is shorter (e.g., management only look 6 months ahead), the auditor must ask them to extend the assessment. Events or conditions beyond 12 months may also be relevant but the formal minimum is 12 months from the reporting date. A, C and D are incorrect.
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