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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 121
What are 'substantive analytical procedures' and how do they differ from tests of detail?
Select an option first.
Correct answer: B — Procedures that evaluate financial information through analysis of relationships and comparisons — they provide evidence about plausible amounts when relationships are predictable and controls are reliable; tests of detail examine individual transactions or balances
Explanation: B is correct. Substantive analytical procedures (ISA 520) are most effective when: relationships are predictable, data is reliable, and precision is achievable. They are efficient for testing large populations. Tests of detail test individual items. The choice depends on risk assessment. A, C and D are too narrow.
Question 122
What are the key audit procedures for testing the existence and valuation of inventory?
Select an option first.
Correct answer: B — Attending the inventory count, tracing count results to the final inventory listing, verifying cost to purchase invoices, testing net realisable value, and reviewing the appropriateness of the cost allocation for work-in-progress
Explanation: B is correct. Inventory audit procedures address existence (count attendance, test-counts), completeness, valuation (cost vs NRV, cost allocation, cut-off), and rights (title to goods). A is a receivables procedure. C is additional evidence but not the primary procedure. D does not test inventory directly.
Question 123
What is a 'physical inventory count' and what is the auditor's role?
Select an option first.
Correct answer: B — The client's staff perform the count following written instructions; the auditor attends to observe the procedures, make test counts, and identify any issues with the count — gathering evidence for existence and completeness
Explanation: B is correct. ISA 501: the auditor attends (does not perform) the inventory count to: evaluate counting instructions, observe procedures, perform test counts (checking items exist and are complete), identify cut-off information, and assess the condition of inventory for NRV purposes. A overstates the auditor's role. C and D are incorrect.
Question 124
What is 'cut-off testing' for inventory and sales?
Select an option first.
Correct answer: B — Verifying that transactions near the period-end are recorded in the correct accounting period — e.g., checking goods received before the year-end are included in inventory and the related liability is recorded, and goods dispatched before year-end generate a sale in the correct period
Explanation: B is correct. Cut-off testing around the year-end prevents manipulation of figures — goods received before year-end but invoiced after should be in inventory/payables; goods dispatched before year-end generate revenue/receivables. It tests the cut-off assertion. A, C and D are unrelated.
Question 125
What substantive procedures would an auditor perform on non-current assets (property, plant and equipment)?
Select an option first.
Correct answer: B — Reviewing additions (agreeing costs to purchase documents, checking capitalisation policy), testing disposals (agreeing proceeds, verifying gain/loss), recalculating depreciation, verifying physical existence, and reviewing impairment indicators
Explanation: B is correct. NCA procedures cover all assertions: existence (physical verification, title documents), completeness (checking asset register vs ledger), valuation (depreciation recalculation, impairment review), accuracy (cost verified to invoices), and rights/obligations (ownership documents). A, C and D are too narrow.
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Question 126
What are the key substantive procedures for testing trade receivables?
Select an option first.
Correct answer: B — Circularisation of a sample of receivable balances to obtain external confirmation, testing subsequent receipts, reviewing the aged debt analysis, and evaluating the adequacy of the allowance for doubtful debts
Explanation: B is correct. Receivable procedures: external confirmation (existence, valuation), subsequent receipts (strongest evidence of collectability), aged debt review (identifies slow-moving/irrecoverable balances), allowance assessment (NRV valuation), and GDN to invoice cut-off. A provides limited evidence. C and D are too narrow.
Question 127
What are the key substantive procedures for testing trade payables?
Select an option first.
Correct answer: B — Obtaining a payables listing and casting it, reconciling supplier statements to ledger balances, reviewing after-date payments to identify unrecorded liabilities, and testing cut-off by examining goods received near year-end
Explanation: B is correct. Payables procedures focus mainly on completeness (are all liabilities recorded?): supplier statement reconciliations, after-date payments review, GRN cut-off testing, and unrecorded liabilities search. Existence is less of a concern — companies are more likely to understate than overstate payables. A, C and D are too narrow.
Question 128
What are 'provisions' and what are the key audit procedures for testing them?
Select an option first.
Correct answer: B — Liabilities of uncertain timing or amount — key procedures include confirming a present obligation exists at the year-end, assessing probability of outflow, reviewing the reasonableness of the estimate, and checking post-year-end events for confirmation
Explanation: B is correct. IAS 37 requires: present obligation (past event), probable outflow, reliable estimate. Audit procedures test these criteria: board minutes (decision made), legal advice (obligation confirmed), management estimate (reasonableness), post-year-end payments (confirms amount and existence). A, C and D mischaracterise provisions.
Question 129
What are the substantive procedures for testing bank balances?
Select an option first.
Correct answer: B — Obtaining a bank confirmation letter directly from the bank, agreeing the closing balance to year-end bank statements, reviewing and agreeing the bank reconciliation, and investigating any unusual items or significant timing differences
Explanation: B is correct. Bank procedures: bank letter (external confirmation — most reliable), reconciling bank confirmation to cash book balance, verifying bank reconciliation (outstanding items are reasonable), and investigating unusual items. A tests petty cash, not main bank balances. C is inefficient. D provides insufficient evidence.
Question 130
What is a 'bank reconciliation' and what control does it provide?
Select an option first.
Correct answer: B — A comparison of the company's cash book balance with the bank statement balance, identifying timing differences (unpresented cheques, outstanding lodgements) and errors — it is a detective control confirming the completeness and accuracy of cash records
Explanation: B is correct. A bank reconciliation is a key detective control — it identifies discrepancies between internal records (cash book) and external records (bank statement), such as timing differences, errors, or fraud (e.g., teeming and lading). Prepared regularly and reviewed independently, it is a powerful control. A, C and D are incorrect.
Question 131
What are the key audit procedures for testing payroll?
Select an option first.
Correct answer: B — Agreeing a sample of employees to HR records (existence), recalculating gross and net pay for a sample, tracing net pay to bank transfer listings, testing joiners and leavers for correct inclusion/removal, and verifying statutory deductions
Explanation: B is correct. Payroll procedures: existence testing (agree to HR records, employee files), accuracy (recalculate pay, deductions), occurrence (trace payment to bank), completeness (test joiners/leavers), and authorisation (pay rate changes authorised). A, C and D are too narrow or insufficient.
Question 132
What is the purpose of a 'management letter' (report to management) following an audit?
Select an option first.
Correct answer: B — To communicate internal control deficiencies identified during the audit to management and those charged with governance, along with recommendations for improvement
Explanation: B is correct. The management letter (or report on internal controls) communicates: deficiencies identified, their potential implications, and recommended remedies. It is separate from the audit report. ISA 265 requires written communication of significant deficiencies. A is the audit report. C and D are incorrect.
Question 133
What is a 'significant deficiency' in internal controls?
Select an option first.
Correct answer: B — A deficiency or combination of deficiencies in internal control that, in the auditor's professional judgement, is of sufficient importance to merit the attention of those charged with governance
Explanation: B is correct. ISA 265: significant deficiencies are the most serious control weaknesses — those requiring the attention of the board/audit committee. Not all deficiencies are significant. A is too broad. C and D go beyond the definition — a significant deficiency does not automatically prevent audit completion or cause modification.
Question 134
What is the role of internal audit and how does it differ from external audit?
Select an option first.
Correct answer: B — Internal audit is an in-house function providing assurance on risk management, control, and governance to management — external audit provides statutory assurance to shareholders on financial statements
Explanation: B is correct. Internal audit: reports to management/audit committee, covers risk, controls, governance, efficiency — adds value internally. External audit: independent of management, reports to shareholders, focuses on the truth and fairness of financial statements. A confuses functions. C is incorrect — external audit is more independent. D is not standard practice.
Question 135
Can the external auditor rely on the work of internal audit and under what conditions?
Select an option first.
Correct answer: B — Yes — but only if the internal audit function has sufficient objectivity, adequate technical competence, applies a systematic and disciplined approach, and the specific work is relevant and appropriate for external audit purposes
Explanation: B is correct. ISA 610: the external auditor evaluates: organisational status and objectivity of internal audit, competence (qualifications, experience), and application of systematic methodology. Even where internal audit is used, the external auditor maintains sole responsibility for the opinion. A is too absolute. C and D are incorrect.
Question 136
What is 'data analytics' in auditing and what are its benefits?
Select an option first.
Correct answer: B — The use of tools and technology to analyse large volumes of data — enabling the auditor to test complete populations rather than samples, identify anomalies, trends, and outliers that manual sampling might miss
Explanation: B is correct. Data analytics (increasingly central to the 2025–26 AA syllabus) allows auditors to: test 100% of transactions, identify duplicates, flag outliers, compare complete datasets, and perform more targeted testing. Benefits: increased efficiency, higher coverage, better risk identification. A, C and D are incorrect.
Question 137
What are 'application controls' examples relevant to the completeness of revenue?
Select an option first.
Correct answer: B — Pre-numbered sales invoices and automated sequence checking, automated matching of goods despatch notes to invoices, system rejection of duplicate invoice numbers, and automated updates of the sales ledger from the invoicing system
Explanation: B is correct. Completeness of revenue application controls prevent revenue being omitted: sequence checking (gaps in invoice sequences flagged), automated GDN-to-invoice matching (ensures all despatches are invoiced), duplicate rejection (prevents double invoicing in the wrong direction), and automated ledger updates. A, C and D address other control objectives.
Question 138
What is the difference between 'tests of detail' and 'substantive analytical procedures' as substantive procedures?
Select an option first.
Correct answer: B — Tests of detail examine specific individual transactions or balances (item by item); substantive analytical procedures evaluate relationships and plausible expectations across large amounts of data
Explanation: B is correct. Tests of detail are granular — vouching individual invoices, agreeing specific balances. Substantive analytical procedures are macro — comparing gross profit margin over multiple years, calculating expected payroll based on headcount × average salary. Both provide evidence; the choice depends on efficiency and risk. A, C and D are incorrect.
Question 139
What is a 'three-way match' in the purchase process and what control objective does it serve?
Select an option first.
Correct answer: B — Matching the purchase order (what was ordered), the goods received note (what was delivered), and the supplier invoice (what is being charged) — ensuring the company only pays for goods genuinely ordered and received at the agreed price
Explanation: B is correct. Three-way matching (PO, GRN, invoice) is a key preventive control ensuring: goods were authorised (PO), actually received (GRN), and correctly invoiced (invoice). It prevents payment for goods not ordered/received or at wrong prices. A, C and D describe other controls/procedures.
Question 140
What is a 'subsequent event' and how does it affect the audit?
Select an option first.
Correct answer: B — An event occurring between the financial statement date and the date of the auditor's report that may require adjustment or disclosure in the financial statements, or after the audit report is signed that may require action if the auditor becomes aware of it
Explanation: B is correct. ISA 560: adjusting events (conditions existing at year-end) require adjustment; non-adjusting events (conditions arising after year-end) may require disclosure. After the audit report is signed, the auditor has responsibilities if they become aware of facts that may have caused a different report. A and D are incorrect. C is a specific example.
Question 141
What procedures does the auditor perform to identify subsequent events?
Select an option first.
Correct answer: B — Reviewing board minutes after the year-end, enquiring of management about known events, reviewing management accounts for the post-year-end period, and reviewing any legal correspondence after the year-end
Explanation: B is correct. ISA 560: subsequent events procedures include: reviewing post-year-end board minutes, enquiring of management about material events, reviewing interim financial statements, reviewing legal correspondence, and following up any known matters. A would extend the audit unnecessarily. C is not required. D relies too heavily on management.
Question 142
What is 'revenue recognition' and why is it a significant audit risk?
Select an option first.
Correct answer: B — Determining when and how much revenue should be recognised in the financial statements — it is a significant risk because it involves judgement, is susceptible to manipulation by management to meet targets, and misstatement (premature or fictitious revenue) can have a material impact
Explanation: B is correct. ISA 240 identifies revenue recognition as a presumed fraud risk. Management may accelerate revenue recognition (e.g., recording sales before goods are despatched) or create fictitious sales. The auditor focuses on occurrence (did the sale happen?), cut-off (right period?), and measurement (correct amount?). A, C and D are too narrow.
Question 143
What are 'general IT controls' and why do they underpin all application controls?
Select an option first.
Correct answer: B — Controls over the IT environment as a whole — including logical access management, change management, IT operations, and data backup — that, if effective, mean application controls and system-generated data can be relied upon
Explanation: B is correct. GITCs are foundational. If access controls are poor, unauthorised changes to programs or data are possible. If change management is weak, unauthorised program changes may introduce errors. Weak GITCs undermine all system-generated evidence, requiring the auditor to extend substantive testing. A, C and D mischaracterise GITCs.
Question 144
What is an 'input control' and how does it prevent errors?
Select an option first.
Correct answer: B — A control validating data as it is entered into a system — examples include field format checks, range checks, mandatory field requirements, and reasonableness checks — preventing incorrect data from being processed
Explanation: B is correct. Input (application) controls catch errors at the point of entry: format checks (amount field must be numeric), range checks (hours worked cannot exceed 24 per day), mandatory fields (cost centre required), check digits (account number verified). They are preventive controls improving data quality. A, C and D are different controls.
Question 145
What is 'teeming and lading' fraud and how is it prevented?
Select an option first.
Correct answer: B — A fraud where an employee misappropriates a customer payment and covers it by applying a subsequent customer's payment to the earlier account — creating a rolling shortfall. Prevented by segregation of cash receipts and ledger posting, regular reconciliations, and independent review
Explanation: B is correct. Teeming and lading: Employee steals payment from Customer A; uses Customer B's payment to cover A's account; uses C's payment to cover B — and so on. Controls: segregation of duties (receipts and ledger separate), bank reconciliation, customer statements sent independently, surprise cash counts. A, C and D are different frauds.
Question 146
What is 'inventory count observation' and what does the auditor test?
Select an option first.
Correct answer: B — The auditor attends the client's count to observe procedures, perform test counts (tracing items from the count sheets to physical items and vice versa), gather cut-off information, and assess inventory condition for NRV purposes
Explanation: B is correct. ISA 501: auditor attends (observes) — does not perform — the count. Test counts: (1) from floor to count sheet (completeness); (2) from count sheet to floor (existence). Cut-off: note last GRN and GDN numbers before year-end. Condition: identify damaged/obsolete items for NRV assessment. A overstates the role. C and D are insufficient.
Question 147
What is 'audit evidence from management representations' and its limitations?
Select an option first.
Correct answer: B — Written statements from management confirming responsibilities and specific information — they are a required form of evidence but limited because they come from the same party being audited and must be corroborated for material matters
Explanation: B is correct. ISA 580: representations are required but least reliable standalone. For material assertions, corroboration is essential. Their value: acknowledging responsibilities, confirming completeness of disclosures, and matters only management knows. Refusing to provide them is a scope limitation. A and C overstate reliability. D is incorrect.
Question 148
What are the audit procedures for testing 'long-term contracts'?
Select an option first.
Correct answer: B — Verifying stage of completion, agreeing actual costs to supporting documentation, assessing estimates to completion, recalculating expected margins, and evaluating whether revenue recognised is appropriate under IFRS 15
Explanation: B is correct. Long-term contracts (IFRS 15) involve estimation of stage of completion and future costs. Procedures: verify costs incurred (invoices, timesheets), assess percentage completion method reasonableness, recalculate expected profit/loss, evaluate recognition timing, and review disclosure adequacy. A, C and D are too narrow.
Question 149
What is a 'loan covenant breach' and what are its audit implications?
Select an option first.
Correct answer: B — A breach of conditions attached to a bank loan — potentially allowing the bank to demand immediate repayment, which may trigger going concern concerns and require disclosure in the financial statements as a liability potentially becoming current
Explanation: B is correct. If a covenant is breached (e.g., interest cover falls below required ratio), the loan may become repayable on demand, reclassifying it as current. This affects liquidity, may trigger going concern procedures, and requires disclosure. The auditor recalculates all covenant ratios independently. A, C and D mischaracterise covenant breaches.
Question 150
What is 'cut-off testing' for purchases and why is it important?
Select an option first.
Correct answer: B — Verifying that purchases and related liabilities are recorded in the correct accounting period — ensuring that goods received before year-end create a liability in the period, and goods received after year-end are excluded
Explanation: B is correct. Purchase cut-off testing: select GRNs around the year-end and verify they are recorded in the correct period. Goods received before year-end → should be in inventory and payables. Goods received after year-end → should not be in current year inventory or payables. This tests the cut-off assertion. A, C and D are different tests.
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