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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 181
What is 'physical security' of assets as a control activity and give three examples?
Select an option first.
Correct answer: B — Restricting physical access to assets to prevent theft or damage — examples: cash held in a locked safe accessible only to authorised personnel, server rooms with keycard-only access, warehouse with CCTV and security guards
Explanation: B is correct. Physical controls protect assets from misappropriation or damage. Examples: cash safes with limited access, locked stock rooms for high-value inventory, access-controlled server rooms, vehicles with immobilisers and GPS tracking, restricted access to blank cheques. These are preventive controls reducing the opportunity for theft. A, C and D are different control types.
Question 182
What is 'completeness of revenue' and how do control activities address it?
Select an option first.
Correct answer: B — Ensuring that all sales that should be recorded have been recorded — control activities include: pre-numbered sales invoices with sequence checks, automated matching of despatch notes to invoices, and system-generated reports highlighting unfulfilled orders
Explanation: B is correct. Completeness of revenue means nothing is omitted. Controls: sequential invoice numbering (gaps indicate missing invoices), automated GDN-to-invoice matching (every despatch generates an invoice), system reports on open orders, and management review of revenue trends. A, C and D address different assertions.
Question 183
What is a 'goods despatch note' (GDN) and its role in the sales system?
Select an option first.
Correct answer: B — A document prepared when goods are despatched to a customer, recording the items and quantities sent — used to verify that revenue is recorded when (and only when) goods have been delivered, supporting the occurrence and cut-off assertions
Explanation: B is correct. GDNs are central to revenue recognition under IFRS 15: revenue is recognised when the performance obligation (delivery) is satisfied. The GDN provides evidence of when goods were actually despatched. Matching GDNs to sales invoices confirms occurrence; testing GDNs around year-end confirms cut-off. A and C are purchase-system documents. D is not the primary role.
Question 184
What is 'exception testing' in audit sampling?
Select an option first.
Correct answer: B — A sampling approach where the auditor evaluates how many exceptions (control deviations or misstatements) are found in the sample — if the exception rate exceeds the tolerable deviation rate, the auditor concludes that the control is not operating effectively
Explanation: B is correct. In tests of controls, the auditor measures the deviation rate (exceptions/sample size). If actual deviations > tolerable deviation rate, the control cannot be relied upon. This affects the control risk assessment and may require more substantive testing. A and C mischaracterise exception testing. D is targeted selection, not exception testing.
Question 185
What is 'substantive testing of journal entries' and what does it detect?
Select an option first.
Correct answer: B — Examining manually posted journal entries — particularly those at period-end, of unusual amounts, or to unusual account combinations — to detect fictitious or fraudulent entries posted to manipulate financial results
Explanation: B is correct. ISA 240: journal entry testing is a key fraud detection procedure. Unusual journals: round numbers, postings near year-end, credits to revenue accounts, entries by senior staff to avoid normal controls, entries between unrelated accounts. These may indicate management override — the most serious fraud risk. A is too narrow (not all journals need testing). C and D are incorrect.
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Question 186
What are 'letter of comfort' and 'parent company guarantees' and how do they affect the audit?
Select an option first.
Correct answer: B — Letters where a parent company expresses support for a subsidiary or confirms it will not withdraw financial support — relevant to the going concern assessment because they provide evidence that the subsidiary can continue if it needs parental financial support
Explanation: B is correct. Letters of comfort and parent guarantees are relevant to: (1) going concern (subsidiary can rely on parent support); (2) disclosures (if the parent's obligation is a contingent liability). The auditor evaluates the parent's ability and willingness to honour the commitment (is it legally binding? Does the parent have resources?). A, C and D are incorrect.
Question 187
What is 'confirmation of lawyer's response' and why is it important for contingent liabilities?
Select an option first.
Correct answer: B — A direct written response from the entity's external legal advisers to the auditor, confirming: details of legal proceedings, management's assessment of likelihood of loss, and estimate of potential liability — providing external, independent evidence for contingent liability disclosures
Explanation: B is correct. ISA 501: the auditor obtains a 'lawyer's letter' to corroborate management's disclosures about legal proceedings. The lawyer confirms: (1) proceedings the lawyer is involved in; (2) their assessment of the likely outcome; (3) any estimate of financial exposure. This is more reliable than management's representations alone. A, C and D are incorrect.
Question 188
What is 'test data' as a CAAT and what does it test?
Select an option first.
Correct answer: B — Fictitious transactions created by the auditor and processed through the client's live or test system to check whether application controls operate as expected — e.g., testing that the system rejects a negative salary, a duplicate invoice, or a payment without an authorised purchase order
Explanation: B is correct. Test data (CAAT): the auditor creates transactions designed to test specific controls — valid data that should be accepted, invalid data that should be rejected. By observing how the system responds, the auditor gains evidence on whether programmed controls operate as designed. Limitation: must use a copy of the system or carefully reverse any live system effects. A and C are different techniques. D is IT backup.
Question 189
What is 'trade payables circularisation' and what assertion does it primarily test?
Select an option first.
Correct answer: B — Sending confirmation requests directly to suppliers asking them to confirm the outstanding balance as at the year-end — primarily testing completeness (are all liabilities recorded?) by identifying discrepancies between what the supplier believes is owed and the company's records
Explanation: B is correct. Unlike receivables (where existence is the primary risk — are debtors real?), for payables the primary risk is understatement (completeness — are all liabilities recorded?). The circularisation identifies suppliers who believe more is owed than the company has recorded — potential unrecorded liabilities. A is receivables circularisation. C and D are incorrect.
Question 190
What is 'cut-off testing for revenue' and why is it a high-risk area?
Select an option first.
Correct answer: B — Testing that sales are recorded in the correct accounting period — a high-risk area because management has an incentive to record revenue early (to meet targets) or defer it (for tax reasons), and because IFRS 15 requires complex judgements about when performance obligations are satisfied
Explanation: B is correct. Revenue cut-off is a presumed fraud risk (ISA 240). Procedures: select GDNs immediately before and after year-end and trace to revenue records; inspect credit notes after year-end (may indicate reversed sales); analytical review of revenue by month (unusual spikes at year-end?). A, C and D test different assertions.
Question 191
What is a 'management override of controls' in the context of payroll fraud?
Select an option first.
Correct answer: B — Senior management using their authority to bypass controls and create fictitious employees, approve inflated salaries for themselves, or divert payroll payments — bypassing segregation of duties and authorisation controls that would otherwise prevent lower-level employee fraud
Explanation: B is correct. Management override risk in payroll: senior managers can add fictitious employees, change pay rates, or divert payments to personal accounts because they have authority to override or approve controls. This is why ISA 240 requires specific procedures (e.g., testing journal entries, agreeing master file changes to authorisation) for management override. A, C and D are not management override.
Question 192
What is 'audit evidence from analytical procedures' and what makes it strong?
Select an option first.
Correct answer: B — Evidence derived from evaluating relationships between financial and non-financial data — strong analytical evidence requires: a reliable and independent data source, a predictable relationship between the variables, a precise expected value, and a small acceptable difference threshold
Explanation: B is correct. ISA 520: analytical procedures can be strong evidence where relationships are predictable and data is reliable. Example: expected payroll cost = headcount × average salary. If the relationship is tight and data is reliable, this can substitute for detailed transaction testing. Strength depends on: reliability of data, stability of the relationship, precision of the expectation, and what level of difference is acceptable. A, C and D are too restrictive.
Question 193
What is a 'perpetual inventory system' and what audit implications does it have?
Select an option first.
Correct answer: B — A continuous inventory recording system that updates inventory records with every transaction (receipt, despatch, write-off) — audit implications: the auditor may attend interim counts rather than only year-end, but must assess the reliability of the system by reviewing the frequency and size of count adjustments
Explanation: B is correct. ISA 501: if a perpetual inventory system is reliable (few and small count adjustments), the auditor can attend counts at any point during the year rather than only at year-end. However, if adjustments are frequent or large, the system is unreliable and a full year-end count is needed. A, C and D are incorrect.
Question 194
What is 'cash flow testing' for the going concern assessment?
Select an option first.
Correct answer: B — Evaluating management's cash flow forecasts for at least 12 months — assessing: the reasonableness of the assumptions (revenue growth, cost savings, refinancing), comparing forecasts to actual post-year-end results, and evaluating whether the forecast demonstrates sufficient liquidity to continue operations
Explanation: B is correct. ISA 570: cash flow forecasts are the primary tool for going concern assessment. The auditor: challenges the assumptions (are they achievable?), recalculates sensitivities (what if revenue is 10% lower?), compares to post-year-end actuals, reviews refinancing letters, and assesses whether the entity will have enough cash. A, C and D are incorrect.
Question 195
What are the key elements of an independent auditor's report under ISA 700?
Select an option first.
Correct answer: B — Title, addressee, opinion paragraph, basis for opinion, going concern section (if applicable), key audit matters (listed entities), management's responsibilities, auditor's responsibilities, signature, date, and auditor's address
Explanation: B is correct. ISA 700 specifies the structure of the auditor's report. Each element has a specific purpose: the title identifies independence; the opinion states the conclusion; the basis explains how the opinion was reached; responsibilities paragraphs address the expectation gap. A and C are too narrow. D is incorrect.
Question 196
What is an 'unmodified opinion' in an audit report?
Select an option first.
Correct answer: B — An opinion stating that the financial statements give a true and fair view in accordance with the applicable financial reporting framework — the standard clean opinion issued when no material misstatements are found
Explanation: B is correct. An unmodified opinion (ISA 700) is the most common outcome — it means the auditor found no material misstatements and is satisfied with the financial statements. A confuses 'unmodified' with 'uncommented.' C and D mischaracterise the term.
Question 197
What are the three types of modified audit opinion and when is each used?
Select an option first.
Correct answer: B — Qualified (material misstatement or material limitation), adverse (material and pervasive misstatement), and disclaimer (material and pervasive limitation on scope)
Explanation: B is correct. ISA 705: Qualified — except for one material matter (misstatement or limitation); Adverse — financial statements do NOT give a true and fair view (pervasive misstatement); Disclaimer — auditor CANNOT express an opinion (pervasive limitation on evidence gathering). A misstates the grounds. C and D are incorrect.
Question 198
What does 'pervasive' mean in the context of modified audit opinions?
Select an option first.
Correct answer: B — Effects that are not confined to specific elements — they either affect the financial statements as a whole or represent a substantial portion so that the effect is fundamental to users' understanding
Explanation: B is correct. ISA 705: pervasive effects are those that cannot be contained to a specific area — they affect the financial statements fundamentally. This is what elevates a modified opinion from qualified to adverse or disclaimer. A, C and D mischaracterise pervasive.
Question 199
A company has overstated inventory by an amount that is material but not pervasive. What audit opinion should be issued?
Select an option first.
Correct answer: B — Qualified opinion — 'except for' the material misstatement in inventory
Explanation: B is correct. ISA 705: material but not pervasive misstatement → qualified opinion. The opinion reads: 'In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section, the financial statements give a true and fair view...' The specific matter is described. A ignores the material misstatement. C and D apply to pervasive matters.
Question 200
When would an auditor issue a 'disclaimer of opinion'?
Select an option first.
Correct answer: B — When the auditor cannot obtain sufficient appropriate audit evidence and the possible effects of undetected misstatements are both material and pervasive — making it impossible to express any opinion
Explanation: B is correct. ISA 705: a disclaimer is issued for material and pervasive scope limitations. Examples: management refuses access to key records; management's confirmation cannot be verified and the matter is pervasive; the auditor is appointed after a critical inventory count. A describes an adverse opinion situation. C and D are incorrect.
Question 201
What is an 'emphasis of matter' paragraph in the audit report?
Select an option first.
Correct answer: B — A paragraph added by the auditor to draw users' attention to a matter already disclosed in the financial statements that is fundamental to their understanding — without modifying the opinion
Explanation: B is correct. ISA 706: emphasis of matter (EOM) draws attention to a disclosed matter without modifying the opinion. Examples: material uncertainty related to going concern (adequately disclosed), a significant subsequent event, early adoption of a new standard. A confuses EOM with a modification. C and D are different paragraphs.
Question 202
What is an 'other matter' paragraph in the audit report?
Select an option first.
Correct answer: B — A paragraph drawing attention to a matter not disclosed in the financial statements but relevant to users' understanding of the audit, the auditor's responsibilities, or the audit report
Explanation: B is correct. ISA 706: an other matter paragraph addresses matters not in the financial statements — e.g., reporting obligations under local law, restriction on distribution of the audit report, or noting that prior year accounts were audited by another firm. A, C and D are incorrect.
Question 203
What is the 'material uncertainty related to going concern' section in the audit report?
Select an option first.
Correct answer: B — A specific section added to an unmodified report when a material uncertainty about going concern exists and is adequately disclosed in the financial statements — drawing users' attention to the disclosure
Explanation: B is correct. ISA 570: if there is a material uncertainty about going concern but management has adequately disclosed it, the auditor issues an unmodified opinion but adds a 'Material Uncertainty Related to Going Concern' section. If disclosure is inadequate, the opinion is modified. A and C describe modification. D is too narrow.
Question 204
What are 'key audit matters' (KAMs) and in which reports are they required?
Select an option first.
Correct answer: B — The matters that, in the auditor's professional judgement, were of most significance in the audit — required in audit reports of listed entities and based on matters communicated to those charged with governance
Explanation: B is correct. ISA 701: KAMs are the most significant matters in the current period audit — selected from matters communicated to those charged with governance. Each KAM section describes: why it was significant, and how it was addressed in the audit. Mandatory for listed companies, encouraged for others. A, C and D mischaracterise KAMs.
Question 205
What is the 'expectation gap' and how can it be reduced?
Select an option first.
Correct answer: B — The difference between what stakeholders believe auditors do and their actual role — it can be reduced through better communication in audit reports (e.g., KAMs, clearer responsibilities sections) and public education about the nature of auditing
Explanation: B is correct. The expectation gap (public believing auditors guarantee solvency, detect all fraud, prepare accounts) is addressed by: expanded audit reports communicating what an audit is and is not, transparency through KAMs, and clear responsibilities sections differentiating management's and auditors' roles. A, C and D are unrelated.
Question 206
What are the principal threats to auditor independence?
Select an option first.
Correct answer: B — Self-interest, self-review, advocacy, familiarity, and intimidation threats
Explanation: B is correct. The IESBA Code identifies five threats to independence: (1) Self-interest (financial interest in client); (2) Self-review (reviewing own work); (3) Advocacy (promoting client's position); (4) Familiarity (too close a relationship); (5) Intimidation (pressure from client). These can reduce independence in fact or appearance. A, C and D are not independence threats.
Question 207
What is 'independence in appearance' and why does it matter?
Select an option first.
Correct answer: B — The avoidance of facts and circumstances that would lead a reasonable and informed third party to conclude that the auditor's independence has been compromised — even if the auditor is actually independent in fact
Explanation: B is correct. Independence in appearance (IESBA Code) is essential because auditing's value depends on stakeholder confidence. Even if an auditor is genuinely independent, if relationships or interests would make a reasonable observer doubt independence, trust in the audit is undermined. A, C and D mischaracterise the concept.
Question 208
What safeguards can reduce threats to auditor independence?
Select an option first.
Correct answer: B — Safeguards created by the profession (codes of ethics, standards), safeguards within the audit firm (rotation, quality review, independence policies), and client-level safeguards (audit committee oversight, authorisation policies)
Explanation: B is correct. The IESBA Code identifies safeguards at three levels: (1) profession-wide (regulation, standards, education); (2) firm-level (policies, rotation of personnel, consultation); (3) client-level (strong audit committee, governance mechanisms). A is too narrow. C and D are not safeguards.
Question 209
What is 'auditor rotation' and why is it considered a safeguard against familiarity threat?
Select an option first.
Correct answer: B — The requirement to change the engagement partner or audit firm after a defined period — reducing the risk that long-term relationships lead to the auditor becoming too sympathetic with management's views
Explanation: B is correct. Familiarity threat increases with the length of an audit relationship. Partner rotation (required after typically 5 years for listed companies) and firm rotation (required in some jurisdictions) address this. Rotation brings fresh perspectives and challenges assumptions developed over long relationships. A, C and D are not auditor rotation.
Question 210
What are 'non-audit services' and what threats to independence can they create?
Select an option first.
Correct answer: B — Services provided by the audit firm to an audit client other than the audit — such as tax compliance, accounting, IT consulting, or valuation — which can create self-review, advocacy, and management threat if the auditor reviews their own work or acts as management
Explanation: B is correct. Non-audit services (IESBA Code, ISA 620 for experts) create risks: self-review (auditing own tax or accounting work), management threat (making decisions for management), and advocacy (representing client in negotiations). Ethical rules require evaluation and mitigation of these threats. A, C and D are incorrect.
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