QB Chapter 1: Concept of and need for assurance

Question 1

Which three of the following are key elements of a general assurance engagement?
A A user
B A subject matter
C Suitable criteria
D An assurance file

Answer 1

1 A,B,C
A key element of an assurance engagement is sufficient appropriate evidence, but is
not generally mandatory that this evidence is recorded in an assurance file. (It is
mandatory to record audit evidence, however.)

Question 2

2 Which three of the following describe aspects of the expectations gap with respect to the
external audit?
A Users do not understand the meaning of the audit opinion
B Users are not aware of the limitations of the audit process
C Users do not appreciate that reasonable assurance is a low level of assurance
D Users do not understand what the audit process involves

Answer 2

2 A,B,D
Reasonable assurance is a high, but not absolute, level of assurance. The other options
available represent various aspects of the expectations gap which is the gap between
what the assurance provider understands he is doing and what the user of the
information believes he is doing

Question 3

3 Which one of the following qualifications is required for individuals working on audits in the
UK?
A University degree
B Professional qualification
C Membership of a recognised supervisory body
D Employment by a firm controlled by qualified persons

Answer 3

3 D Employment by a firm controlled by qualified persons. Membership of a recognised
supervisory body cannot be obtained until exams have been passed, but provided that
the person is employed by a qualifying person/firm, work can be carried out on audits.

Question 4

4 Which two of the following are limitations of the provision of assurance?
A Assurance work is carried out by people independent of the entity
B Sampling is used in assurance work
C Client systems have inherent limitations
D Unqualified staff may be used on assurance engagements

Answer 4

4 B,C The answer is not option A as the fact that assurance work is carried out by
independent people is a strength of assurance provision. Option D is also incorrect as
the use of unqualified staff increases the detection risk of the auditor as opposed to
being an inherent limitation of the provision of assurance. Work carried out by less
qualified staff should always be supervised, directed and reviewed by more senior
personnel.

Question 5

5 In any assurance engagement there are three parties involved: the responsible party, the
practitioner and the user.
In respect of given subject matter state which party:
determines the suitable criteria?
A User
B Practitioner
C Responsible party
provides an opinion on whether the subject matter complies with the criteria?
D User
E Practitioner
F Responsible party

Answer 5

5 C,E It is the responsible party who will determine the suitable criteria (in response to the
obligations it has) against which the practitioner will test the subject matter and on
which the practitioner will report to the users.
It is the practitioner who will provide the opinion on whether the subject matter
complies with the criteria after the evidence has been gathered and evaluated
accordingly. The opinion prepared will be issued to the user.

Question 6

6 Which one of the following statements best describes the evidence obtained and the
opinion given in a reasonable assurance engagement?
A Sufficient appropriate evidence and a negatively worded opinion
B Sufficient appropriate evidence and a positively worded opinion
C A lower level of evidence and a negatively worded opinion
D A lower level of evidence and a positively worded opinion

Answer 6

6 B Sufficient appropriate audit evidence is gathered and a positively worded opinion
issued in a reasonable assurance engagement. A lower level of evidence coupled with
a negatively worded opinion applies to a limited assurance engagement.

Question 7

7 For each of the following statements, select whether they are true or false.
A statutory audit gives reasonable assurance that the financial statements give a true and
fair view.
A True
B False
A negative assurance conclusion gives a limited level of assurance.
C True
D False
Reasonable assurance is absolute assurance of the correctness of the subject matter.
E True
F False

Answer 7

7 A,C,F
Whereas the statutory audit provides reasonable assurance through a positively
worded assurance conclusion, in a review engagement, limited assurance is provided
with the issue of the negatively worded assurance conclusion. This can be seen in the
wording of the two conclusions. The positively worded assurance conclusion includes
wording ‘the financial statements give a true and fair view’, whereas the negatively
worded assurance conclusion includes the wording ‘nothing has come to our
attention’, emphasising the limited nature of the assignment.
Reasonable assurance is high assurance provided on the truth and fairness of the
subject matter as opposed to absolute assurance of the correctness of the subject
matter.

Question 8

8 Jones LLP is the external auditor of Blue plc, a listed company. The directors of Blue plc
have requested that Jones LLP carry out a review engagement assessing the effectiveness
of its corporate governance policies against the UK Corporate Governance Code.
For the above review engagement, select which part of the engagement description
constitutes the subject matter, which describes the suitable criteria and which party is the
responsible party.
The subject matter
A Blue plc’s corporate governance policies
B The UK Corporate Governance Code
The suitable criteria
C Blue plc’s corporate governance policies
D The UK Corporate Governance Code
The responsible party
E Jones LLP
F The directors of Blue plc

Answer 8

8 A,D,F
The subject matter under examination are the company’s corporate governance
policies. These policies are to be assessed against the UK Corporate Governance
Code, which is the suitable criteria. The responsible party is Blue plc, the party
commissioning the report, who has the responsibility to apply the UK Corporate
Governance Code. Jones LLP is the practitioner, responsible for gathering the
appropriate evidence and issuing an appropriate opinion.

Question 9

9 For each of the following statements, select whether they are true or false in respect of
suitable criteria used in an assurance engagement.
The criteria for all assurance engagements will be the same.
A True
B False
Suitable criteria can only be identified for assurance engagements relating to financial
statements.
C True
D False
Relevant criteria for assurance engagements relating to financial statements are likely to be
accounting standards.
E True
F False

Answer 9

9 B,D,E
Criteria used will depend on the type of engagement conducted. Suitable criteria
should be available for other engagements eg, health and safety can be measured
against health and safety legislation.

Question 10

10 There are two types of assurance engagement: reasonable assurance engagements and
limited assurance engagements. There are also two types of assurance conclusion: positive
and negative.
For each type of assurance engagement, select the appropriate conclusion given.
Reasonable assurance
A Positive form of words
B Negative form of words
Limited assurance
C Positive form of words
D Negative form of words

Answer 10

10 A,D Reasonable assurance engagements include the statutory audit. The auditor’s report is
phrased using a positive form of words but does not give absolute assurance. Limited
assurance indicates that nothing has come to light which would cast doubt on the
subject matter being reviewed, and is expressed using a negative form of words.

Question 11

1 For each of the following statements relating to the provisions of the Companies Act 2006,
select whether they are true or false.
An individual or firm is eligible for appointment as statutory auditor if the individual or firm
is a member of a recognised supervisory body and is eligible for appointment under the
rules of that body.
A True
B False
A person may not act as a statutory auditor if that person is an officer or employee of the audit
client.
C True
D False

Answer 11

1 A,C As per Companies Act, 2006, a statutory auditor must be a member of a recognised
supervisory body and an officer or employee of the client is ineligible as auditor

Question 12

12 Which one of the following best describes the concept of assurance?
Assurance refers to:
A an assurance firm’s high level of satisfaction as to the reliability of an assertion being
made by one party for the use of another party
B an assurance firm’s satisfaction as to the reliability of an assertion being made by one
party for the use of another party
C a user’s satisfaction as to the reliability of an assertion being made by another party
D an assurance firm’s limited level of satisfaction as to the reliability of an assertion being
made by one party for the use of another party LO 1

Answer 12

2 B Assurance refers to an assurance firm’s satisfaction as to the reliability of an assertion
being made by one party for the use of another party. This assurance is then expressed
in an assurance report with a negative or positive conclusion given as appropriate to
that particular engagement. SAMPLE PAPE

Question 13

13 Which three of the following are benefits of an assurance report on financial information?
An assurance report:
A enhances the credibility of the information being reported on
B reduces the risk of management bias in the information being reported on
C attests to the correctness of the information being reported on
D draws the attention of the user to deficiencies in the information being reported on

Answer 13

13 A,B,D
An assurance report does not ‘attest(s) to the correctness of the information being
reported upon’. Even a reasonable assurance engagement (which gives more
assurance than a limited assurance engagement) does not provide a guarantee that
the information being reported on is correct. Assurance can never be absolute as this
statement implies. SAMPLE PAPE

Question 14

14 In any assurance engagement there are three parties involved: the responsible party, the
practitioner and the user.
For each of the following select which party:
prepares the subject matter?
A Responsible party
B Practitioner
C User
gathers evidence on the subject matter?
D Responsible party
E Practitioner
F Use

Answer 14

14 A,E It is the responsible party that prepares the subject matter and the practitioner who is
responsible for gathering evidence. The user is the party who receives the final report.
SAMPLE PAPER

Question 15

5 The following is an extract from an independent accountant’s unmodified report on a profit
forecast:
‘Based on our examination of the evidence supporting the assumptions, nothing has come
to our attention which causes us to believe that these assumptions do not provide a
reasonable basis for the forecast.’
Which one of the following best describes the type of assurance provided by this
statement?
A Positive assurance expressed negatively
B Negative assurance expressed positively
C High level of assurance expressed negatively
D Limited level of assurance expressed negatively

Answer 15

5 D There are two types of conclusion which can be given: a conclusion expressed in
positive terms and a conclusion expressed in negative terms. A conclusion expressed
in negative terms is indicated by the phrase ‘nothing has come to our attention’ which
indicates the restricted work carried out and hence the fact that the assurance is
limited, as opposed to reasonable. Hence this type of assurance is limited level of
assurance expressed negatively.

Question 16

16 In the context of a statutory audit which three of the following are examples of the
expectation gap?
The belief that:
A the auditor’s report certifies the financial statements as correct
B the auditor’s principal duty is to detect fraud
C the auditor is employed by the directors
D the auditor checks all transactions

Answer 16

16 A,B,D
The expectation gap is the gap between what users of financial statements believe the
auditor does and what the auditor actually does. The following three are common
manifestations of the expectation gap:
 the auditor’s report certifies the financial statements as correct
 the auditor’s principal duty is to detect fraud
 the auditor checks all transactions
The belief that the auditor is employed by the directors is a common misconception
but not a manifestation of the expectation gap. (The company employs the auditor,
who is appointed by the shareholders in a general meeting.) SAMPLE PAPER

Question 17

17 The level of assurance provided by an assurance engagement will depend on the type of
engagement.
For each of the following examples, select the level of assurance which would be given.
Statutory audit
A Absolute
B Reasonable
Review of financial information
C Reasonable
D Limited
Report on profit and cash flow forecasts
E Reasonable
F Limited

Answer 17

17 B,D,F
A statutory audit provides reasonable assurance, which reflects the comprehensiveness
of the audit procedures carried out. No assurance engagement, not even a statutory
audit, can give absolute assurance.
A review of financial information gives limited assurance, which is a lower level of
assurance than a statutory audit. Its conclusion would be worded negatively.
A report on profit and cash flow forecasts gives limited assurance. Forecasts are by
nature about uncertain future events, and so cannot be made with enough certainty to
give a ‘reasonable’ level of assurance. SAMPLE PAPER

Question 18

18 Which two of the following factors would render a person ineligible to be a company
auditor, in line with the Companies Act 2006?
A He/she is a partner in a firm of auditors regulated by an RSB
B His/her wife/husband is an officer/employee of the company
C He/she is an officer/employee of a directly connected company
D He/she does not hold an appropriate qualification, although they do work for a firm
controlled by qualified persons

Answer 18

18 B,C
An officer/employee of the company cannot act as auditor of the same company as
they would not be independent of it.
If the individual’s wife/husband is an officer/employee of the company, then they
cannot audit that company as they too would not be independent of it.
If the person is a partner in a firm of auditors regulated by an RSB then this is a good
thing as it provides assurance that they are appropriately trained and qualified.
It is acceptable for an individual, who is not themselves qualified, to act as auditor
provided that they are in a firm controlled by qualified persons.

Question 19

19 The Companies Act 2006 requires all companies to be audited, but allows small companies
an exemption from this requirement where they meet certain criteria.
Small Ltd has an annual turnover of £10 million, total assets of £5.1 million, and
101 employees.
Assuming no special circumstances exist, is Small Ltd required to have an audit in the UK?
A Yes
B No
Tiny Ltd has an annual turnover of £15 million, total assets of £5.2 million, and
99 employees.
Assuming no special circumstances exist, is Tiny Ltd required to have an audit in the UK?
C Yes
D No
Little Ltd has an annual turnover of £5 million, total assets of £4.9 million, and
45 employees.
Assuming no special circumstances exist, is Little Ltd required to have an audit in the UK?
E Yes
F No

Answer 19

19 B,C,F
Small Ltd meets the requirements of a small company in relation to turnover and total
assets (it has no more than £5.1 million total assets), which is the two out of three
required for the company to be exempted from having an audit even though it has
more than 50 employees.
Tiny Ltd does not meet any of the requirements to be a small company, and must have
an audit.
Little Ltd meets all three of the requirements, and is therefore exempted from having
an audit.