QB Chapter 4: Process of assurance: evidence and reporting Flashcards
Which three of the following are procedures that could be used by assurance providers to
provide evidence relating to a balance in the financial statements?
A Walk-through procedure
B Test of control
C Test of detail
D Analytical procedure
B,C,D
A walk-through procedure does not provide evidence relating to a specific balance on
the financial statements, but is used instead to ensure that the systems operate as the
assurance provider believes that they do.
Which two of the following are valid comments about the quality of assurance evidence?
A Evidence from external sources is more reliable than evidence obtained from the
entity’s records.
B Evidence from internal sources is more reliable when related internal controls operate
effectively.
C Evidence from internal sources is more reliable than evidence created by the assurance
provider.
D Photocopies are more reliable than facsimiles.
A,B Option C and D are incorrect as evidence from internal sources is not more reliable
than evidence created by the assurance provider (in fact, the reverse is true).
Furthermore, the statement that photocopies are more reliable than facsimiles is not
true as the assurance provider should exercise professional caution with both.
Which three of the following are assertions used by the auditor about classes of transactions? A Occurrence B Existence C Completeness D Cut-off E Rights and obligations
A,C,D
Options B and E are incorrect as existence and rights and obligations would be used in
respect of a balance, not a class of transactions.
Which three of the following statements are valid?
A Positive (reasonable) assurance will be given on a statutory audit assignment.
B Positive (reasonable) assurance requires more rigorous work to be undertaken than
negative assurance does.
C Positive (reasonable) assurance will be given on a review assignment.
D Negative assurance is assurance given in the absence of any indications to the
contrary.
A,B,D
Option C is incorrect as positive (or reasonable) assurance will be given on an audit
assignment, whereas negative (or limited) assurance is given on a review assignment,
reflecting the limited procedures carried out.
Which two of the following describe manifestations of the expectations gap?
A Users blaming the auditors for a fraud discovered in a company subsequent to an audit
B Users discovering that the directors refuse to cooperate in providing the auditor with
the evidence he requests
C Shareholders approving the appointment of the auditor at an annual general meeting
D Users relying on the audited financial statements as a fair valuation of the company
A,D Directors refusing to cooperate with the auditor constitute an inability to obtain
sufficient appropriate audit evidence – the fact that users discover this has nothing to
do with the expectations gap. Shareholders approving the auditor’s appointment at a
general meeting is a legal obligation of the company.
The level of assurance given by an assurance engagement will depend on the type of engagement. For each of the following examples, select the level of assurance you would expect to be given. Statutory audit A Absolute B Reasonable C Limited Report on prospective financial information D Absolute E Reasonable F Limited Report on review of interim financial information G Absolute H Reasonable I Limited
B,F,I
It is only the statutory audit that provides reasonable assurance. The review
engagements provide limited assurance. None of the engagements provides absolute
assurance.
For each of the following situations, select the most appropriate approach which should be
used by the assurance firm in the given circumstances.
The audit of a client where controls have been assessed as deficient
A Tests of controls only
B Substantive procedures only
C A mix of tests of controls and substantive procedures
The audit of a client where controls have been assessed as strong
D Tests of controls only
E Substantive procedures only
F A mix of tests of controls and substantive procedures
B,F Option B is correct as where the controls have been assessed as deficient, this means
that reliance can not be put on these controls. Option F is correct as where controls
have been assessed as strong, this means that they can be relied upon. In this way,
tests of controls are carried out coupled with limited substantive procedures.
The following are types of test that might be carried out by an assurance provider. For each
example, select the financial statement assertion that is being tested.
Review of the financial statements using a Companies Act checklist
A Existence
B Completeness
C Classification
Tracing non-current assets which have been observed in use back to the non-current asset
register
D Existence
E Completeness
F Classification
C,E The Companies Act checklist ensures that all classification issues are addressed.
Tracing non-current assets observed back to the non-current asset register ensures that
this balance is recorded completely.
Which three of the following are assertions used by the auditor about account balances at the period end? A Existence B Accuracy, valuation and allocation C Cut-off D Completeness
A,B,D
Option C is incorrect because cut-off relates to classes of transactions (ISA (UK) 315:
para. A129).
For each of the following statements, select whether they are true or false in respect of
substantive procedures.
The auditor must carry out substantive procedures on all material items.
A True
B False
The auditor only carries out substantive procedures if the results of tests of controls are
inconclusive.
C True
D False
Substantive procedures include both analytical procedures and tests of details.
E True
F False
A,D,E
Option A is correct as material items must be tested with substantive procedures,
although the extent of these procedures will depend on whether reliance can be
placed on the related internal controls. Option D is correct as while results from tests of
controls may affect the extent of substantive procedures they will not eliminate the
need for them completely.
Two types of procedures used in gathering evidence are tests of controls and substantive
procedures.
For each of the following examples, select the type of procedure illustrated.
Observation of opening the post
A Test of control
B Substantive procedure
Calculation of the gross profit margin and comparison with that of the previous accounting
period
C Test of control
D Substantive procedure
Reviewing invoices paid for evidence of authorisation
E Test of control
F Substantive procedure
A,D,E
Observing the opening of the post is a test of control as it is the observation of a
control taking place. Calculation of the gross profit margin and comparison with that of
the previous accounting period is an analytical procedure (which is, in turn, a
substantive procedure). Reviewing for authorisation is also testing that a control has
been applied (option E)
An auditor’s report prepared in accordance with ISA (UK) 700, Forming an Opinion and
Reporting on Financial Statements expresses an opinion on a number of matters. Some of
these matters are required by the Companies Act 2006 to be reported on by exception
only.
Which two of the following are reported on by exception only?
A The financial statements have been prepared in accordance with the requirements of
the Companies Act 2006
B Adequate accounting records have been kept
C Directors’ remuneration has been disclosed correctly
D Information in the strategic report and the directors’ report is consistent with the
financial statements
B,C As per Companies Act 2006, ‘That adequate accounting records have been kept’ and
‘Directors’ remuneration has been disclosed correctly’ are reported on by exception
Two types of procedures used in gathering evidence are tests of controls and substantive
procedures.
For each of the following examples, select the type of procedure illustrated.
Observation of inventory counting at the year end
A Test of control
B Substantive procedure
Calculation of the quick ratio and comparison with that of the previous accounting period
C Test of control
D Substantive procedure
Inquiring into the operation of the purchases transaction cycle
E Test of control
F Substantive procedure
A,D,E
Observing inventory counting is a test of control as it is the observation of a control
taking place (ie, the year end inventory count).
Calculation of the quick ratio and comparison with that of the previous accounting
period is an analytical procedure (which is, in turn, a substantive procedure).
Inquiring into the systems used to process purchases is a test of control (option E)
The following are types of test that might be carried out by an assurance provider. For each
example, select the financial statement assertion that is being tested.
Tracing a sample of transactions selected from sales orders back to the nominal ledger
A Occurrence
B Completeness
C Classification
Reviewing the financial statements disclosure note for non-current assets, using a checklist
based on IFRS requirements
D Existence
E Completeness
F Valuation
B, E By selecting items from sales orders and tracing them back to the nominal ledger, the
auditor is beginning outside of the accounting system (with the sales orders), and then
testing whether these orders have been reflected in the accounts. The aim is therefore
to test whether all of the sales orders have been included in the accounts (it will be
discovered in the course of testing whether all of the orders resulted in sales). This is
therefore a test of whether the accounts are complete.
Reviewing the non-current assets disclosure note is not testing for existence or
classification, because no test is being performed here of the underlying assets. From
the information given in the question, this could either be a test of completeness
(completeness of disclosures in line with IFRS), or a test of presentation (that
disclosures are relevant and understandable in line with IFRS). Only completeness is
offered as an option here.
Smith plc is required to apply ISA 701, Communicating Key Audit Matters in the
Independent Auditor’s Report.
Which two of the following could be key audit matters?
A Areas of high audit risk
B Areas in relation to which the auditor expresses a separate opinion
C Areas of significant auditor judgement
D Significant transactions or events
A,C Key audit matters are the matters that are of most significance to the audit.
The auditor does not express a separate opinion on any of the key audit matters,
rather; the auditor expresses a single opinion on the financial statements as a whole,
and then communicates the key audit matters that relate to that opinion.
