The document provides feedback on multiple choice questions from an audit exam. It addresses topics like the purpose of an external audit, the roles in an assurance engagement, the body responsible for issuing auditing standards in the UK, limitations of auditing, factors that indicate a high risk audit client, elements that must be included in an audit engagement letter, and examples of the expectations gap in auditing. The feedback clarifies the correct answers and explains the reasoning.
The document provides feedback on multiple choice questions from an audit exam. It addresses topics like the purpose of an external audit, the roles in an assurance engagement, the body responsible for issuing auditing standards in the UK, limitations of auditing, factors that indicate a high risk audit client, elements that must be included in an audit engagement letter, and examples of the expectations gap in auditing. The feedback clarifies the correct answers and explains the reasoning.
The document provides feedback on multiple choice questions from an audit exam. It addresses topics like the purpose of an external audit, the roles in an assurance engagement, the body responsible for issuing auditing standards in the UK, limitations of auditing, factors that indicate a high risk audit client, elements that must be included in an audit engagement letter, and examples of the expectations gap in auditing. The feedback clarifies the correct answers and explains the reasoning.
The document provides feedback on multiple choice questions from an audit exam. It addresses topics like the purpose of an external audit, the roles in an assurance engagement, the body responsible for issuing auditing standards in the UK, limitations of auditing, factors that indicate a high risk audit client, elements that must be included in an audit engagement letter, and examples of the expectations gap in auditing. The feedback clarifies the correct answers and explains the reasoning.
Which ONE of the following statements correctly describes the principal purpose of an external audit of a limited company?
To assist in the preparation of the company’s financial statements.
To prevent fraud within the company. To examine and express an opinion on the company’s financial statements. To assist the directors in improving the company’s financial reporting process.
1 out of 1
The correct answer is:
To examine and express an opinion on the company’s financial statements.
It is management’s responsibility to prevent fraud within a company and there are auditor independence issues with regard to external auditors being involved in the preparation of financial statements and in assisting management to improve reporting processes. AS Step 01 Question Feedback 2 of 20
Which TWO of the following describe the roles of the responsible party in any assurance engagement?
Setting the criteria of the assurance engagement.
Gathering evidence on the subject matter. Issuing an opinion on the subject matter against the criteria set. Preparing the subject matter.
0 out of 1
The correct answers are:
Setting the criteria of the assurance engagement.
Preparing the subject matter.
The practitioner is responsible for gathering evidence and reaching a conclusion on the subject matter.
AS Step 01 Question Feedback 3 of 20
Which body is responsible for issuing International Standards on Auditing (UK)?
International Accounting Standards Board.
Financial Reporting Council. International Auditing and Assurance Standards Board. International Federation of Accountants.
0 out of 1
The correct answer is:
Financial Reporting Council.
The International Accounting Standards Board develops and issues IFRS, not auditing standards. The International Auditing and Assurance Standards Board develops and issues ISAs, but not ISAs (UK). The International Federation of Accountants is the parent of the International Auditing and Assurance Standards Board. AS Step 01 Question Feedback 4 of 20
In which piece of legislation are the terms ‘True’ and ‘Fair’, as they apply to auditors, defined?
Companies Act 2006.
International Standards on Auditing. The terms are not defined by legislation. Auditor’s Act 2009.
0 out of 1
The correct answer is:
The terms are not defined by legislation.
The Companies Act does not define these terms. ISAs do not refer to ‘True and Fair’, but are intended to apply to financial reporting frameworks which are ‘fair presentation’ frameworks, which in practice includes ‘True and Fair’. The Auditor’s Act 2009 does not exist.
AS Step 01 Question Feedback 5 of 20
In addition to reporting on the financial statements, which of the following reports might auditors make at the end of the audit?
Solvency report Report to management Control report Legal report
1 out of 1
The correct answer is:
Report to management
As well as issuing an audit report, auditors might also send a final report to management. This is an internal report for the company’s management only. AS Step 01 Question Feedback 6 of 20
Which ONE of the following is not a limitation of auditing?
Sampling is used as an audit tool.
Internal control systems have inherent limitations. Client staff may collude in fraud. Unqualified staff may be used on audit assignments.
1 out of 1
The correct answer is:
Unqualified staff may be used on audit assignments.
This increases detection risk but is not an inherent limitation.
AS Step 01 Question Feedback 7 of 20
Which ONE of the following factors indicates that a potential audit client is high risk?
The business is well-financed.
Strong internal controls. Unusual transactions. Small owner-managed business.
1 out of 1
The correct answer is:
Unusual transactions.
Unusual transactions lead to a higher risk of error in the financial statements. The fact that the client is a small owner-managed business does not indicate a higher risk, as long as it is well- managed, well-funded and has strong internal controls. AS Step 01 Question Feedback 8 of 20
Which of the following are elements of an assurance engagement?
1. Written report from the assurance team addressed to the client team preparing the financial statements. 2. A relationship involving the practitioner, shareholders and the management of an organisation. 3. Documentary evidence of the testing of internal controls relied upon by the assurance team.
(1) only (1) and (3) only (2) and (3) only (1), (2) and (3)
1 out of 1
Correct answer is: (2) and (3) only.
(1) Is incorrect as the written report will be addressed to the users of the financial statements, not the responsible party.
AS Step 01 Question Feedback 9 of 20
Which of TWO the following items MUST be included in the audit engagement letter?
The objective of the audit of financial statements.
The fact that because of the test nature and other inherent limitations of an audit there is an unavoidable risk that some material misstatements may remain undiscovered. The reporting framework that is applicable for the financial statements being prepared. Basis on which fees are computed and any billing arrangements.
1 out of 1
The correct answer is:
The objective of the audit of financial statements.
The reporting framework that is applicable for the financial statements being prepared.
Other options may be included in the audit engagement letter, but there is no requirement to do so. AS Step 01 Question Feedback 10 of 20
Which ONE of the following statements does NOT illustrate an inherent risk?
The organisation is seeking to raise finance to diversify.
The auditor uses samples when carrying out audit testing. Directors participate in a profit-related bonus scheme. The financial statements contain complex transactions.
1 out of 1
The correct answer is:
The auditor uses samples when carrying out audit testing.
This illustrates detection risk.
AS Step 01 Question Feedback 11 of 20
Which ONE of the following is NOT an objective of audit planning?
To assign work to the audit team.
To identity risk areas and focus on them appropriately. To identify potential problems and resolve them. To determine the scope of the engagement.
1 out of 1
The correct answer is:
To determine the scope of the engagement.
This is the purpose of the letter of engagement.
AS Step 01 Question Feedback 12 of 20
Tinker & Co is succeeding Tailor & Co as the auditor of Soldier Ltd, following Soldier’s acquisition by Spy Ltd. Tinker & Co plans to consult Tailor & Co and review Tailor & Co’s prior year working papers.
Tinker & Co may do so with the consent of:
Tailor & Co and Soldier Ltd.
Soldier Ltd alone. Tailor & Co, Spy Ltd and Soldier Ltd. Tailor & Co alone.
0 out of 1
The correct answer is:
Tailor & Co and Soldier Ltd.
An auditor does not have any automatic right of access to Tailor & Co’s working papers. Confidentiality, courtesy and consideration mean that the client must also be consulted. Spy Ltd, as the parent company, would not need to be consulted. AS Step 01 Question Feedback 13 of 20
It is common for auditors to prepare, at the commencement of the audit, a document whose primary purposes are to provide a record of:
1. Major areas, particular difficulties and points of concern which are peculiar to the audit client and to which the auditors attach special significance. 2. The auditor’s proposed approach to these matters.
As which of the following is this document commonly known?
A management letter. An audit planning memorandum. An audit completion checklist. An engagement letter.
1 out of 1
The correct answer is:
An audit planning memorandum.
The engagement letter is the contract between the auditor and the client where responsibilities are set down and the scope of the audit is agreed. The audit completion checklist is normally used at the end of the audit and serves as a control document for the closing stages. The management letter is a report at the end of the audit where the auditor feeds back on deficiencies identified during the audit. AS Step 01 Question Feedback 14 of 20
Which TWO of the following are examples of the expectations gap?
The audit of the financial statements provides full assurance to them being free from error. The audit of the financial statement can act as a deterrent against fraud. The audit of the financial statements may give confidence to potential investors of the organisation. The audit of the financial statements will ensure that the figures are free from fraud and mistatement.
0 out of 1
The correct answers are:
The audit of the financial statements provides full assurance to them being free from error. The audit of the financial statements will ensure that the figures are free from fraud and mistatement.
The audit of the financial statements can act as a deterrent to fraud, but it is not an absolute guarantee that fraud is not occuring at the client. The audit will be planned and risks assessed, together with a considered level of testing, however, it is always possible that occasions of fraud may go undetected. Equally, the opinion will show the accounts are 'materially free from mistatement' but not every transaction is tested as this would be impractical and expensive. AS Step 01 Question Feedback 15 of 20
Orange & Co are an assurance firm based in Portsmouth. They have been approached by a potential new client, Fruity Times Limited.
Identify which of the following is the correct answer using the drop down options supplied.
(1) The users of the assurance report to be
the shareholders of Fruity Times Limited. ▼ provided by Orange & Co are (2) The responsible parties of the three way the directors of Fruity Times Limited. ▼ relationship are
1 out of 1
The correct answers are:
The users of the assurance report to be provided by Orange & Co are the shareholders of Fruity Times Limited. The responsible parties of the three way relationship are the directors of Fruity Times Limited.
The responsible parties are the ones who prepared the subject matters, and it is the responsibility of the directors to prepare the financial statements.
The users of the assurance report will be the shareholders of Fruity Times AS Step 01 Question Feedback 16 of 20
Which TWO of the following elements are included within a standard assurance engagement letter?
The form of any reports of results of the engagement.
Basis on which fees are calculated and how they will be billed. Names of the assurance team who will be attending. The scope to monitor the effectiveness of the internal audit function.
0 out of 1
The correct answers are
The form of any reports of results of the engagement.
Basis on which fees are calculated and how they will be billed.
Although the audit fee is not a part of the engagement letter, how the fee is calculated and the method of invoicing will be a fundamental part of the engagement letter.
The names of the assurance team will not be listed (although the audit partner may be mentioned). There is no scope for the external auditors to monitor the effectiveness of the internal audit function as part of a standard assurance engagement (this is the responsibility of the audit committee or as a special audit project). AS Step 01 Question Feedback 17 of 20
Select which of the following statements are correct in relation to the 'true and fair' aim of an assurance engagement
1. Information is free from discrimination or bias.
2. Information is free from fraud or misstatement. 3. Information is corrected extracted from the books and records of the client.
(a) only (a) and (b) only (a), (b) and (c) (a) and (c) only
0 out of 1
The correct answer is: (a) and (c) only.
The concept of 'true' and 'fair' requires that information is factual and confirms with reality (that the accounts have been correctly extracted from the books and records). Also, that the information is 'fair' and is free from discrimination and bias. The assurance will not state that the information is wholly free from fraud and misstatement, rather that it is materially free of fraud or misstatement. AS Step 01 Question Feedback 18 of 20
Which TWO of the following would normally be included in the overall audit strategy?
Confirmation of management's responsibility for the financial statements
Details of the industry of the client and any industry-wide factors affecting them Detailed plan of audit procedures to be carried out Calculation of preliminary materiality
1 out of 1
The correct answers are
Details of the industry of the client and any industry-wide factors affecting them Calculation of preliminary materiality
The confirmation of management's responsibility for the financial statements is included in the engagement letter. The detailed plan of audit procedures to be carried out will be in the audit plan rather than the higher level audit strategy
AS Step 01 Question Feedback 19 of 20
Which of the following BEST describes the concept of assurance?
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. An assurance firm's satisfaction as to the reliability of an assertion being made by one party for the use of another party. An assurance firm's limited level of assurance as to the reliability of an assertion being made by one party for the use of another party. A user's satisfaction as to the reliability of an assertion being made by another party.
0 out of 1
The correct answer is:
An assurance firm's satisfaction as to the reliability of an assertion being made by one party for the use of another party.
It is the assurance firm stating the reliability of an assertion (that the financial statements are 'true and fair') for use by another party (the shareholders of the organisation for example). AS Step 01 Question Feedback 20 of 20
What are the purposes of planning the audit?
1. To ensure appropriate attention is devoted to different areas of the audit.
2. To identify potential problem areas. 3. To facilitate delegation of work to audit team members. 4. To ensure the audit is completed within budget and time restraints.
1, 2, 3 and 4 1, 3 and 4 1, 2 and 3 2 and 3
1 out of 1
The correct answer is: 1, 2 and 3
The main aim of planning is not to ensure the audit is completed within cost and time restraints but that it is carried out in an effective manner. All the other statements comprise the aims of planning.
