Practice by paper · Finance & Accounting
ACCA AA: Audit and Assurance Practice Questions
45 original practice questions for ACCA Audit and Assurance (AA), written for this site with full explanations. They are original questions in the style of the syllabus - not taken from any official exam. Use them to test coverage, then confirm details against ACCA's official materials.
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The primary purpose of an external audit of financial statements is to:
Correct answer: C. An external audit exists to provide an independent opinion on whether the financial statements give a true and fair view (or are presented fairly) in accordance with the applicable framework. The directors, not the auditor, prepare the statements; an audit gives no guarantee of future solvency; and while auditors consider fraud risk, an audit provides reasonable assurance only and cannot be expected to detect every fraud. -
An audit provides reasonable assurance rather than absolute assurance because:
Correct answer: A. Absolute assurance is unattainable: auditors examine samples rather than every transaction, much audit evidence is persuasive rather than conclusive, financial statements contain judgemental estimates, and controls can be overridden or fail. Auditors do have a right of access to records, so access is not the constraint; the limitation is conceptual, not a matter of fee size; and management's own assurances are among the least reliable forms of evidence, not a substitute for audit work. -
Responsibility for preparing the financial statements and for the prevention and detection of fraud rests primarily with:
Correct answer: D. Management and the directors are responsible for preparing financial statements, maintaining internal control and preventing and detecting fraud. The external auditor's role is to form an opinion on the statements, not to prepare them; shareholders appoint the auditors and receive the statements but do not prepare them; and an audit committee oversees the process on behalf of the board rather than carrying primary responsibility itself. -
Which of the following is one of the five fundamental principles of professional ethics for accountants?
Correct answer: B. The five fundamental principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Objectivity - not allowing bias, conflicts of interest or undue influence to override judgement - is one of them. Prudence is an accounting concept, going concern is an accounting assumption, and materiality is an audit and reporting concept; none of them are ethical principles. -
Which situation creates a self-review threat to auditor independence?
Correct answer: D. A self-review threat arises when the firm audits its own work, such as financial statements or valuations it prepared, because it is unlikely to criticise its own output. Share ownership creates a self-interest threat, a threat to switch auditors over a dispute is an intimidation threat, and attending a normal social event is, at most, a minor familiarity issue rather than self-review. -
An audit engagement partner has led the audit of the same major client for many years and has developed close relationships with its directors. The main threat to independence is:
Correct answer: B. Long association and close personal relationships create a familiarity threat: the partner may become too trusting or insufficiently sceptical of management's representations. Advocacy arises from promoting a client's position (for example in litigation or a share issue), self-review from auditing the firm's own work, and taking on management responsibilities is a separate prohibition, not the threat described here. -
Which of the following is a safeguard against the familiarity threat from long association with an audit client?
Correct answer: A. Partner rotation breaks the long association that causes the familiarity threat, which is why rotation after a defined period is required for listed-entity audits. A higher fee does nothing for independence and can worsen self-interest, the finance director reviewing working papers would destroy independence rather than protect it, and cutting evidence would degrade audit quality without addressing the threat. -
The recurring fees from one listed audit client have come to represent a large proportion of an audit firm's total fee income. This situation primarily creates:
Correct answer: C. Fee dependence creates a self-interest threat (the firm benefits from keeping the client happy) and an intimidation threat (the client can pressure the firm by threatening to leave). Safeguards include monitoring the fee proportion, engagement quality reviews and, ultimately, declining or resigning from work. It is not advocacy, which involves promoting the client's position; prompt payment does not remove the dependence; and reviewing invoices has nothing to do with self-review of audit work. -
An auditor may disclose confidential client information without the client's consent when:
Correct answer: A. Confidentiality can be overridden where disclosure is required by law or regulation (such as money laundering reporting) or permitted and appropriate (for example, defending the firm in litigation). Journalists and potential investors have no right to confidential information regardless of how the request is made, and using client information to win work is a straightforward breach of both confidentiality and professional behaviour. -
The main purpose of an audit engagement letter is to:
Correct answer: C. The engagement letter confirms the auditor's acceptance and documents the objective and scope of the audit, the responsibilities of auditor and management, the reporting framework and other terms, reducing the risk of misunderstanding. It is not a marketing document, materiality is determined during planning rather than in the letter, and opinions on financial statements belong in the auditor's report. -
Before accepting an audit engagement, the auditor must establish that the preconditions for an audit are present. These include:
Correct answer: B. The preconditions are that the financial reporting framework to be applied is acceptable and that management acknowledges and understands its responsibilities for the statements, for internal control and for giving the auditor access to information. No management guarantee of a misstatement-free set of statements is possible or required, access to predecessor working papers is a professional courtesy rather than a precondition, and fee levels are a commercial matter. -
The overall audit strategy differs from the detailed audit plan in that the strategy:
Correct answer: D. The strategy is the high-level document establishing scope (for example, locations and components), timing (interim and final visits, deadlines) and direction (key risk areas, materiality, team resources), and the detailed plan then specifies the nature, timing and extent of individual procedures. Listing every procedure is the role of the plan, both documents are prepared before and updated during fieldwork rather than afterwards, and planning documents are prepared by the auditor, never by management. -
A misstatement is material if it:
Correct answer: B. Materiality is defined by user impact: a misstatement (individually or in aggregate) is material if it could influence users' economic decisions. There is no universal monetary threshold - materiality is entity-specific and judgemental. Intent matters for characterising fraud, not materiality, although deliberate misstatements may be qualitatively material at lower amounts; and directors' sensitivities do not define what matters to users. -
Performance materiality is:
Correct answer: D. Performance materiality is deliberately set lower than overall materiality so that the sum of individually small uncorrected and undetected misstatements is unlikely to breach overall materiality. It is a working threshold for designing procedures, not a disclosed figure; it is below, not equal to, overall materiality; and even amounts below any threshold can be qualitatively material (for example, misstatements that turn a loss into a profit). -
An auditor sets overall materiality using a benchmark of 1% of revenue. If revenue is $10,000,000, overall materiality is:
Correct answer: C. 1% of $10,000,000 is $100,000. $1,000,000 applies 10% rather than 1%, $10,000 applies 0.1%, and $500,000 applies 5%, which is a common rule-of-thumb percentage for profit before tax but not the 1% revenue benchmark stated in the question. -
At the planning stage, analytical procedures are used primarily to:
Correct answer: A. Planning-stage analytical procedures (comparisons with prior years, budgets and industry data) are required to help the auditor understand the business and direct attention to risk areas such as unexpected margin changes. They are risk assessment tools at this stage, not conclusive substantive evidence; they do not substitute for control work where reliance on controls is planned; and report wording is a completion matter. -
Professional scepticism is best described as:
Correct answer: D. Professional scepticism means maintaining a questioning mind, being alert to conditions that may indicate misstatement, and critically assessing evidence rather than accepting it uncritically. It does not require presuming management dishonesty - the auditor neither assumes dishonesty nor unquestioned honesty. Accepting evidence at face value is the opposite of scepticism, and prior-year conclusions cannot substitute for current-year evidence. -
The three components of audit risk are:
Correct answer: A. Audit risk is the product of inherent risk (susceptibility of an assertion to misstatement), control risk (the risk controls fail to prevent or detect it) and detection risk (the risk the auditor's procedures fail to find it). Business, financial and operational risks describe threats to the entity rather than the audit risk model, sampling risk is only one contributor to detection risk, and liquidity, market and credit risk are financial risk categories. -
Where the auditor assesses inherent risk and control risk as high, detection risk must be set:
Correct answer: C. Audit risk must be held to an acceptably low level, so when the risks of material misstatement (inherent and control) are high, the auditor compensates by driving detection risk down - larger samples, more reliable evidence and more experienced staff. Setting detection risk high would push overall audit risk above the acceptable level, budget pressure is never a basis for risk decisions, and there is no rule tying detection risk to control risk. -
Which of the following would most increase the inherent risk of misstatement in the financial statements?
Correct answer: B. Inherent risk is the susceptibility of an assertion to misstatement before considering controls, and it is highest where complexity, judgement and estimation uncertainty are greatest, such as provisions for uncertain legal outcomes. Routine automated transactions, an experienced finance team and a simple business model all point towards lower, not higher, inherent risk. -
The control environment of an entity refers to:
Correct answer: B. The control environment is the foundation component of internal control: management's integrity and ethical values, commitment to competence, governance participation, organisational structure and assignment of authority. Physical security devices and software settings are specific control activities within the system, not the environment itself, and external regulation is part of the entity's context rather than its internal control. -
Segregation of duties is designed to ensure that:
Correct answer: C. Separating authorisation, recording and custody means committing and concealing a fraud requires collusion, and honest errors are more likely to be caught by a second person. Cross-training everyone to do everything works against segregation, self-approval of expenses is a textbook segregation failure, and minimising team size tends to reduce, not strengthen, the scope for segregation. -
Tests of controls are performed to obtain evidence about:
Correct answer: A. Tests of controls (such as inspecting evidence of authorisation, reperformance and observation) address whether controls were suitably designed and operated effectively during the period, supporting a lower assessment of control risk. Evidence about balances and the accuracy of the statements comes from substantive procedures, and asset market values are a valuation matter tested substantively, not through control testing. -
A walkthrough test involves:
Correct answer: D. A walkthrough follows a transaction from initiation through processing to reporting, confirming that the system operates as documented and that identified controls actually exist. Recalculating depreciation and confirming receivables are substantive procedures, and inspecting asset condition addresses existence and valuation rather than the auditor's understanding of the processing system. -
During controls testing, the auditor finds that a key authorisation control over purchases was frequently not performed. The most appropriate response is to:
Correct answer: A. When controls are not operating effectively, the auditor cannot rely on them: control risk is reassessed as higher, planned reliance is withdrawn and substantive testing is extended to compensate, with the deficiency reported to management and those charged with governance. Good design without operation provides no assurance, resignation is a last resort for extreme circumstances rather than routine control failures, and management representations cannot substitute for audit evidence. -
Which of the following is an IT general control rather than an application control?
Correct answer: B. General controls apply across the IT environment as a whole - access security, program change controls, backups and disaster recovery - and password-based access restriction is a classic example. Credit limit rejection, invoice matching and batch total reconciliations are application controls, because each is embedded in the processing of a specific class of transactions. -
In the audit of a small owner-managed company with few accounting staff, the auditor will most likely:
Correct answer: D. Small entities rarely have enough staff for effective segregation of duties, and a dominant owner-manager both strengthens oversight and creates opportunity to override controls, so auditors typically respond with a substantive-based strategy. Full reliance on controls is the opposite of the appropriate response, small companies are audited routinely, and management override is a risk in every audit - a dominant owner increases rather than removes it. -
In the phrase 'sufficient appropriate audit evidence', sufficiency refers to:
Correct answer: C. Sufficiency is the measure of quantity - whether enough evidence has been obtained given the assessed risks - while appropriateness is the measure of quality, combining relevance and reliability. Relevance and reliability therefore describe appropriateness, not sufficiency, and cost is a practical constraint that is never a component of the definition. -
Which of the following sources of audit evidence is generally the most reliable?
Correct answer: C. Evidence is more reliable when it comes from independent external sources and is received directly by the auditor, so a direct third-party confirmation ranks highest. Client-prepared spreadsheets and oral management explanations are internal and easily influenced, and photocopies are less reliable than originals because they can be altered. -
A bank confirmation received directly from the client's bank primarily provides evidence about:
Correct answer: D. The bank letter confirms balances held, accounts open, loans and security directly from an independent source, giving strong evidence of existence, rights and obligations, and accuracy of bank balances. It says nothing about whether all sales were recorded, has no bearing on inventory valuation, and is not a measure of treasury efficiency. -
A trade receivables circularisation primarily provides evidence about which assertion?
Correct answer: B. When customers confirm balances selected from the receivables ledger, they confirm that the recorded debts exist and are owed. The procedure is weak on completeness, because it starts from recorded balances and cannot reveal unrecorded ones, and it is also weak on valuation, since a customer may confirm a debt it cannot pay. It provides no evidence on note presentation or on future-period sales. -
Reviewing payments made after the year end and comparing them with recorded liabilities is a procedure primarily designed to test:
Correct answer: A. Post year-end payments often settle obligations that existed at the reporting date; if such a payment has no corresponding year-end liability, an unrecorded liability may have been found, so the procedure targets completeness. It does not address whether cash existed, how non-current assets are valued, or whether recorded revenue occurred - liabilities being understated is the specific risk in scope. -
The main reason the auditor attends the client's year-end inventory count is to:
Correct answer: D. Attendance lets the auditor observe the count being carried out, evaluate compliance with the count instructions, perform two-way test counts (records to floor for existence, floor to records for completeness) and note damaged or slow-moving items. Counting remains management's responsibility, valuation is tested later against cost and net realisable value evidence, and demand forecasting is not an audit objective of the count. -
Several customers do not reply to a positive receivables confirmation request. The auditor should:
Correct answer: A. For non-responses to a positive confirmation, the auditor performs alternative procedures - most persuasively checking cash received from the customer after the year end, and inspecting invoices and despatch documents. Assuming correctness means accepting the balance with no evidence, removing balances would misstate the ledger without justification, and non-response alone is commonplace and not an indicator of fraud. -
The purpose of audit sampling is to:
Correct answer: C. Sampling applies procedures to fewer than 100% of items so that the results can be projected to the population, making the audit feasible at reasonable cost. It introduces sampling risk rather than eliminating risk, selection must be controlled by the auditor (with each item having a chance of selection), never by management, and sampling concerns selection of items, not merely arithmetic checking. -
Which statement about written representations from management is correct?
Correct answer: B. Written representations are required on matters including management's fulfilment of its responsibilities and areas like intentions and completeness of information, but they come from the entity itself, so they support rather than replace other evidence. They are among the less reliable evidence forms, not the most reliable; estimates still require testing of methods, data and assumptions; and obtaining them is a required, standard part of every audit. -
When auditing a significant accounting estimate, such as a warranty provision, the auditor should:
Correct answer: A. Estimates are audited by examining how they were made - the reasonableness of methods and assumptions, the reliability of underlying data, comparison with outcomes of prior estimates, and events after the year end - while remaining alert to management bias and contradictory evidence. Blanket acceptance abandons scepticism, the auditor forms an opinion on the statements rather than inserting figures into them, and board approval is one control, not sufficient evidence in itself. -
An unmodified audit opinion states that the financial statements:
Correct answer: C. The unmodified opinion concludes that the statements give a true and fair view, or present fairly in all material respects, under the applicable framework. The opinion is framed by materiality, so it never certifies freedom from every small error; it speaks to the position and performance reported, not to future validity; and management involvement is inherent, since management prepares the statements. -
A qualified ('except for') opinion is appropriate when:
Correct answer: B. An 'except for' qualification fits when a misstatement (or an inability to obtain evidence) is material but not pervasive - the problem is isolated and the rest of the statements can be relied on. Profitability is not an opinion criterion, material and pervasive misstatement leads to an adverse opinion instead, and drawing attention to an adequately disclosed matter is the role of an emphasis of matter or going concern section, not a qualification. -
A disclaimer of opinion is issued when:
Correct answer: D. A disclaimer means the auditor is unable to form an opinion at all: the evidence gap is so significant that possible undetected misstatements could be material and pervasive. An isolated material misstatement leads to a qualified opinion, not a disclaimer; completion timing is irrelevant to the opinion; and a fee dispute is an ethical and commercial issue, not a reporting basis. -
An emphasis of matter paragraph in the auditor's report:
Correct answer: B. An emphasis of matter highlights something already properly reflected in the statements - such as a major catastrophe or significant uncertainty - that is fundamental to understanding them, and the paragraph explicitly does not modify the opinion. Uncorrected material misstatements lead to a modified opinion instead, and the paragraph points to existing note disclosure rather than replacing it. -
The auditor concludes that a material uncertainty exists over going concern, and the directors have disclosed it adequately in the financial statements. The auditor should issue:
Correct answer: D. Where the uncertainty is adequately disclosed, the statements are fairly presented, so the opinion remains unmodified, and the auditor adds a dedicated section drawing attention to the disclosure. An adverse opinion would apply if the statements were prepared on a going concern basis that is inappropriate, and a qualified or adverse opinion would follow inadequate disclosure - neither applies when disclosure is adequate, and a disclaimer concerns lack of evidence, not a disclosed uncertainty. -
Key audit matters in the auditor's report of a listed company are:
Correct answer: A. Key audit matters are chosen from matters communicated to those charged with governance as the areas of most significance - typically higher-risk areas and significant judgements - and the report explains why each mattered and how the audit addressed it. They are not a list of all misstatements or procedures, and they appear openly in the published auditor's report, not in a confidential regulatory filing. -
Compared with an audit, a review engagement of financial statements provides:
Correct answer: C. A review relies mainly on enquiry and analytical procedures, so it supports only limited (moderate) assurance, expressed in the negative form that nothing has come to the practitioner's attention suggesting the statements are materially misstated. Absolute assurance is unattainable in any engagement, reasonable assurance with a positive opinion is the audit level, and a review does provide assurance - just a lower level than an audit. -
Regarding events occurring between the reporting date and the date of the auditor's report, the auditor:
Correct answer: C. Up to the date of the auditor's report, the auditor must actively look for subsequent events - through enquiry of management, reading board minutes and reviewing later management accounts - because adjusting and non-adjusting events can require changes to the statements or notes. Responsibility during this window is active rather than absent, it covers unfavourable and favourable events alike, and a newspaper search alone would fall far short of the required procedures.
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