CAF 9 Audit and Assurance Question bank ICAP

2015

AUDIT AND
ASSURANCE
QUESTION BANK



ICAP

Question
Bank

P

Audit and Assurance


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Certificate in Accounting and Finance
Audit and Assurance

C
Contents
Page

Question and Answers Index

v

Questions
Section A

Multiple choice questions

1

Section B

Objective test and long-form questions

17

Section C

Multiple choice answers

71

Section D

Objective test and long-form answers

77

Answers

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Audit and Assurance

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Certificate in Accounting and Finance
Audit and Assurance

I
Index to Objective test and long-form
questions and answers
Question
page

Answer
page

Audit framework, regulation and ethics
1

ICAP Code of Ethics

17

77

2

Levels of assurance

18

79

3

Shamsuddin

18

79

4

Core concepts

18

80

5

Threats

19

81

6

Burewala and Kamal

19

82

7

Zaman and Bilal

19

83

8

Audit process

19

84

9

Regulatory and professional
requirements

20

85

10

Fundamental principles

20

87

11

Oops

20

87

12

Independence of external auditors

20

88

13

Tahira and Parvez

21

88

Planning and risk assessment
14

Saad Co

21

89

15

Alpha

21

90

16

Engagement letter and documentation

22

90

17

Shahid Corporation

22

91

18

Assertions

22

91

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Audit and Assurance

Question

page

Answer
page

19

Companies Ordinance 1984

23

93

20

ASPL

23

93

21

AMF

24

94

22

Acceptance and planning

24

95

23

SPL

25

95

24

Fruit and nuts

25

96

25

Discussions and judgment

26

97

26

Dynamic

26

98

27

Changing Terms

26

99

28

EL

27

99

29

Calm Co

27

100

30

Azam

27

100

31

Hurricane

27

102

32

Zakir Co

29

104

33

Hajira

30

106

34

Tahir Co

30

108

Internal control
35

Controls

31

110

36

Shahzad

31

111

37

Waheed Engineering

32

112

38

Danish

33

113

39

Roses Anytime

34

115

40

Trade Receivables

35

117

41

Granger

35

119

Audit evidence
42

Nobel

36

122

43

Masoom Limited

37

122

44

Sky Blue

37

123

45

Direct confirmations 1

37

123

46

Chill

37

124

47

Sales sampling

38

124

48

PQR

38

125

49

Hard Stone Limited

39

126

50

Related parties

39

127

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Index to questions and answers

Question
page

Answer
page

51

Direct confirmations 2

39

127

52

Working papers

39

128

53

Al-Shams

39

128

54

Auditor’s expert

40

129

55

ADL

40

130

56

Guava & Co

40

131

57

RP Planning

41

132

58

Manufacturing inventories

41

132

59

Wedge & Co

41

135

60

MWL

41

136

61

BPR

42

137

62

Taskeen Co

42

138

63

Wings

43

140

64

Glasses2Go

43

142

65

ISA 620

44

144

66

Cuddly World

45

144

67

Analytical procedures and materiality

45

146

68

Tahira Transporters

46

148

69

Willow

47

150

70

Sparkle Forever

48

152

71

Bubbles

48

154

72

ISA 500

49

156

73

Javeria Co

49

157

74

Porridge

50

158

75

Trembridge Engineering

51

160

76

ISA 620: Using the Work of an Auditor’s
Expert

51

162

77

Heidi Co

52

163

Scenarios
78

Zeedin Co

52

165

79

Sahito Co

54

168

80

Bashir Co

55

170

57

173

Completion
81

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Analytical Procedures

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Audit and Assurance

Question
page

Answer
page

82

Auditor Responsibility

57

175

83

Al-Badr

57

175

84

Shahrukh and Company

58

176

85

The engagement partner

59

177

86

Different audit clients

60

177

87

Situations have arisen on different
clients

60

178

88

Hafiz Limited

61

179

89

An ‘emphasis of matter’ paragraph and
an ‘other matter’ paragraph

61

180

90

MM Electronics (Private) Limited

61

180

91

Ranjha Limited

62

181

92

Pervasive effects

63

182

93

Audit report at the end of the audit

63

183

94

Iqra Industries Limited

64

184

95

Blue Sky Limited

64

184

96

Form 35A in the Companies

64

185

97

Written Representations

65

185

98

Shahrukh and Co

65

186

99

Kazmi-Wassan

66

186

100

RK Resourcing

67

188

101

Rake Enterprises

67

191

Review engagements
102

ISRE 2400

68

192

103

Karim

68

193

104

IFI

69

194

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SECTION

Certificate in Accounting and Finance
Audit and Assurance

A

Multiple choice questions
CHAPTER 1 – CONCEPT AND NEED FOR ASSURANCE
1

2

3

The fundamental objective of the audit of a company is to
A

Protect the interests of the minority shareholders

B

Detect and prevent errors and fraud

C

Assess the effectiveness of the company’s performance

D

Attest to the credibility of the company’s accounts

The concept of stewardship means that a company’s directors
A

Are responsible for ensuring that the company complies with the law

B

Are responsible for ensuring that the company pays its tax by the due date

C

Safeguard the company’s assets and manage them on behalf of the
shareholders

D

Report suspected fraud and money laundering to the authorities

Why do auditors concentrate their efforts on material items in accounts?
A

Because they are easier to audit

B

Because it reduces the audit time

C

Because the risk to the accounts of their being incorrectly stated is greater

D

Because the directors have asked for it

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Audit and Assurance

4

5

Which of the following is NOT the responsibility of a company’s directors?
A

Reporting to the shareholders on the accuracy of the accounts

B

Establishment of internal controls

C

Keeping proper accounting records

D

Supplying information and explanations to the auditor

International auditing standards are issued by the:
A

International Accounting Standards Board

B

Financial Accounting Standards Board

C

International Audit and Assurance Standards Board

D

Auditing Practices Board

CHAPTER 2 – OBTAINING AN ENGAGEMENT
6

7

8

9

When an auditor is proposed for removal from office, which one of the following is he
NOT permitted to do?
A

Circulate representations to members

B

Apply to the court to have the proposal removed

C

Speak at the AGM/EGM where the removal is proposed

D

Receive notification of the AGM/EGM where the removal is proposed

Which one of the following is NOT a duty of the auditor?
A

Duty to report to the company’s bankers

B

Duty to report to the members

C

Duty to sign the audit report

D

Duty to report on any violation of law

Assuming that it is not the first appointment of the auditor, who is responsible for the
appointment of the auditor?
A

The shareholders in a general meeting

B

The managing director

C

The board of directors in a board meeting

D

The audit committee

The independent auditor's primary responsibility is to:
A

the directors

B

the company's creditors (payables)

C

the company's bank

D

the shareholders

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Question bank: Multiple choice questions

10

How long is the auditor’s term of office?
A

Until the audit is complete

B

Until the financial statements are complete

C

Until the next AGM

D

Until the directors remove them

CHAPTER 3 – PLANNING AND RISK ASSESSMENT

11

12

13

14

15

Which of the following is correct in relation to materiality?
A

A matter is material only if it changes the audit report

B

A matter is material if the auditor and the directors both decide that further work
needs to be done in the area under question

C

A matter is material only if it affects directors’ emoluments

D

A matter is material if its omission or misstatement would reasonably influence
the decisions of an addressee of the auditors’ report

Which one of the following is NOT considered to be part of planning?

A

Background i.e. industry

B

Previous year’s audit i.e. any qualifications in the report

C

Considering the work to be done by the client staff e.g. internal audit

D

Considering whether the financial statements show a true and fair view

Audit risk is composed of 3 factors. Which of the following is NOT one of those factors?
A

Compliance risk

B

Detection risk

C

Control risk

D

Inherent risk

Which of the following should NOT be considered at the planning stage?
A

The timing of the audit

B

Analytical review

C

Last year’s written representation letter

D

Obtaining written representations

At the planning stage you would NOT consider:
A

the timing of the audit

B

whether corrections from the inventory count have been implemented

C

last year's audit

D

the potential use of internal audit

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Audit and Assurance

CHAPTER 4 – EVIDENCE AND SAMPLING
16

17

18

19

20

Which of the following describes sampling risk?
A

The risk of the auditor carrying out a test the wrong way round

B

The risk of reliance on unsuitable audit evidence

C

The risk that the sample does not reflect the population

D

The risk of the auditor reaching the wrong conclusions from testing

Which of the following is NOT an accepted method of selection in sampling?
A

Systematic selection

B

Pervasive selection

C

Random selection

D

Haphazard selection

Which of the following are you unlikely to see in the current file of auditors’ working
papers?
A

Memorandum & articles of association

B

Audit planning memorandum

C

Summary of unadjusted errors

D

Details of the work done on the inventory count

According to ISA 500, the strength of audit evidence is determined by which two
qualities?
A

Appropriateness & competence

B

Sufficiency & appropriateness

C

Reliability & extensiveness

D

Objectivity & independence

Which of the following is normally the most reliable source of audit evidence?
A

Internal audit

B

Suppliers’ statements

C

Board minutes

D

Analytical review

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Question bank: Multiple choice questions

CHAPTER 5 – INTERNAL CONTROL
21

22

23

24

25

The degree of effectiveness of an internal control system depends on:
A

The design of the internal control system and the implementation of the controls

B

The design of the internal controls and the implementation of the control system

C

The implementation of the controls and the correctness of the accounting records

D

The design of the internal control system and the correctness of the accounting

records

According to ISA 315, which of the following is NOT an element of the control
environment?
A

Participation of management

B

Information processing

C

Commitment to competence

D

Human resource policies and practices

According to ISA 315, which of the following is NOT a control activity?
A

Performance reviews

B

Physical controls

C

Organisational structure

D

Segregation of duties

Which of the following is NOT an internal control?
A

Authorising purchase orders

B

Ensuring cash is locked away

C

Performing external confirmation of receivables

D

The opening of the post should not be the same person who banks the cheques

A walk-through test is designed to do what?
A

To check that materiality levels are acceptable

B

As a checklist to see if all substantive tests have been performed

C

To provide assurance within a letter of representation

D

To confirm that the auditor’s understanding of the internal control system is
correct

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Audit and Assurance

CHAPTER 6 – FLOWCHARTS AND IT CONCEPTS
26

27

28

29

Which of the following descriptions is correct?
A

An internal control evaluation questionnaire is circulated to staff within the
internal control function of an organisation to ask for feedback about their job
satisfaction and targets for the coming year.

B

Narrative notes are a list of questions about controls in a particular aspect of
operations or accounting. They are designed to establish whether appropriate
controls exist that meet specific control objectives.

C

An internal control questionnaire is sent from the internal auditors to the external
auditors during the audit to request ideas for improving the internal control
system.

D

A systems flowchart provides a logical representation of an accounting system
(or part of a system) in the form of a diagram representing documents generated,
processes applied and the flow of documents between departments.

Which of the following are levels within a systems flowchart?
A

Top, middle, lower

B

Mini, micro, macro

C

Executive, managerial, operational

D

Strategic, tactical, factory

Which of the following descriptions for flowchart symbols is correct?
A

A circle is used to indicate the starting and ending points of the process.

B

An oval represents an individual activity or step in the process

C

Triangles are used to show decision points. Each path emerging from the triangle
must be labelled with one of the potential answers.

D

A pentagon is used to link a particular step of the process to another page or part
of the flowchart. Letters are placed in the pentagon to clarify continuation.

Which of the following is not a type of physical access control?
A

Taking a weekly backup of data

B

Surveillance video

C

Fingerprint readers for system log-in

D

Fences, doors and door-locks

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Question bank: Multiple choice questions

30

Which of the following descriptions of ciphers is correct?

A

Asymmetric key ciphers – these use related (often identical) keys to both encrypt
and decrypt information. This is sometimes called ‘shared secret’ between two or
more parties

B

Block ciphers – data is encrypted one ’data unit’ (typically 1 byte) at a time in the
same order it was received. The simplest method is to use translation tables
which offset the input blocks across an array of the table. Enhanced encryption
can be achieved by combining two or more tables

C

Symmetric key ciphers – these use related (often identical) keys to both encrypt
and decrypt information. This is sometimes called ‘shared secret’ between two or
more parties

D

Stream ciphers – this is where fixed length blocks are encrypted and streamed
across the network with a high speed connection

CHAPTER 7 – TESTS OF CONTROLS
31

32

33

34

Which one of the following is NOT an internal control you would expect to see in a
sales system?
A

All goods received notes are authorised by the customer

B

All orders are checked against credit limits

C

All invoices are recorded on pre-numbered sequential documents

D

All cash is banked on the same day as it was received

Which one of the following is NOT an internal control you would expect to see in a
purchases system?
A

Preferred suppliers are used

B

All invoices are grid-stamped to create the company’s own invoice system

C

Employees are only paid for work done

D

There is a list of authorised cheque signatories

Which of the following is NOT a main element of a sales system?
A

Receiving orders from customers

B

Marketing

C

Despatching the goods and invoicing customers

D

Recording sales and debtors in the accounts

Which of the following is NOT a test of control?
A

Checking that all purchase invoice are authorised by the proper people

B

Test checking from purchase invoices to goods received notes

C

Where a list of approved suppliers exists, checking that orders are placed only
with suppliers on such a list

D

Checking for sequential numbering by the client of purchase invoices received

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Audit and Assurance

35

Which of the following is NOT a main element of a purchases system?
A

Placing orders

B

Receiving purchase invoices

C

Goods received

D

Decisions at board level on whether to incur capital expenditure

CHAPTER 8 – INTRODUCTION TO SUBSTANTIVE PROCEDURES
36

37

38

39

40

Which of the following is NOT a financial statement assertion?
A

Completeness

B

Occurrence

C

Cash flow

D

Existence

Which of the following is NOT an accepted means of obtaining audit evidence?
A

Inspection

B

Enquiry

C

Analytical procedures

D

Estimates

Which one of the following types of evidence is the most reliable?
A

The client's sales invoices

B

Report obtained from a client’s bank confirming balances

C

The written representation letter

D

Confirmation during a telephone call with the Managing Director that there are no
loans outstanding

At what stage of the audit do ISAs 315 and 520 require the auditor to use analytical
procedures?
A

When tendering for the audit of a new client

B

During the planning stage and the review stage

C

At the report writing stage

D

When deciding whether to rely on the evidence of an expert

Which of the following is not an accounting estimate?
A

Depreciation

B

Provision for claims under a law suit

C

Price paid for a new non-current asset

D

Accrued revenue

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Question bank: Multiple choice questions

CHAPTER 9 – SUBSTANTIVE PROCEDURES: NON-CURRENT ASSETS

41

42

43

44

45

Which tangible non-current assets are normally not depreciated?
A

Land and buildings

B

Land only

C

Buildings only

D

All tangible non-current assets are depreciated

Which of the following should not be shown as an intangible non-current asset?
A

Purchased goodwill

B

Non-purchased goodwill

C

Development costs meeting the criteria in IAS 38

D

Other intangible assets having a readily ascertainable market value

A non-current asset register holds details of non-current assets.
These details will include:
A

Cost, depreciation, service details, location, disposal proceeds

B

Service details, serial number, capital allowances, net book value

C

Capital allowances, disposal proceeds, supplier, location

D

Cost, depreciation, asset number, serial number, location

Which of the following is NOT a substantive test for the audit of non-current assets?
A

Reconcile the non-current assets register to the receivables ledger control
account

B

Consider the reasonableness of any revaluations

C

Physically check a sample of non-current asset additions

D

Vouch disposal proceeds to the bank statement

Which term would you NOT associate with non-current assets?
A

Net realisable value

B

Goodwill

C

Investments

D

Net book value

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Audit and Assurance

CHAPTER 10 – SUBSTANTIVE PROCEDURES: CURRENT ASSETS
46

47

48

49

50

The principal audit procedure at the inventory count is?
A

Analytical review

B

Computation

C

Observation

D

Delegation

Which of the following is NOT a substantive test for the audit of inventories?
A

Test the updating of all inventory count differences to inventory records

B

Test the accuracy of net realisable value through the review of post year-end
sales

C

Have satisfactory explanations been explained for all material inventory count
differences

D

Check that all administrative overheads have been correctly accrued for in the
valuation of inventories

Which of the following are acceptable valuation methods under IAS 2?
A

LIFO and weighted average

B

FIFO and base

C

LIFO and base

D

FIFO and weighted average

Which of the following is NOT a substantive test for the audit of receivables?
A

Test cash received after the end of the reporting period

B

Check adequate provision for doubtful debts

C

Check reasons for debit balances (and ensure they are disclosed under
payables)

D

Check brought forward balance

What is NOT true about bank reconciliations?
A

Reconciling items must be followed through to the bank statement

B

An error, if below materiality, is acceptable

C

If the client has performed the reconciliation, the auditor must cast the whole
reconciliation

D

It is the primary substantive test for cash

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Question bank: Multiple choice questions

CHAPTER 11 – SUBSTANTIVE PROCEDURES: OTHER AREAS
51

52

53

54

55

A good way to authenticate sales is to view the authorisation of?
A

Goods received notes

B

Sales orders

C

Goods despatch notes

D

Supplier statements

Which of the following audit procedures is primarily intended to provide audit evidence
as to existence?
A

Matching sales invoices to goods despatch notes

B

Casting the sales ledger

C

Confirming receivables balances with customers

D

Checking the dating of outstanding cheques

Which of the following is NOT normally a non-current liability?
A

Corporation tax payable

B

Debentures

C

Bank loans

D

Finance lease obligations

Which of the following does not appear in IAS 37?
A

Deferred income

B

Contingent assets

C

Provisions

D

Contingent liabilities

Suppliers’ statements are reconciled in order to:
A

verify the completeness of payables

B

ensure cut-off is correct

C

vouch the authorisation of purchase orders

D

verify the existence of payables

CHAPTER 12 – RELATED PARTY TRANSACTIONS
56

An example of an external business risk is:
A

The existence of related parties

B

Having a small customer database

C

A customer's insolvency

D

Process of dealing with customer relations

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Audit and Assurance

57

58

Which of the following statements about the audit of related parties is correct?
A

The materiality of related parties is judged by reference to the company being
audited, not the individual related party.

B

The main audit concern in relation to related parties is the adequacy of the
disclosures of the related parties that have been identified.

C

It is usually considered unnecessary to obtain written representations from

management about related parties.

D

A company should disclose both the nature of related party relationships and the
amount of related party transactions.

Which of the following statements are correct?
1

With related party transactions, there is some risk of collusion and fraud.

2

A focus of audit attention with regard to related party transactions should be on
significant non-routine transactions.

A

Statement 1 only is correct.

B

Statement 2 only is correct.

C

Both statements are correct.

D

Neither statement is correct.

CHAPTER 13 – RELIANCE ON OTHERS
59

60

The auditor may work with a specialist. What effect does this have on the auditor’s
responsibilities?
A

The client must take full responsibility for the specialist

B

The auditor’s responsibilities are not diminished in any way

C

The auditor and client have joint responsibility for the specialist

D

All 3 are equally responsible

Which of the following statements is correct?
A

Responsibility for a group audit is shared by the group auditor and any

component auditors.

B

An audit firm may accept an engagement as group auditor even if it is
insufficiently involved in the audit of significant components to obtain audit
evidence about them.

C

A group auditor may rely on the work done by a component auditor without the
need to assess its quality.

D

The group auditor sets the group materiality level for the financial statements as
a whole and component materiality levels for components audited by component
auditors.

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Question bank: Multiple choice questions

61

62

63

Which of the following statements about the principal auditor in a group audit is
INCORRECT?
A

The principal auditor is responsible for the opinion on the group financial
statements as a whole.

B

The principal auditor can demand information and explanations from the
secondary auditor.

C

The principal auditor needs to consider the materiality of the portion of the group
audited by him.

D

The principal auditor can demand co-terminus year-ends for all group companies.

Which of the following statements is correct?
A

A component auditor should provide the group auditor with access to its relevant
auditing documentation.

B

A component auditor should provide the group auditor with a report of work
performed unless the group auditor specifically states that this is not necessary.

C

When there is a joint audit, one of the firms must act as the senior firm in the
audit.

D

When a component within a group is significant, the audit of the component
should use group materiality.

Which of the following items should be communicated by a group auditor to the group
management?
1

material weaknesses in group-wide controls

2

material weaknesses discovered by the group auditor in any component of the
group

3

material weaknesses discovered by any component auditor in any component of

the group

4

Any fraud or suspected fraud

A

1, 2, 3 and 4

B

1 only

C

1 and 4 only

D

1, 2 and 4 only

CHAPTER 14 – PROFESSIONAL ETHICS AND CODES OF CONDUCT
64

You have been proposed as auditor of a company. What is the first step that you
should take?
A

Obtain the client’s permission to communicate with the existing auditor

B

Obtain the existing auditor’s working papers

C

Obtain a copy of the company’s most recent board minutes

D

Obtain a copy of the existing auditor’s letter of engagement

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Audit and Assurance

65

66

67

68

Which one of the following may auditors NOT perform for their client?
A

Taking management decisions

B

Preparation of accounting records

C

Preparing tax computations

D

Advising on weaknesses in the internal control systems

Which of the following are fundamental ethical principles for professional accountants?
1

Competence

2

Compliance

3

Integrity

4

Objectivity

A

1, 2 and 3 only

B

1, 3 and 4 only

C

2, 3 and 4 only

D

1, 2 and 4 only

An auditor should not accept a loan on favourable commercial terms from an audit
client because of the threat to his or her independence. The threat would be a:
A

Self-interest threat

B

Self-review threat

C

Advocacy threat

D

Familiarity threat

Which of the following statements is INCORRECT?
A

An auditor may serve on the board of directors of an audit client.

B

An auditor who is an immediate family member of the director of an audit client
must not be assigned to the audit team.

C

Purchasing goods from an audit client on normal commercial terms does not
create a threat to the auditor’s independence.

D

An auditor who was recently a director of an audit client must not be assigned to
the audit team for that client.

CHAPTER 15 – AUDIT FINALISATION AND REPORTING
69

Which of the following is true about written representations?
A

They are the best source of audit evidence

B

They should be used only when there is a lack of other substantive audit
evidence

C

They should be used only when there is other substantive audit evidence to
complement it

D

Shareholders receive a copy of all material written representations

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14

The Institute of Chartered Accountants of Pakistan


Question bank: Multiple choice questions

70

71

72

73

Which of the following would you not use as a benchmark for comparison when
undertaking analytical procedures?
A

Other audit clients

B

Previous years

C

Other companies in the same industry

D

Budget

What is meant by the expression ‘expectation gap’?
A

The gap between how the directors of a company perform their duties and how
the shareholders expect them to perform

B

The gap between how the directors of a company perform their duties and how
the general public expects them to perform

C

The gap between the public perception of the role of company auditors and their
statutory role and responsibilities

D

The gap between the auditors’ own perception of their duties and how they are
set out in the Companies Act

Which of the following does NOT belong in the auditors’ report?
A

Introductory paragraph specifying the pages to which the report relates and the
accounting convention adopted

B

Basis of the opinion

C

Involvement of any specialist

D

Statement of responsibilities of directors and auditors

Which one of the following is part of the auditor’s function?
A

Conducting the inventory count

B

Obtaining and evaluating audit evidence on the financial statements

C

Calculating the year-end accruals figure for inclusion in the accounts

D

Providing representations to management

CHAPTER 16 – INTERNATIONAL STANDARDS ON REVIEW ENGAGEMENTS
74

What sort of assurance is provided in a review engagement?
A

Positive assurance

B

Negative assurance

C

High level of assurance

D

No assurance

© Emile Woolf International

15

The Institute of Chartered Accountants of Pakistan