AA ICAEW EXAM QUESTIONS AND ACCURATE ANSWERS
Name 5 actions that can increase objectivity and independence. - Answer - Rotation of
partners.
- Independence declarations completed annually (or periodically).
- Engagement quality control review to consider adequacy of the documentation of
conclusion on independence and objectivity.
- Appointment of an ethics partner to seek guidance from.
- Training/development processes surrounding objectivity.
Name 6 ways an audit strategy can be altered for increased risk. - Answer - reduce
materiality thresholds.
- increase sample sizes.
- increase level of testing with emphasis on area noted.
- increase professional scepticism.
- place less reliance on management representations.
- arrange audit quality control review.
,Describe what analytical procedures do and three ways they can be used. - Answer
They compare balances with previous periods, month by month, or with industry
data/forecasts.
- Can be used to compare manual vs system generated journal.
- Can be used to compare journal entries year on year.
- Can be used to analyse margins and sales and highlight negative margins.
What are the limitations of analytical procedures (4)? - Answer - require good
knowledge of the business.
- may be prone to performing analytics mechanically and lack of professional
scepticism.
- reliable data for the analytic may not be available.
- lack of comparability if the business is growing or changing.
What is the purpose of walkthroughs? - Answer - they are designed to establish that
internal controls exist.
- for the audit team to gain an understanding of the control.
- they help to decide the audit approach, whether controls can be relied upon.
- they cannot be used as audit evidence.
What is the purpose of tests of controls (3)? - Answer - they are designed to obtain
sufficient audit evidence of operating effectiveness.
- the auditor is to rely on controls when determining extent of substantive procedures.
- substantive procedures alone are not sufficient audit evidence.
What is the third party test? - Answer when considering whether the requirements of the
ethical standard have been met, evaluation should be made with reference to the
,perspective of an objective, reasonable and informed third party.
Name 5 criticisms of external auditors. - Answer - lack of audit quality/scepticism.
- lack of competition due to dominance of big four.
- lack of independence.
- non-audit services provided to clients.
What type of actions/transactions indicate money laundering and what steps should be
taken if this issue arises? - Answer - large periodic transactions of the same amount,
being billed to and from overseas locations.
- report to money laundering officer at the firm as activity represents proceeds of crime.
- report to the national crime agency as it is an offence not to report.
- avoid tipping off the client as it would be a criminal offence to do so.
How should a question which suggest an ethical dilemma/situation be answered? -
Answer - first explain what the question presents (e.g. conflict of interest, overdue fees,
opinion shopping, long association).
- then discuss the ethical threats that will arise from the situation (e.g. management
threat, advocacy, familiarity, self-interest etc.).
- then discuss any safeguards that could be applied to these threats.
- then come to conclusion.
What are the safeguards to management threat? - Answer - have an informed
management (with knowledge of area so can evaluate advice given by auditor instead of
just taking opinion as gospel, and there auditor effectively making the decision).
- only perform work of a technical/mechanical nature only (not judgemental).
What are PIE clients? - Answer - an issuer whose transferable securities are admitted to
, trading on a UK regulated market.
- a credit institution.
- a person who would be an insurance undertaking.
If warranties have been deemed a risky area in the audit, how could they be tested (5
ways). - Answer · Enquire with management about the basis for the estimate of the
warranty provision
· Compare prior year provisions with actual claims made to ascertain the accuracy of
managements estimates
· Review the level of returns post year end and compare this with the assumptions made
about returns
· Review listing of repair costs incurred and compare this with the assumptions made
· Check the movement in the provision has been appropriately recorded in the statement
of profit or loss
If going concern has been deemed a risky area in the audit, how could they be tested (5
ways). - Answer · Obtain cash flow forecast for at least a year from the reporting date
and assess reasonableness
· Perform sensitivity analysis on key components of forecast such as revenue, interest
rates
· Review cash flow forecast to determine whether entity can pay debts and will comply
with bank covenants
· Obtain written representations from management regarding future plans and their
feasibility
· Inspect bank correspondence for evidence of banking relationship including covenants
If management override of controls has deemed to be very high risk, how could this be
tested? (5 ways) - Answer · Substantiate journal entries and investigate reconciling
items
· Review significant accounting estimates and judgement for bias
· Investigate transactions outside of the ordinary course of business
Name 5 actions that can increase objectivity and independence. - Answer - Rotation of
partners.
- Independence declarations completed annually (or periodically).
- Engagement quality control review to consider adequacy of the documentation of
conclusion on independence and objectivity.
- Appointment of an ethics partner to seek guidance from.
- Training/development processes surrounding objectivity.
Name 6 ways an audit strategy can be altered for increased risk. - Answer - reduce
materiality thresholds.
- increase sample sizes.
- increase level of testing with emphasis on area noted.
- increase professional scepticism.
- place less reliance on management representations.
- arrange audit quality control review.
,Describe what analytical procedures do and three ways they can be used. - Answer
They compare balances with previous periods, month by month, or with industry
data/forecasts.
- Can be used to compare manual vs system generated journal.
- Can be used to compare journal entries year on year.
- Can be used to analyse margins and sales and highlight negative margins.
What are the limitations of analytical procedures (4)? - Answer - require good
knowledge of the business.
- may be prone to performing analytics mechanically and lack of professional
scepticism.
- reliable data for the analytic may not be available.
- lack of comparability if the business is growing or changing.
What is the purpose of walkthroughs? - Answer - they are designed to establish that
internal controls exist.
- for the audit team to gain an understanding of the control.
- they help to decide the audit approach, whether controls can be relied upon.
- they cannot be used as audit evidence.
What is the purpose of tests of controls (3)? - Answer - they are designed to obtain
sufficient audit evidence of operating effectiveness.
- the auditor is to rely on controls when determining extent of substantive procedures.
- substantive procedures alone are not sufficient audit evidence.
What is the third party test? - Answer when considering whether the requirements of the
ethical standard have been met, evaluation should be made with reference to the
,perspective of an objective, reasonable and informed third party.
Name 5 criticisms of external auditors. - Answer - lack of audit quality/scepticism.
- lack of competition due to dominance of big four.
- lack of independence.
- non-audit services provided to clients.
What type of actions/transactions indicate money laundering and what steps should be
taken if this issue arises? - Answer - large periodic transactions of the same amount,
being billed to and from overseas locations.
- report to money laundering officer at the firm as activity represents proceeds of crime.
- report to the national crime agency as it is an offence not to report.
- avoid tipping off the client as it would be a criminal offence to do so.
How should a question which suggest an ethical dilemma/situation be answered? -
Answer - first explain what the question presents (e.g. conflict of interest, overdue fees,
opinion shopping, long association).
- then discuss the ethical threats that will arise from the situation (e.g. management
threat, advocacy, familiarity, self-interest etc.).
- then discuss any safeguards that could be applied to these threats.
- then come to conclusion.
What are the safeguards to management threat? - Answer - have an informed
management (with knowledge of area so can evaluate advice given by auditor instead of
just taking opinion as gospel, and there auditor effectively making the decision).
- only perform work of a technical/mechanical nature only (not judgemental).
What are PIE clients? - Answer - an issuer whose transferable securities are admitted to
, trading on a UK regulated market.
- a credit institution.
- a person who would be an insurance undertaking.
If warranties have been deemed a risky area in the audit, how could they be tested (5
ways). - Answer · Enquire with management about the basis for the estimate of the
warranty provision
· Compare prior year provisions with actual claims made to ascertain the accuracy of
managements estimates
· Review the level of returns post year end and compare this with the assumptions made
about returns
· Review listing of repair costs incurred and compare this with the assumptions made
· Check the movement in the provision has been appropriately recorded in the statement
of profit or loss
If going concern has been deemed a risky area in the audit, how could they be tested (5
ways). - Answer · Obtain cash flow forecast for at least a year from the reporting date
and assess reasonableness
· Perform sensitivity analysis on key components of forecast such as revenue, interest
rates
· Review cash flow forecast to determine whether entity can pay debts and will comply
with bank covenants
· Obtain written representations from management regarding future plans and their
feasibility
· Inspect bank correspondence for evidence of banking relationship including covenants
If management override of controls has deemed to be very high risk, how could this be
tested? (5 ways) - Answer · Substantiate journal entries and investigate reconciling
items
· Review significant accounting estimates and judgement for bias
· Investigate transactions outside of the ordinary course of business
