ACCA Advanced Audit and Assurance Exam Practice Questions and Answers

ACCA Advanced Audit and Assurance Exam Practice Questions and Answers Define materiality - ANSWERMatters are material if their omission or misstatement could influence the economic decisions of users of the financial statements. What are the materiality benchmarks? - ANSWER- Above 1⁄2- 1% of revenue - Above 1 - 2% of total assets - Above 5 - 10% of profit before tax Define performance materiality - ANSWERThis is an amount set by the auditor that is less than the overall materiality threshold. Its purpose is to reduce the risk that the total undetected and uncorrected misstatements will exceed materiality for the financial statements as a whole. Define business risk - ANSWERBusiness risk is defined as a threat which could mean that a business fails to meet one of its key business objectives. Essentially, a "business risk" is any risk which could affect a business' revenues, profits or reputation What are the three types of business risks? - ANSWER- Financial ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 2/29 - Operational - Compliance Define inherent risk - ANSWERThis is the risk that an account balance or transaction is susceptible to a material misstatement. It arises due to the nature of the business or the external pressures placed on the business. What are the five factors which increase inherent risk? - ANSWER- Complexity - Subjectivity - Change - Uncertainty - Susceptibility to management bias or other fraud risk factors Define control risk - ANSWERThis is the risk that the client's internal control system will fail to prevent or detect a material misstatement. The auditor's preliminary assessment of controls will help determine control risk. Define Attestation - ANSWERAs an engagement in which a practitioner What does an adverse opinion mean? - ANSWERAn adverse opinion means that the auditor considers the misstatement to be material and pervasive to the financial statements. Pervasive matters ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 3/29 are those which affect a substantial proportion of the financial statements or fundamentally affect the users' understanding of the financial statements. When is an emphasis of matter used? - ANSWEREmphasis of matter is only used for matters where the auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements. What are the seven key assertions? - ANSWERCompleteness, Occurrence, Disclosure, Existence, Cut- Off, Accuracy and Rights and Obligations Define aggregation risk - ANSWERAggregation risk is the risk that the sum of all uncorrected and undetected misstatements is greater than materiality for the group. This risk is greater where a group is made up of many components which are audited separately. Risk is reduced by setting PM lower than group PM How long can administration last? - ANSWERUp to 12 months What is a compulsory liquidation? - ANSWEROne ordered by the courts. What does ISA 300 state? - ANSWER-Establish the overall audit strategy for the engagement -develop an audit plan What does the audit strategy set out? - ANSWERThe scope, timing and direction of the audit. ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 4/29 Define audit risk - ANSWERThe overall risk of giving an inappropriate opinion on the financial statements. It is a combination of material misstatement and detection risk Define risk of material misstatement - ANSWERThe risk that the financial statements are materially misstated prior to audit and consists of two components - inherent risk and control risk. It may exist at financial statement level or in relation to particular assertions. What are the five main aspects of the clients business which the auditor should understand? - ANSWER- Industry and regulatory framework - Nature of the entity and its accounting policies - Objectives and strategies and related business risks -Measurement and review of the entity's financial performance - Internal control What is the audit risk for IAS 21 Forex? - ANSWERIncorrect exchange ra