AAA- Module 1 Quiz 2

For an assurance engagement with respect to the cash budgets of XYZ Ltd (XYZ) prepared for CDE Bank Ltd (CDE), the responsible party would be

• The shareholders of XYZ.

• The management of XYZ.

• The shareholders of CDE.

• The management of CDE.

Answer explanation

B is correct. The responsible party is the management of XYZ as they are responsible for the company (the subject matter) and its functions, including the cash budgeting. See the International Framework for Assurance Engagements, Appendix para. 2, for a description of the role of the responsible party.

A is incorrect because the shareholders of XYZ are not the responsible party as they have no direct authority over the company.

C and D are incorrect because either or both the shareholders and the management of CDE are the intended users of the assurance report.

Module: 1 > 1.2 Assurance engagement framework > Elements of an assurance engagement > Page: 29

Which of the following actions would be considered as self-interest threats?

I.One client provides a high percentage of total audit fees.

II.A member of the assurance team designed the internal controls that are to be assessed.

III.An auditor has potential employment with an assurance client.

IV.An auditor acts as an advocate on behalf of an assurance client.

• I and II

• I and III

• II and III

• III and IV

Answer explanation

B is correct.

Item I is correct because where one client provides more than 10–15 per cent of the audit fee, an independence threat is created for the assurance firm because of the significant amount of firm revenue received from that client.

Item III is correct because an offer of employment to an auditor with an assurance client is also a self- interest threat due to the potential employment income.

Item II is incorrect because it is a self-review threat, where the member of the assurance team may be reviewing some of their own work.

Item IV is incorrect because it is an advocacy threat, with the auditor advocating on behalf of its client.

Module: 1 > 1.2 Assurance engagement framework > Ethical principles > Page: 13

Which of the following fundamental principles of professional conduct is under threat when an accountant prepares an advertisement comparing the quality of their work with that of other accountants in the local region?

• Objectivity

• Professional behaviour

• Professional scepticism

• Professional competence and due care

Answer explanation

B is correct because accountants have to avoid any actions that discredit the profession. Such advertisements have the potential to damage the reputation of other firms and the profession.

The other options do not relate to conduct.

A is incorrect because it is part of the engagement process and requires auditors to maintain an impartial attitude.

C, professional scepticism, is incorrect because this is required when collecting and evaluating evidence.

D is incorrect because it is not relevant as it is part of the skills and expertise that the auditor is required to have to undertake an assurance engagement.

Module: 1 > 1.2 Assurance engagement framework > Ethical principles > Page: 13

Which of the following statements are correct?

I.Professional scepticism implies an expectation of fraud or error, so is a biased viewpoint.

II.The level of professional scepticism needs to be maintained throughout the whole engagement.

III.Professional scepticism is important in considering management’s explanations for unusual trends.

IV.The level of professional scepticism can be reduced where the auditor has past experience with the entity indicating the honesty and integrity of management.

• I and II

• I and IV

• II and III

• III and IV

Answer explanation

C is the correct answer. Item II is correct because the auditor must maintain their professional scepticism throughout the entire engagement. Item III is important in that it appropriately focuses professional scepticism on management explanations.

Item I is a common but incorrect view of the meaning of scepticism. To be sceptical means to be unbiased or open-minded in the sense that the auditor has no expectation that an amount or transaction has been recorded either correctly or incorrectly.

Item IV is incorrect. As noted in the Study guide, ‘a long or close relationship with a client may pose a familiarity threat to professional scepticism because the practitioner may become too sympathetic to the client’s interest or too accepting of their work (the Code, para. 120.6 A3(d))’.

Module: 1 > 1.2 Assurance engagement framework > Elements of an assurance engagement > Page: 33

Which of the following statements are true?

I.  Reviews of historical financial information are limited assurance engagements.

I.  A limited assurance engagement provides less confidence to users than a reasonable assurance engagement as the engagement risk is lower.

III.  A review engagement does not ordinarily require tests of accounting records through inspection, confirmation and observation.

IV.  A common form of expression for a review engagement is ‘The financial statements are prepared in accordance with the [appropriate accounting] framework’.

• I and II

• I and III

• II and III

• III and IV

Answer explanation

B is the correct. Item I is correct because a review is a limited assurance engagement where sufficient appropriate evidence includes obtaining an understanding of the subject matter information and other engagement circumstances, but the procedures are limited in comparison to a reasonable assurance engagement. Item III is also correct as a review gives limited rather than reasonable assurance. Item II is incorrect. A limited assurance engagement provides less confidence to users than a reasonable assurance engagement as the engagement risk is greater. This is because the detection risk is higher as the auditor performs less audit procedures in a limited assurance engagement than in a reasonable assurance engagement. Item IV is incorrect because this is a positive form of expression. For the review engagement, the practitioner expresses a conclusion in a form that conveys whether, based on the procedures performed and evidence obtained, a matter has come to the practitioner’s attention to cause   the practitioner to believe the subject matter information is materially misstated. Reference: Module 1

‘2 Assurance engagement framework’ > ‘Reasonable and limited assurance engagements’.

Module: 1 > 1.2 Assurance engagement framework > Scope of the framework > Page: 27

An auditor leaves an audit firm and takes the role of the CFO of an audit client two months after completing the audit. This would involve some of the following threats:

I.  Familiarity

II.  Self-review

II.  Self-interest

IV.  Intimidation

• I, II and III

• I, II and IV

• I, III and IV

• II, III and IV

Answer explanation

C is the correct answer. The auditor’s judgement and independence may have been impacted by the financial inducements associated with the new role of CFO.

Regarding item I and IV , the code of ethics makes it clear that employment of auditors, especially those who have recently been engaged in the audit, leads to familiarity and intimidation threats.

Employment with an Audit Client

524.3 A1 A familiarity or intimidation threat might be created if any of the following individuals have been an audit team member or partner of the firm or a network firm:

• A director or officer of the audit client.

• An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements.

Item III, self-interest, is also a threat because the offer of employment is a financial inducement and may have biased the judgement of the auditor.

Item II is incorrect because it is not relevant to this scenario. Self-review relates to review of one’s own work which would not arise in the CFO’s role. The CFO would not review the prior auditor’s work.

Module: 1 > 1.2 Assurance engagement framework > Ethical principles > Page: 13

Which of the following potential criteria could be used in an internal control assurance engagement?

I.  International accounting standards

II.  COSO (2013) Internal Control – Integrated Framework

III.  Criteria developed by the practitioner for the purpose of the engagement

IV.  ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management

• I, and II

• I and III

• II and III

• II and IV

Answer explanation

C is the correct answer. Item II is correct because COSO (2013) provides an established framework for such engagements. Item C is correct because the International Framework for Assurance Engagements, para. 42 says that criteria can be established or specifically developed for the purpose of the engagement by the assurance practitioner.

Item A is incorrect because the international accounting standards are an appropriate framework for financial statement audits, but not for an internal control assurance engagement.

Item D is incorrect. ISA 265, as the title suggests, is concerned with the reporting of the findings of an internal control examination. It does not provide criteria for this examination.

Module: 1 > 1.2 Assurance engagement framework > Elements of an assurance engagement > Table 1.7 > Page: 31

The following is an extract from an assurance report on forecast financial information.

Pro forma Forecast Financial Information

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that:

• the directors’ best-estimate assumptions used in the preparation of the Pro forma Forecast Financial Information do not provide reasonable grounds for the Pro forma Forecast Financial Information

• in all material respects, the Pro forma Forecast Financial Information…

• the Pro forma Forecast Financial Information itself is unreasonable.

Which of the following best describes the level of assurance of subject matter?

• Limited assurance of other information

• Reasonable assurance of other information

• Limited assurance of historical financial information

• Reasonable assurance of historical financial information

Which of the following statements best describes the role of the Auditor-General in Australia?

• The Auditor-General is the external auditor of the public sector.

• The Auditor-General provides assurance on the financial reports of government entities.

• The Auditor-General provides assurance services to the Australian Department of Defence.

• The Auditor-General provides recommendations to improve the management practices of government entities

Answer explanation

A is correct because the Auditor-General is responsible for auditing the financial reports and the performance of all government entities. The Auditor-General is independent of these entities, determining their own program of work and reporting directly to parliament.

B and D are incorrect because they are just partial descriptions of the Auditor-General’s role. The Auditor-General’s role includes the audit of financial reports of government entities (B), as well as performance audits (D).

C is incorrect because while the Auditor-General is responsible for the audit of the Department of Defence, the Auditor-General’s role is far more extensive and includes audit of all government entities.

Module: 1 > 1.4 Application of standards > Application of ISAs > Page: 49

Which of the following options is not an accurate description of the application of the International Standards on Auditing (ISAs)?

• They apply to audits of all sizes and complexity.

• They apply to all types of assurance engagements.

• They apply to the public sector and the private sector.

• They apply to all members of the accounting profession.

Answer explanation

B is correct because ISAs are written in the context of an audit of financial statements, which is a subset of assurance engagements.

A is incorrect because ISAs apply to audits of all sizes and complexity.

C is incorrect because ISAs apply to both the public and the private sector.

D is incorrect because ISAs apply to all members of the accounting profession.

Module: 1 > 1.4 Application of standards > Application of ISAs > Page: 45