ACCA AA · Chapter 1
Audit and other assurance engagements MCQs with Answers
8 multiple-choice questions on Audit and other assurance engagements for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT one of the elements of an assurance engagement?
- A) An audit committee that oversees the practitioner's work
- B) A written assurance report in an appropriate form
- C) Suitable criteria against which the subject matter is evaluated
- D) A three-party relationship between the practitioner, the responsible party and the intended users
Show answer & explanation
Answer: A) An audit committee that oversees the practitioner's work
An assurance engagement has five elements: a three-party relationship, an appropriate subject matter, suitable criteria, sufficient appropriate evidence and a written assurance report. An audit committee is a corporate governance mechanism within the client; many assurance engagements are performed for entities that have no audit committee at all.
Question 2
What level of assurance is provided by a statutory external audit of financial statements, and how is the conclusion expressed?
- A) Limited assurance, expressed as a negative conclusion
- B) Reasonable assurance, expressed as a positive opinion
- C) Reasonable assurance, expressed as a negative conclusion
- D) Absolute assurance, expressed as a positive opinion
Show answer & explanation
Answer: B) Reasonable assurance, expressed as a positive opinion
An audit provides reasonable assurance, which is a high but not absolute level of assurance, and the auditor expresses a positive opinion on whether the financial statements give a true and fair view. Absolute assurance is never possible because of the inherent limitations of an audit. Negative (limited) assurance conclusions are used in review engagements.
Question 3
An accountancy firm has completed a review engagement on a client's interim financial statements under ISRE 2400. Which of the following wordings is most appropriate for the conclusion in its report?
- A) We certify that the financial statements are free from error and fraud
- B) In our opinion, the financial statements give a true and fair view in accordance with the applicable framework
- C) Based on our review, nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable framework
- D) In our opinion, the financial statements may contain material misstatements which we have not been able to identify
Show answer & explanation
Answer: C) Based on our review, nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable framework
A review engagement gives limited assurance, so the practitioner expresses a negative conclusion stating that nothing has come to their attention suggesting the information is materially misstated. A positive 'true and fair' opinion is reserved for reasonable assurance engagements such as an audit. Practitioners never certify that information is free from all error.
Question 4
Which of the following is an inherent limitation of an audit that explains why only reasonable, rather than absolute, assurance can be given?
- A) Auditors have no responsibility to consider fraud when planning the audit
- B) Directors are responsible for the financial statements, so auditors may not challenge their judgements
- C) Auditors are prohibited by ISAs from testing every transaction in a population
- D) Much of the audit evidence obtained is persuasive rather than conclusive
Show answer & explanation
Answer: D) Much of the audit evidence obtained is persuasive rather than conclusive
ISA 200 explains that audit evidence is generally persuasive rather than conclusive, financial reporting involves judgement, and there are practical limits on time and cost. ISAs do not prohibit 100% testing; it is simply often impractical. Auditors must consider fraud under ISA 240 and must challenge management's judgements with professional scepticism.
Question 5
Which of the following beliefs held by some users of financial statements contributes to the 'expectation gap'?
- A) An unmodified audit opinion means that the company is financially sound and will not fail
- B) The auditor gives an opinion on whether the financial statements give a true and fair view
- C) The auditor usually tests a sample of transactions rather than every transaction
- D) The directors are responsible for preparing the financial statements
Show answer & explanation
Answer: A) An unmodified audit opinion means that the company is financially sound and will not fail
The expectation gap is the difference between what users believe auditors do and what auditors actually do. An audit opinion is not a guarantee of the entity's future viability or financial health. The other three statements are accurate descriptions of the audit and so do not contribute to the gap.
Question 6
In an audit of financial statements, who has primary responsibility for preparing the financial statements?
- A) The shareholders in general meeting
- B) The external auditor
- C) The internal audit function
- D) Management, with oversight from those charged with governance
Show answer & explanation
Answer: D) Management, with oversight from those charged with governance
Management, overseen by those charged with governance, is responsible for preparing financial statements in accordance with the applicable framework. The external auditor's responsibility is to express an opinion on them. Shareholders receive the financial statements and internal audit is part of the entity's monitoring of controls.
Question 7
A bank has asked a practitioner to provide assurance on a cash flow forecast prepared by the directors of Ostrander Co, which the bank will use to decide whether to extend a loan. In this engagement, which party is the 'responsible party'?
- A) The bank
- B) The directors of Ostrander Co
- C) The practitioner
- D) The shareholders of Ostrander Co
Show answer & explanation
Answer: B) The directors of Ostrander Co
The responsible party is the party responsible for the subject matter, which here is the directors who prepared the forecast. The bank is the intended user of the assurance report and the practitioner is the party providing assurance. Shareholders are not involved in this particular engagement.
Question 8
Consider the following engagements: 1. Statutory audit of annual financial statements 2. Review of interim financial statements under ISRE 2400 3. Agreed-upon procedures engagement on a list of payables Which of these engagements provides limited assurance?
- A) 1 and 2
- B) 2 and 3
- C) 2 only
- D) 3 only
Show answer & explanation
Answer: C) 2 only
A statutory audit provides reasonable assurance. A review engagement provides limited assurance with a negative conclusion. An agreed-upon procedures engagement provides no assurance at all: the practitioner simply reports factual findings and the users draw their own conclusions.