ACCA AA · Chapter 7
Fraud, laws and regulations and audit documentation MCQs with Answers
8 multiple-choice questions on Fraud, laws and regulations and audit documentation for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under ISA 240, who has primary responsibility for the prevention and detection of fraud?
- A) Management and those charged with governance
- B) The internal audit function
- C) The shareholders
- D) The external auditor
Show answer & explanation
Answer: A) Management and those charged with governance
ISA 240 states that primary responsibility for preventing and detecting fraud rests with those charged with governance and management, mainly through internal controls. The external auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error.
Question 2
Which of the following does ISA 240 require the auditor to presume is a risk of material misstatement due to fraud, unless rebutted?
- A) Fraud risks in share capital
- B) Fraud risks in revenue recognition
- C) Fraud risks in the depreciation charge
- D) Fraud risks in payroll
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Answer: B) Fraud risks in revenue recognition
ISA 240 contains a rebuttable presumption that there are risks of fraud in revenue recognition, and the auditor must document reasons if it is rebutted. The risk of management override of controls is also always treated as a significant risk and cannot be rebutted.
Question 3
A cashier at Gusset Co steals cash received from one customer and covers the shortfall by allocating a later receipt from another customer to the first customer's account. How is this fraud best described?
- A) Misappropriation of assets, known as a ghost employee fraud
- B) Fraudulent financial reporting, known as window dressing
- C) Misappropriation of assets, known as teeming and lading
- D) Fraudulent financial reporting, known as cut-off manipulation
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Answer: C) Misappropriation of assets, known as teeming and lading
Teeming and lading is a form of asset misappropriation in which receipts are stolen and the theft is concealed by misallocating later receipts. It is not fraudulent financial reporting because the aim is theft of assets rather than deliberate misstatement of reported results. Ghost employees relate to payroll fraud.
Question 4
Which of the following procedures does ISA 240 require the auditor to perform in response to the risk of management override of controls?
- A) Sending positive confirmations to all customers
- B) Testing the appropriateness of journal entries recorded in the general ledger
- C) Attending the year-end inventory count
- D) Re-performing the bank reconciliation for every month of the year
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Answer: B) Testing the appropriateness of journal entries recorded in the general ledger
Because management override can occur in unpredictable ways, ISA 240 requires the auditor to test journal entries and other adjustments, review accounting estimates for bias, and evaluate the business rationale of significant unusual transactions. The other procedures may be relevant to specific areas but are not the required responses to override.
Question 5
Under ISA 250, for which category of laws and regulations must the auditor obtain sufficient appropriate audit evidence regarding compliance?
- A) Only operating licences and environmental regulations
- B) Only laws that carry criminal penalties for directors
- C) All laws and regulations to which the entity is subject
- D) Those generally recognised to have a direct effect on the determination of material amounts and disclosures, such as tax laws
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Answer: D) Those generally recognised to have a direct effect on the determination of material amounts and disclosures, such as tax laws
ISA 250 distinguishes laws with a direct effect on the financial statements, such as tax and pension laws, for which the auditor obtains sufficient appropriate evidence of compliance, from other laws that are fundamental to operations, for which the auditor performs specified procedures such as enquiry and inspection of correspondence. The auditor cannot be expected to test compliance with every law.
Question 6
Which of the following is a purpose of audit documentation under ISA 230?
- A) To provide a copy of the financial statements to shareholders
- B) To allow the client's management to review the auditor's judgements before the report is signed
- C) To provide evidence of the auditor's basis for a conclusion about the achievement of the auditor's overall objectives
- D) To replace the need for the client to keep its own accounting records
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Answer: C) To provide evidence of the auditor's basis for a conclusion about the achievement of the auditor's overall objectives
Audit documentation provides evidence that the audit was planned and performed in accordance with ISAs and supports the conclusions reached. It also assists supervision, review and quality inspections. It belongs to the audit firm and is not a substitute for the client's records.
Question 7
Under ISA 230 and related quality management standards, what is the usual time limit for assembling the final audit file after the date of the auditor's report?
- A) 30 days
- B) 60 days
- C) 90 days
- D) 365 days
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Answer: B) 60 days
Assembly of the final audit file is an administrative process that should normally be completed within 60 days of the date of the auditor's report. No new audit procedures should be performed during assembly, and documentation is then retained for a period that is commonly at least five years.
Question 8
After the final audit file has been assembled, the auditor finds that it is necessary to add documentation relating to a matter already concluded. Which of the following is correct under ISA 230?
- A) The auditor may add the documentation but must record when and by whom it was added and the specific reasons, and must not delete any existing documentation
- B) The auditor may replace the original working papers with updated versions, provided the engagement partner approves
- C) The auditor may add documentation only if the client's audit committee agrees
- D) No further documentation may ever be added once the file has been assembled
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Answer: A) The auditor may add the documentation but must record when and by whom it was added and the specific reasons, and must not delete any existing documentation
After assembly, the auditor must not delete or discard documentation before the end of the retention period. If modifications or additions are necessary, ISA 230 requires the auditor to document the specific reasons, and when and by whom they were made and reviewed. This preserves the integrity of the record of work actually performed.