S2 AUDIT & ASSURANCE SOLVED
MCQ’S WITH REFERENCE SEE FILE
SOME OF THE QUESTIONS MIGHT
BE WRONG ALL THE OPTIONS ARE
CORRECT CHECKED FROM CHAT
GPT. CHECK MCQ NO 28 & 21.
DESCRIPTIVE QUESTIONS ALSO
SOLVED WITH REFERENCE. ISA
MCQ’S WERE FROM 962
HANDBOOK AVAILABLE IN
GOOGLE DRIVE WITH GREEN &
BLUE COVER
IMPORTANT NOTE: READ
DIFFERENT ISA VERY CAREFULLY
LIKE ISA 230, 330, 405, 450, 500,
550 BECAUSE 10 to 15 MCQ’S
WERE FROM THOSE. ISA
HANDBOOK, IT IS AVAILABLE IN
YOUR GOOGLE DRIVE OF 962
PAGES APPROXIMATELY
S-2 AUDIT & ASSURANCE MCQ’S SOLVED
WITH REFERENCE AND DESCRIPTIVE
QUESTIONS AND ANSWERS
1. Changes may be made to the audit documentation during the final assembly
process if they are administrative in nature, such changes, may not include:
a.
b.
c.
d.
Signing off on completion checklists relating to the file assembly
process
Accumulating superseded documentation
Documenting audit evidence that the auditor has obtained, discussed
and agreed with the relevant members of the engagement team before
the date of auditor’s report
Sorting, collating and cross-referencing working papers
REFERENCE: (FROM PAGE NO 152, 153) (FROM a011-2010-iaasbhandbook-isa -230.pdf) – IFAC INTERNATIONAL STANDARD ON AUDITING
230 AUDIT DOCUMENTATION (Effective for audits of financial statements
for periods beginning on or after December 15, 2009)
A22. Changes may, however, be made to the audit documentation during
the final assembly process if they are administrative in nature. Examples of
such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed
and agreed with the relevant members of the engagement team before
the date of the auditor’s report.
2. Which one of the following procedures is not appropriate for obtaining
evidence regarding the going concern assumption?
a. Inspect correspondence with the bank regarding loan or overdraft facilities
b. Examine cash flow forecasts
c. Obtain external confirmation from a customer regarding their
outstanding balance
d. Discuss with management their plans for the future
REFERENCE:
The correct option is c. Obtain external confirmation from a
customer regarding their outstanding balance.
Explanation: The going concern assumption is an accounting
principle that assumes the business will continue to operate
indefinitely. To obtain evidence regarding the going concern
assumption, auditors perform various procedures to assess the
entity's ability to continue as a going concern.
Inspecting correspondence with the bank regarding loan or
overdraft facilities, examining cash flow forecasts, and discussing
with management their plans for the future are all appropriate
procedures for obtaining evidence regarding the going concern
assumption. However, obtaining external confirmation from a
customer regarding their outstanding balance is not an
appropriate procedure for assessing the entity's ability to
continue as a going concern. This procedure may provide
evidence of the entity's liquidity, but it does not directly relate to
the entity's ability to continue as a going concern.
3. In accordance with ISA 200, select the best option from the following which
indicates the responsibility of management and those charged with governance
to provide the auditor with:
a. Access to all information of which management and, where appropriate, those
charged with governance are aware that is relevant to the preparation of the financial
statements
b. All of these
c. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
d. Additional information that the auditor may request from management and, where
appropriate, those charged with governance for the purpose of the audit
REFERENCE: (FROM PAGE NO 77) (A008 2010 IAASB Handbook ISA 200)
INTERNATIONAL STANDARD ON AUDITING 200 OVERALL
OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF
AN AUDIT IN ACCORDANCE WITH INTERNATIONAL STANDARDS ON
AUDITING (Effective for audits of financial statements for periods beginning on
or after December 15, 2009) (iii) To provide the auditor with:
a. Access to all information of which management and, where appropriate, those
charged with governance are aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
b. Additional information that the auditor may request from management and,
where appropriate, those charged with governance for the purpose of the audit;
and
c. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
4. In accordance with ISA 500, if information to be used as audit evidence has been
prepared by using the work of a management’s expert, the auditor shall, to the extent
necessary, having regard to the significance of that expert’s work for the auditor’s
purposes:
(i)
(ii)
(iii)
Evaluate the competence, capabilities and objectivity of that expert
Obtain an understanding of the work of that expert
Evaluate the appropriateness of that expert’s work as audit evidence for
the relevant assertion
a. Option (i) and (ii) are correct
c. Option (i), (ii) and (iii) are correct
b. Option (i) is correct
d. Option (ii) and (iii) are correct
REFERENCE: (FROM PAGE NO 382) (A022 2010 IAASB Handbook ISA
500) INTERNATIONAL STANDARD ON AUDITING 500 AUDIT EVIDENCE
(Effective for audits of financial statements for periods beginning on or after
December 15, 2009)
8. If information to be used as audit evidence has been prepared using the work
of a management’s expert, the auditor shall, to the extent necessary, having
regard to the significance of that expert’s work for the auditor’s purposes:
(Ref: Para. A34–A36)
(a) Evaluate the competence, capabilities and objectivity of that expert; (Ref:
Para. A37–A43)
(b) Obtain an understanding of the work of that expert; and (Ref: Para. A44–
A47)
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the
relevant assertion. (Ref: Para. A48)
5. A significant employee fraud took place shortly after an internal auditing
engagement. The internal auditor may not have properly fulfilled the
responsibility for the prevention of fraud by failing to note and report that:
a. There were no written policies describing prohibited activities and the
action required whenever violations are discovered. (From Audit - Ch. 8
Gleim) (From Website https://www.chegg.com/flashcards/audit-ch-8gleim-127c73ac-42fe-4130-acb7-ddc48d5b8b80/deck)
b. A system of control that depended upon separation of duties could be
circumvented by collusion among three employees.
c. Policies, practice and procedures to monitor activities and safeguard assets
were less extensive in low risk areas than high-risk areas.
d. Divisional employees had not been properly trained to distinguish between
bona fide signatures and cleverly forged ones on authorization forms
6. According to ISA 550, which one of the following shall not be considered as
related party?
a. Another entity over which the reporting entity has control or significant influence,
directly or indirectly through one or more intermediaries
b. A person or other entity that has control or significant influence, directly or
indirectly through one or more intermediaries, over the reporting entity
c. A related party as defined in the applicable financial reporting framework
d. Entities that are under common control by a state that is national,
regional or local government
REFERENCE: (FROM PAGE NO 507, 508) (FROM A029 2010 IAASB
Handbook ISA 550) INTERNATIONAL STANDARD ON AUDITING 550
RELATED PARTIES (Effective for audits of financial statements for
periods beginning on or after December 15, 2009)
Related party – A party that is either: (Ref: Para. A4–A7)
(i) A related party as defined in the applicable financial reporting
framework; or
(ii) Where the applicable financial reporting framework establishes
minimal or no related party requirements:
a. A person or other entity that has control or significant influence,
directly or indirectly through one or more intermediaries, over the
reporting entity;
b. Another entity over which the reporting entity has control or
significant influence, directly or indirectly through one or more
intermediaries; or
c. Another entity that is under common control with the reporting entity
through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
However, entities that are under common control by a state (that is, a
national, regional or local government) are not considered related
unless they engage in significant transactions or share resources to a
significant extent with one another.
7. Where management will not acknowledge its responsibilities or agree to
provide the written representation the auditor will:
a. Be unable to obtain sufficient appropriate audit evidence
b. Be able to provide disclaimer
c. Be able to provide evidence for financial statements
d. Refuse to conduct the audit
REFERENCE:
a. Be unable to obtain sufficient appropriate audit evidence.
When management does not acknowledge its responsibilities or refuses
to provide written representation, it is considered a significant limitation
to the scope of the audit. As a result, the auditor may not be able to
obtain sufficient appropriate audit evidence to support the financial
statements. In such cases, the auditor should communicate the matter to
those charged with governance and consider the impact on the auditor's
report. It may result in the auditor issuing a qualified opinion or a
disclaimer of opinion, depending on the nature and extent of the
limitation on the scope of the audit. The auditor cannot refuse to
conduct the audit solely on this basis, but they may withdraw from the
engagement if they believe that the limitation is pervasive and cannot be
addressed appropriately.
8. Which one of the following statement regarding fraud is correct?
a. The auditor must detect al material fraud in the financial statements
b. The auditor may not detect all material fraud in the financial
statements but this will not necessarily mean the auditor has been
negligent to make sure of the nature of fraud and the likelihood of
concealment
c. The auditor is not responsible for detecting fraud as this is management’s
responsibility
d. The auditor must detect every fraud in the financial statements
REFERENCE:
b. The auditor may not detect all material fraud in the financial
statements but this will not necessarily mean the auditor has been
negligent to make sure of the nature of fraud and the likelihood of
concealment.
The auditor's responsibility is to plan and perform the audit to obtain
reasonable assurance that the financial statements are free from material
misstatement, whether due to fraud or error. However, it is not possible
for the auditor to detect all instances of fraud, especially those involving
collusion, override of controls, or management bias. Therefore, the
auditor must exercise professional skepticism and maintain an attitude of
questioning to assess the risk of material misstatement due to fraud, and
design audit procedures to detect material misstatements resulting from
fraud.
The auditor's responsibility for the detection of fraud is not absolute,
and they are not expected to guarantee that all fraud will be detected.
However, if the auditor becomes aware of any fraud during the audit,
they are required to report it to the appropriate level of management
and, in some cases, to regulatory authorities. Additionally, the auditor
should consider the implications of any identified fraud on the financial
statements and the auditor's report.
9. Mr. Rohaan conducted the audit of Furious Limited and found multiple
misstatements in the financial statements of the company which are
immaterial when added together. Which one of the following opinion is
appropriate in this situation?
a. Adverse
c. Unmodified
Disclaimer
b. Qualified
d.
REFERENCE:
c. Unmodified
If Mr. Rohaan found multiple misstatements in the financial statements
of Furious Limited which are immaterial when added together, it means
that these misstatements do not affect the overall fairness of the
financial statements. Therefore, an unmodified opinion is appropriate in
this situation.
An unmodified opinion indicates that the financial statements are
presented fairly, in all material respects, in accordance with the
applicable financial reporting framework. Since the misstatements found
by Mr. Rohaan are not material, they do not affect the overall fairness of
the financial statements, and there is no need for an adverse, qualified,
or disclaimer opinion.
10. As per ISA 260, if the two-way communication between the auditor and
those charged, with governance is not adequate and the situation cannot be
resolved, which of the following action the auditor may take?
(i)
Modify the auditor’s opinion on the basis of the scope limitation
(ii)
Perform additional audit procedures
(iii)
Obtaining legal advice about the consequences of different course of
actions
a. Option (ii) and (iii) are correct
c. Option (i) and (iii) are correct
b. Option (i) and (ii) are correct
d. Option (i) is correct
REFERENCE: (FROM PAGE NO 232) (FROM A014 2010 IAASB Handbook
ISA 260) INTERNATIONAL STANDARD ON AUDITING 260
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
(Effective for audits of financial statements for periods beginning on or
after December 15, 2009)
A44. If the two-way communication between the auditor and those
charged with governance is not adequate and the situation cannot be
resolved, the auditor may take such actions as:
• Modifying the auditor’s opinion on the basis of a scope limitation.
• Obtaining legal advice about the consequences of different courses of
action.
• Communicating with third parties (for example, a regulator), or a higher
authority in the governance structure that is outside the entity, such as
the owners of a business (for example, shareholders in a general
meeting), or the responsible government minister or parliament in the
public sector.
• Withdrawing from the engagement, where withdrawal is possible under
applicable law or regulation.
11. Select the best option from the following which does not indicate going
concern problem for a company.
a. The company find it difficult to repay loans
b. Inability to trade due to loss of key staff
c. Net current liabilities indicate an ability to meet debts as they fall due
d. Over reliance on a small number of products
REFERENCE:
c. Net current liabilities indicate an ability to meet debts as they fall due.
Net current liabilities mean that a company's current liabilities exceed its
current assets. This situation may indicate a potential liquidity problem
for the company, but it does not necessarily indicate a going concern
problem. In some cases, a company may have a short-term liquidity issue
that can be addressed by management without affecting the company's
ability to continue as a going concern.
On the other hand, options a, b, and d all indicate potential going
concern problems for a company. The company finding it difficult to
repay loans may indicate that it is experiencing financial difficulties,
which could lead to a going concern problem if it cannot generate
enough cash to meet its obligations. The inability to trade due to loss of
key staff could also indicate a going concern problem if the company
relies heavily on key personnel, and their loss could affect the company's
ability to continue as a going concern. Over-reliance on a small number
of products could also be a going concern problem if the company's
revenue stream is too reliant on a limited number of products that could
become obsolete or lose popularity over time.
12. Audit documentation may be recorded on paper or on electronic media. Which
one of the following does not represent example of audit documentation?
a. Correspondence via phone call
c. Summaries of significant matters
b. Audit programs
d. Analysis
REFERENCE: (PAGE NO 147) (FROM A011 2010 IAASB Handbook ISA
230) INTERNATIONAL STANDARD ON AUDITING 230
AUDIT DOCUMENTATION (Effective for audits of financial statements for
periods beginning on or after December 15, 2009)
Audit documentation may be recorded on paper or on electronic or other
media. Examples of audit documentation include:
• Audit programs.
• Analyses.
• Issues memoranda.
• Summaries of significant matters.
• Letters of confirmation and representation.
• Checklists.
• Correspondence (including e-mail) concerning significant matters.
13. The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand:
(i)
The nature, timing and extent of the audit procedures performed to comply
with the ISA and applicable legal and regulatory requirements
(ii)
The results of the audit procedures performed, and the audit evidence obtained
(iii) Significant matters arising during the audit, the conclusions reached and
significant professional judgments made in reaching those conclusions.
a. Option (i), (ii) and (iii) are correct
c. Option (i) is correct
b. Option (i) and (ii) are correct
d. Option (ii) and (iii) are correct
REFERENCE: (FROM PAGE NO 144, 145) (FROM A011 2010 IAASB
Handbook ISA 230) INTERNATIONAL STANDARD ON AUDITING 230
AUDIT DOCUMENTATION (Effective for audits of financial statements for
periods beginning on or after December 15, 2009)
The auditor shall prepare audit documentation that is sufficient to
enable an experienced auditor, having no previous connection with the
audit, to understand: (Ref: Para. A2–A5, A16–A17)
(a) The nature, timing and extent of the audit procedures performed to
comply with the ISAs and applicable legal and regulatory requirements;
(Ref: Para. A6–A7)
(b) The results of the audit procedures performed, and the audit
evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached
thereon, and significant professional judgments made in reaching those
conclusions. (Ref: Para. A8–A11)
14. ____________ of audit evidence is the measure of the quantity of audit evidence.
The quantity of the audit evidence needed is affected by the __________ of the risks
of material misstatement and also by the quality of such audit evidence.
a. Appropriateness, auditor’s assessment
b. Sufficiency, management’s assessment
c. Appropriateness, management’s assessment
d. Sufficiency, auditor’s assessment
REFERENCE: (//leaccountant.com/isa-500-summary-audit-evidence/)
Sufficiency (of audit evidence) – definition
The measure of the quantity of audit The quantity of the audit
evidence needed is affected by the auditor’s assessment of
the risks of material misstatement and also by the quality of
such audit evidence.
15. Analytical procedures are commonly used as substantive procedures over revenue,
purchases and payroll for which of the following reasons?
a. It would be far too time consuming to perform tests of details over these items
as there are many transactions
b. These are often areas where controls are strong and analytical procedures will
therefore be the most efficient way of testing these items
c. The auditor does not need as much evidence for statement of profit or loss items as
they need for statement of financial position items
d. Analytical procedures are more reliable than tests of details
REFERENCE:
a. It would be far too time consuming to perform tests of details over
these items as there are many transactions.
Analytical procedures are commonly used as substantive procedures over
revenue, purchases, and payroll for a variety of reasons. One of the
primary reasons is that these are areas with a large volume of
transactions, and it would be time-consuming and costly to perform tests
of details on all of them. Analytical procedures allow the auditor to
evaluate the reasonableness of account balances or transactions by
comparing them to expectations based on relationships with other
financial and non-financial data.
While controls in these areas may be strong, this is not necessarily the
reason why analytical procedures are used. Analytical procedures can be
effective even in areas with weak controls or areas where controls are not
effective. The auditor still needs sufficient evidence to support the
financial statements, regardless of whether they relate to the statement
of profit or loss or the statement of financial position. Finally, whether
analytical procedures are more reliable than tests of details depends on
the specific circumstances of the engagement. In some cases, tests of
details may be more reliable or necessary to support the auditor's
opinion.
16. ‘The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements’.
The above definition explains which one of the following concept?
a. Audit risk
c. Inherent risk
b. Detection risk
d. Control risk
REFERENCE: (https://quizlet.com/129277053/auditing-ch-7-flash-cards/)
17. ______________ is known as summary that the auditor may prepare or retain as
part of the audit documentation.
a. Management letter
c. Acceptance letter
b. Audit file
d. Completion memorandum
REFERENCE: (FROM PAGE NO 149) (A011 2010 IAASB Handbook ISA
230) INTERNATIONAL STANDARD ON AUDITING 230 AUDIT
DOCUMENTATION (Effective for audits of financial statements for periods
beginning on or after December 15, 2009)
The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary (sometimes known as a completion memorandum)
that describes the significant matters identified during the audit and how they
were addressed, or that includes cross-references to other relevant supporting
audit documentation that provides such information. Such a summary may
facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits.
18. An internal auditor is examining inventory control in a merchandising
division with annual sales of Rs 30,000,000 and a 40 percent gross profit rate.
Tests show that 2 percent of the monetary amount of purchases do not reach
inventory because of employee theft. Adding certain controls costing Rs.
350,000 annually could reduce these losses to 0.50% of purchases. Should
the control be recommended?
a. Yes, because the projected savings exceed the cost of the added controls.
b. Yes, because the ideal system of internal control is the most extensive one.
c. No, because the cost of the added controls exceeds the projected savings.
d. Yes, regardless of cost-benefit considerations, because the situation involves
employee theft.
REFERENCE: (EXPLANATION GIVEN BELOW) (STATEMENT IS SAME
SIMILAR FORMULA WILL BE APPLIED) (OPTIONS ARE ALSO SIMILAR
EXCEPT ABOVE STATEMENT IN Rs. AND DOWN STATEMENT IN $)
(https://books.google.com.pk/books?id=M0ILEAAAQBAJ&pg=PA355&lpg=PA
355&dq=an+internal+auditor+is+examining+inventory+control+in+a+merchan
dising+division&source=bl&ots=Q6J6Us7oIC&sig=ACfU3U2pJoLkZeJD5Voob
jhDGo2be5HsPw&hl=en&sa=X&ved=2ahUKEwjq_JC69cz9AhV9if0HHde8BQ
0Q6AF6BAgREAM#v=onepage&q=an%20internal%20auditor%20is%20exami
ning%20inventory%20control%20in%20a%20merchandising%20division&f=f
alse)
19. As per ISA 450, misstatements may arise due to the following factors, except:
a. Judgements of management concerning accounting estimates that the auditor
considers unreasonable
b. An inaccuracy in gathering or processing data from which the financial statements
are prepared
c. An appropriate classification, aggregation or disaggregation of information
d. An incorrect accounting estimate arising from overlooking, or clear
misinterpretation of, facts
REFERENCE: (FROM PAGE NO 373) (A021 2010 IAASB Handbook ISA
450) INTERNATIONAL STANDARD ON AUDITING 450 EVALUATION OF
MISSTATEMENTS IDENTIFIED DURING THE AUDIT (Effective for audits
of financial statements for periods beginning on or after December 15,
2009)
Definition of Misstatement (Ref: Para. 4(a))
A1. Misstatements may result from:
(a) An inaccuracy in gathering or processing data from which the financial
statements are prepared;
(b) An omission of an amount or disclosure;
(c) An incorrect accounting estimate arising from overlooking, or clear
misinterpretation of, facts; and
(d) Judgments of management concerning accounting estimates that the auditor
considers unreasonable or the selection and application of accounting policies
that the auditor considers inappropriate. Examples of misstatements arising
from fraud are provided in ISA 240.
20. Mr. Alam conducted the audit of Ramsha Limited, he drew new conclusions by
performing additional audit procedures after the date of auditor’s report. In this
respect, which of the following information he shall document?
(i)
The circumstances encountered
(ii)
When and by whom the resulting changes to audit documentation were made
and reviewed
(iii) The identifying characteristics of the specific items or matters tested
a. Option (ii) and (iii) are correct
c. Option (i) is correct
b. Option (i), (ii) and (iii) are correct
d. Option (i) and (ii) are correct
REFERENCE: (FROM PAGE NO 145) (A011 2010 IAASB Handbook ISA
230) INTERNATIONAL STANDARD ON AUDITING 230 AUDIT
DOCUMENTATION (Effective for audits of financial statements for
periods beginning on or after December 15, 2009)
If, in exceptional circumstances, the auditor performs new or additional audit
procedures or draws new conclusions after the date of the auditor’s report, the
auditor shall document: (Ref: Para. A20)
(a) The circumstances encountered;
(b) The new or additional audit procedures performed, audit evidence obtained,
and conclusions reached, and their effect on the auditor’s report; and
(c) When and by whom the resulting changes to audit documentation were made
and reviewed.
21. Mr. Hassan is conducting the audit of Rafiq Limited, for maintaining professional
skepticism he should remain alert to conditions, such as:
a. The evaluation of management’s judgements in applying the entity’s
applicable financial reporting framework
b. Evaluating whether sufficient appropriate audit evidence has been obtained
c. The drawing of conclusions based on the audit evidence obtained
d. Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence
REFERENCE: FROM CHAT GPT. All options are correct. All of the options
(a), (b), (c), and (d) are correct.
As an auditor, Mr. Hassan should remain alert to all of the conditions
mentioned, as they are all important aspects of maintaining professional
skepticism in an audit engagement.
a. The evaluation of management’s judgements in applying the entity’s
applicable financial reporting framework is important because it helps the
auditor to assess the reasonableness of the financial statements prepared by the
management.
b. Evaluating whether sufficient appropriate audit evidence has been obtained is
crucial because it helps the auditor to ensure that the financial statements are
free from material misstatements and to form an opinion on the fairness of the
financial statements.
c. The drawing of conclusions based on the audit evidence obtained is a critical
step in the audit process, as it helps the auditor to form an opinion on the
financial statements.
d. Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence is significant because it helps
the auditor to assess the quality and sufficiency of the audit evidence obtained.
Therefore, Mr. Hassan should remain alert to all of these conditions to maintain
professional skepticism in the audit engagement.
22. Domination of management by a single person or small group of persons without
compensating controls is a fraud risk factor. Which of the following factor may
include as an indicator of dominant influence exerted by a related party?
(i)
Significant transactions are referred to the related party for final approval.
(ii)
Transactions under contracts whose terms are changed before expiry.
(iii) Transactions involving the related party are rarely independently reviewed and
approved.
a. Option (i), (ii) and (iii) are correct
c. Option (ii) and (iii) are correct
b. Option (i) is correct
d. Option (i) and (iii) are correct
REFERENCE: (FROM PAGE NO 522,523) (A029 2010 IAASB Handbook
ISA 550 ) INTERNATIONAL STANDARD ON AUDITING 550 RELATED
PARTIES (Effective for audits of financial statements for periods beginning on
or after December 15, 2009)
Domination of management by a single person or small group of persons without
compensating controls is a fraud risk factor.24 Indicators of dominant influence
exerted by a related party include:
• The related party has vetoed significant business decisions taken by
management or those charged with governance.
• Significant transactions are referred to the related party for final approval.
• There is little or no debate among management and those charged with
governance regarding business proposals initiated by the related party.
• Transactions involving the related party (or a close family member of the
related party) are rarely independently reviewed and approved.
23. In accordance with ISA 330, which one of the following factor the auditor will not
consider in determining whether it is appropriate to use audit evidence about the
operating effectiveness of controls obtained in previous audits, and, if so, the length
of the time period that may elapse before retesting a control:
a. The risks arising from the characteristics of the control, including whether it is
material or automated
b. The risks of material misstatement and the extent of reliance on the control.
c. Whether the lack of a change in a control posses a risk due to changing
circumstances
d. The effectiveness of IT controls of entity’s competitor
REFERENCE: (FROM PAGE NO 325) (A019 2010 IAASB Handbook ISA 330
)(INTERNATIONAL STANDARD ON AUDITING 330 THE AUDITOR’S
RESPONSES TO ASSESSED RISKS (Effective for audits of financial
statements for periods beginning on or after December 15, 2009)
In determining whether it is appropriate to use audit evidence about the
operating effectiveness of controls obtained in previous audits, and, if so, the
length of the time period that may elapse before retesting a control, the auditor
shall consider the following:
(a) The effectiveness of other elements of internal control, including the
control environment, the entity’s monitoring of controls, and the entity’s
risk assessment process;
(b) The risks arising from the characteristics of the control, including whether it
is manual or automated;
(c) The effectiveness of general IT controls;
(d) The effectiveness of the control and its application by the entity, including the
nature and extent of deviations in the application of the control noted in previous
audits, and whether there have been personnel changes that significantly affect
the application of the control;
(e) Whether the lack of a change in a particular control poses a risk due to
changing circumstances; and
(f) The risks of material misstatement and the extent of reliance on the control.
(Ref: Para. A35)
24. In accordance with ISA 260, which of the following matters the auditor may not
take into account when considering communicating with a subgroup of those charged
with governance?
a. Entity’s control environment
b. The respective responsibilities of the subgroup and the governing bodies
c. The nature of the matter to be communicated.
d. Relevant legal or regulatory requirements.
REFERENCE: (FROM PAGE NO 221) (A014 2010 IAASB Handbook ISA
260)INTERNATIONAL STANDARD ON AUDITING 260COMMUNICATION
WITH THOSE CHARGED WITH GOVERNANCE (Effective for audits of
financial statements for periods beginning on or after December 15, 2009)
When considering communicating with a subgroup of those charged with
governance, the auditor may take into account such matters as:
• The respective responsibilities of the subgroup and the governing body.
• The nature of the matter to be communicated.
• Relevant legal or regulatory requirements.
• Whether the subgroup has the authority to take action in relation to the
information communicated, and can provide further information and
explanations the auditor may need.
25. In accordance with ISA 540, management does not consider the following factor
when making the accounting estimates, and an understanding of the data on which
they are based:
a. How the controls were applied at relevant times during the period under audit
b. Whether management has used an expert
c. The assumptions underlying the accounting estimates
d. The method, including where applicable the model, used in making the accounting
estimate
REFERENCE: (FROM PAGE NO 462) (A028 2010 IAASB Handbook ISA
540 ) INTERNATIONAL STANDARD ON AUDITING 540 AUDITING
ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING
ESTIMATES, AND RELATED DISCLOSURES
(Effective for audits of financial statements for periods beginning on or after
December 15, 2009)
How management makes the accounting estimates, and an understanding of the
data on which they are based, including: (Ref: Para. A22–A23)
(i) The method, including where applicable the model, used in making the
accounting estimate; (Ref: Para. A24–A26)
(ii) Relevant controls; (Ref: Para. A27–A28)
(iii) Whether management has used an expert; (Ref: Para. A29vA30)
(iv) The assumptions underlying the accounting estimates; (Ref: Para. A31–A36)
(v) Whether there has been or ought to have been a change from the prior period
in the methods for making the accounting estimates, and if so, why; and (Ref:
Para. A37)
(vi) Whether and, if so, how management has assessed the effect of estimation
uncertainty. (Ref: Para. A38)
26. As per ISA 402, identify which one of the following options best define
“Subservice Organization”.
a. The policies and procedures designed, implemented and maintained by the service
organization to provide user entities with the services covered by the service auditor’s
report
b. A service organization used by another service organization to perform some
of the services provided to user entities that are part of those user entities’
information systems relevant to financial reporting.
c. A third-party organization that provides services to user entities that are part of
those entities’ information systems relevant to financial reporting.
d. Controls that the service organization assumes, in the design of its service, will be
implemented by user entities, and which, if necessary to achieve control objectives,
are identified in the description of its system.
REFERENCE: (FROM PAGE NO 360) (A020 ISA 402 for
Handbook_formatted.doc ) INTERNATIONAL STANDARD ON AUDITING
402 AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A
SERVICE ORGANIZATION (Effective for audits of financial statements for
periods beginning on or after December 15, 2009)
Subservice organization – A service organization used by another service
organization to perform some of the services provided to user entities that are
part of those user entities’ information systems relevant to financial reporting.
27. ____________ is used to improve operational performance through control
action by management.
a. Variance analysis
control c. Responsibility Accounting
Functional Analysis
b. Budgetary
d.
REFERENCE:
The correct answer is b. Budgetary control.
Budgetary control is a technique used by management to improve
operational performance by comparing actual results with budgeted
results and taking corrective action where necessary. The process
involves setting targets, monitoring actual results, identifying variances,
and taking corrective action.
Variance analysis (option a) is a tool used to compare actual performance
with budgeted performance and to identify and explain any differences.
Responsibility accounting (option c) is a system of accounting that
assigns responsibility for costs and revenues to specific individuals or
departments within an organization.
Functional analysis (option d) is a method of analyzing the functions or
activities of an organization or system in order to identify areas for
improvement or optimization.
28. Which one of the following is not a valid substantive procedure for noncurrent assets?
a. Inspection of purchase invoices to verify the cost of additions
b. Inspection of board minutes to ensure the acquisition was authorized
c. Physical inspection of the assets to confirm existence
d. Recalculation of a depreciation charge
REFERENCE:
All of the options are valid substantive procedures for non-current
assets, so there is no correct answer to this question.
Option a, "Inspection of purchase invoices to verify the cost of
additions," is a valid substantive procedure for non-current assets. This
procedure verifies that the cost of non-current assets recorded in the
financial statements is accurate by inspecting purchase invoices for
additions.
Option b, "Inspection of board minutes to ensure the acquisition was
authorized," is a valid substantive procedure for non-current assets. This
procedure ensures that the acquisition was properly authorized by
reviewing board minutes.
Option c, "Physical inspection of the assets to confirm existence," is a
valid substantive procedure for non-current assets. This procedure
verifies that the assets exist by physically inspecting them.
Option d, "Recalculation of a depreciation charge," is a valid substantive
procedure for non-current assets. This procedure verifies the accuracy of
the depreciation charge by recalculating it.
Therefore, all of the options are valid substantive procedures for noncurrent assets.
29. Which one of the following audit procedure is most appropriate that the auditor
may perform in order to ascertain account receivables balance?
a. Examining preceding cash receipts, shipping documentations and sales near
the period end
b. Examining subsequent cash disbursements or correspondence from third parties
and other records
c. Examining specific subsequent cash receipts, shipping documentations and sales
near the period end
d. Examining preceding cash disbursements or correspondence from third parties and
other records
REFERENCE:
The correct option for this question is a. Examining preceding cash
receipts, shipping documentations, and sales near the period end.
Examining preceding cash receipts, shipping documentations, and sales
near the period end is the most appropriate audit procedure for
ascertaining the accounts receivable balance. This procedure involves
reviewing sales transactions, shipping documents, and cash receipts to
verify that the receivables balance is accurately recorded in the financial
statements.
Option b, examining subsequent cash disbursements or correspondence
from third parties and other records, is not a suitable procedure for
ascertaining accounts receivable balance. This procedure may help in
identifying unrecorded cash receipts, but it may not be effective in
verifying the accounts receivable balance.
Option c, examining specific subsequent cash receipts, shipping
documentations, and sales near the period end, may be useful in
verifying specific items, but it may not provide sufficient evidence to
verify the entire accounts receivable balance.
Option d, examining preceding cash disbursements or correspondence
from third parties and other records, is not a suitable procedure for
ascertaining accounts receivable balance. This procedure is more
appropriate for verifying accounts payable balances, rather than
accounts receivable balances.
30. In accordance with ISA 210, when the auditor of a parent entity is also the auditor
of a component, the factor that may influence the decision whether to send a separate
audit engagement letter to the component include the following:
i.
Who appoints the component auditor
ii.
Whether a separate auditor’s report is to be issued on the component
iii.
Legal requirements in relation to audit appointments
iv.
Arrangements concerning the involvement of other auditors and experts in
some aspects of the audit
a. (ii),(iii),(iv) are correct
b. (i),(ii) are correct
c. (iii),(iv) are correct
d. (i),(ii) and (iii) are correct
REFERENCE: (READ PAGE NO 231 & 239) (Microsoft Word - A065 ISA
210 ) INTERNATIONAL STANDARD ON AUDITING 210 TERMS OF
AUDIT ENGAGEMENTS (Effective for audits of financial statements for
periods beginning on or after December 15, 2006. Appendix 2 contains
conforming amendments to the Standard that become effective at a future date.)
Audits of Components
9. When the auditor of a parent entity is also the auditor of its subsidiary,
branch or division (component), the factors that influence the decision whether
to send a separate engagement letter to the component include the following:
• Who appoints the auditor of the component.
• Whether a separate auditor’s report is to be issued on the component.
• Legal requirements.
• The extent of any work performed by other auditors.
• Degree of ownership by parent.
• Degree of independence of the component’s management.
The “experienced auditor principle” states that auditors prepare audit documentation that is
sufficient to enable an experienced auditor, having no previous connection with the audit, to
understand
the nature, timing and extent of the audit procedures performed to comply with professional
standards and applicable legal and regulatory requirements;
the results of the audit procedures performed and the audit evidence obtained; and
significant matters arising during the audit (including observations), the recommendations and
conclusions reached thereon, and significant professional judgments made in reaching those
conclusions.
The review process consists of
discussions between a reviewer and the preparer—all or part of the team, including an individual
team member;
review of documented evidence, including documents in both electronic and any external hard
copy files; and
the review and approval of conclusions including the support for those conclusions.
Whether these elements are undertaken at the same or at different times, and regarding particular
areas of the audit or the audit as a whole depends on the engagement circumstances.
When designing and performing substantive analytical procedures, either alone or in combination
with tests of details, as substantive procedures in accordance with ISA 330 the auditor shall:
(a) Determine the suitability of particular substantive analytical procedures for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any, for these
assertions;
(b) Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or
ratios is developed, taking account of source, comparability, and nature and relevance of
information available, and controls over preparation;
(c) Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
sufficiently precise to identify a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated; and
(d) Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
Appointment of cost auditors:
(i) Every company shall be required to get its cost accounts audited by a cost auditor who is a
Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of
1961), or a Cost and Management Accountant within the meaning of the Cost and Management
Accountants Act, 1966 (XIV of 1966).
(ii) The cost auditor shall be appointed by the directors with the prior approval of the Corporate
Law Authority within sixty days of the close of financial year of the company.
(iii) None of the following persons shall be appointed as cost auditor of a company, namely: a) a person who has been appointed as auditor of the company for the respective period under
section 246 of the Companies Act-2017;
b) a person who is, or at any time during the preceding three years was, a director, officer or
employee of the company;
c) a person who is a partner of, or in the employment of, a director, officer or employee of the
company;
d) a spouse of a director of the company;
e) a person who is indebted to the company; and
f) a body corporate.
(iv) The remuneration of the cost auditor shall be fixed by the directors.
Note that the audit procedures suggested below focus on obtaining evidence that the treatment of
the relevant item conforms with these requirements.
 Enquire with the directors or inspect relevant supporting documentation to confirm that a
present obligation exists at the end.
 Inspect relevant board minutes to ascertain whether payment is probable.
 Obtain a breakdown of the items to be provided for and cast it: verifies completeness.
 Recalculate the provision and agree components of the calculation to supporting documentation:
verifies completeness.
 Review the post year-end period to identify whether any payments have been made, compare
actual payments to the amounts provided to assess whether the provision is reasonable: verifies
valuation.
 Obtain a written representation from management to confirm the completeness of the provision.
 If applicable, enquire with the client's solicitors about the likely outcome and chances of
payment/ expenditure.
 Review the disclosure of the provision to ensure compliance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets: verifies classification and understandability.
Taking favorable results from above procedure i. e no misstatements is found hence
there will not be any impact on auditor’s report.
According to IAS 500
Independent, externally generated evidence is better than evidence generated internally by
the client;
 Effective controls imposed by the entity, generally improve the reliability of evidence;
 Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or
by inference;
 It is better to get written, documentary evidence rather than verbal confirmations;
 Original documents provide more reliable evidence than photocopies or facsimiles.
Bank Confirmation
Bank is a good example of where the reliability of the evidence available means that only a small
quantity of evidence is needed. The auditor relies mainly on just two key pieces of evidence: the
bank confirmation letter and the bank reconciliation.
-
Obtain the company’s bank reconciliation and cast to ensure arithmetical accuracy.
Verify the reconciliation’s balance per the cash book to the year-end cash book.
Trace all of the outstanding lodgments to the pre-year-end cash book, post year-end.
bank statement and also to paying-in-book pre-year-end.
Trace all unpresented cheques through to a pre-year-end cash book and post year-end.
Statement for any unusual amounts or significant delays obtain explanations from
management.
- Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are no longer valid to be presented.
Receivables
o Direct confirmation of accounts receivable from customers is a strong third party
evidence
o other evidence in relation to receivables and prepayments
o other evidence in relation to current assets
o completeness and occurrence of revenue.
The risk of material misstatement is the risk that the financial statements of an organization
have been misstated to a material degree. This risk is assessed by auditors at the following
two levels:

At the assertion level. This is further subdivided into inherent risk and control risk.
Inherent risk is the susceptibility of an assertion to misstatement because of error or
fraud, before considering controls. Control risk is the risk of misstatement that will
not be prevented or detected by a reporting entity's internal controls.
Most risks are at the assertion level e. g. risk of revenue overstatement due to cut-off
[assertion] error; risk of understatement of trade payables due to unrecorded purchase invoices
[completeness assertion].

At the financial statement level. Relates to the financial statements as a whole. This
risk is more likely when there is a possibility of fraud.
Examples of risks that affect financial statements as a whole (i. e. effect is not limited to
individual classes of transaction/account balance) include the risk that entity is not a going
concern (e.g. if financial statements should be prepared on a basis other than going concern)
and significant risks of management fraud (e.g. if management is involved in fraudulent
financial reporting).
When the risk of material misstatement is high, the level of detection risk is lowered
(increases the amount of evidence obtained from substantive procedures). Doing so reduces
the overall audit risk.
Under IAS 24
The following are deemed not to be related: [IAS 24.11]

two entities simply because they have a director or key manager in common
Hence the Sale of 70% of output by AL to a company owned by a Director in AL is not a related
party transaction.
However, an entity is related to a reporting entity if
1. The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
2. One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
Hence the 30% sales to associated company are to be disclosed as transactions with related
parties.
ISA 300 Require to establish overall audit strategy
Identify the characteristics of the engagement that define its scope;
o Ascertain the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required;
o Consider the factors that, in the auditor’s professional judgement, are significant in
directing the engagement team’s efforts;
o Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and
o Ascertain the nature, timing and extent of resources necessary to perform the engagement.
ISA 300 requires to develop audit plan that involve;
o The nature, timing and extent of planned risk assessment procedures, as determined under
ISA 315;
o The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under ISA 330; and
o Other planned audit procedures that are required to be carried out so that the engagement
complies with ISAs
A company’s control environment comprises seven elements each requiring careful consideration
by the company’s auditor, recognizing that some elements may be more pertinent than others –
depending on the subject company. Each one of these elements is listed below, along with an
explanation of specific practical aspects that may be considered by the auditor when briefing his
trainees. Candidates should be aware that this process forms part of the auditor’s assessment of the
overall effectiveness of the company’s internal control, relevant to the audit.
1.
2.
3.
4.
5.
6.
7.
Communication and enforcement of integrity and ethical values
Commitment to competence
Participation by those charged with governance
Management’s philosophy and operating style
Organizational structure
Assignment of authority and responsibility
Human resources policies and practices
After the financial statements have been issued, the auditor has no obligation to perform any audit
procedures regarding such financial statements. However, if, after the financial statements have
been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date
of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance;
(b) Determine whether the financial statements need amendment; and, if so,
(c) Inquire how management intends to address the matter in the financial statements.

Internal auditors will examine issues related to company business practices and risks,
while external auditors examine the financial records and issue an opinion regarding
the financial statements of the company.

Internal audits are conducted throughout the year, while external auditors conduct a
single annual audit. If a client is publicly-held, external auditors will also provide
review services three times per year.
Independence & Objectives
The objectives of Internal Auditors is to examine issues related to company business
practices and risks. The objectives of External Auditors is to examine the financial records
and issue an opinion on the financial statements.
Internal auditors are company employees,
while external auditors work for an
outside audit firm. Internal auditors are hired by the company, while external auditors are
appointed by a shareholder vote hence perform functions independently.
Audit and Assurance (A&A)
DESCRIPTIVES
Note: These questions are from different students so
multiple questions can be repeated too.
FEB (2023)
• Management Written Representation Ni de Rahi
• Auditor is required to?
• Materiality
• Contents of raw material in cost audit report
• Materiality (2 questions)
• Factors to determine significant related party
• How to determine co's compliance with legal
regulations
• Why auditor gave so much importance to going
concern
• Time chargeable (Labour related: Cost Audit)
• Management written representations nhi derhi. Kia
krna hai?
• Auditor 1 out of 10 branches ka inventory count attend
nhi kr paaya. Branch is significant. Alternate
procedures b apply nhi kr skta. Impact on the auditor's
report
• During audit auditor ko pta chala k company going
concern nhi rhi qk operating finance khatam ho chuka
tha mgr management ne auditor ko yaqeen dilaya k
paisa aa jayega aur usko yaqeen aagya. Impact on
Auditor's report.
MTQS:
• Group Financial Statement:
Conditions/events that may indicate possible material
misstatements.
• Cost Audit:
Provision in cost report for raw materials.
• Recurring engagement:
What will lead to changes in engagement letter in case
of Recurring engagement.
• Written representation from management:
Case scenarios were given, appropriate treatment was
required.
• Procedures for test of controls
• Attendance at inventory count planning procedures
• Code of corporate governance:
• Representation of minority shareholders
• Mr sarfraz experience auditor wala jo ap ne share kia
• mr. Faraz ko auditor ke sampling pr kam krny pr itraz
hai tu auditor ko is case me kia step lene chahye (Jis ka
answer me ne likha ke ISA's allow krty hain sampling
base work ko aur ye inherent limitation hai audit ki.
Auditor ko apni responsibilities in accordance with
ISA's communicate krni chahye)
• wo kon se events hain jo group financial statements
me mis statement hony ke chances ko show krty hain.
(Is ka jawab icmap study text ke 2nd last chapter me
hai)
• cost auditor apni resport me raw material se related
kon sa section add krta hai os ko describe krna tha
(Icmap study text last chapter)
• sales system and receivable se related internal controls
ke chapter se 1 descriptive tha
• ajeeb sa scenario tha jisy bar bar perhny se bhi muje
pta ni lga ke os ka audit report se kia taluq hai, lekin
janab ne requirement rakhi thi effect on audit report
btao
• ISA 300 me se overall audit strategy and audit plan aya
• preconditions of audit
• enlist the six rights of auditor
• scope limitations and its example
• Cost audit ke annexure ka bhi pocha tha kis annexure
me hai ke kitny dino ke ander cost auditor ko appoint
krna hai
• Cost audit ka 1-2 aur mcqs thy
• Management point estimate ki definition kia hai ye
mcq me aya
• Kisi document ka name likh kr pocha tha is pr kis kis ke
sign hony chahye
• Internal auditor se related 2-3 mcqs thy
• Review engagement ka 1 mcq tha from isre 2410
• Quality control review ka 1 mcq tha
• Auditor and his expert se related 2 mcqs thy
• Modified opinions se related 2 mcqs thy
• Isa 710 se related pocha tha ke following statement me
se kon c statement is standard se related hai (aur log
kehty hain isa ke name yad krny ki zrort nhi)
For any other Study material (PDFs of notes, past
papers, MCQs) of any course from OL-1 to SL-2,
contact on:
Name: Arib Sarfaraz
Phone: 03352232888