Audit & Assurance (3) 2016 (AAA)
Assumed knowledge
quiz
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Chartered Accountants Program
Audit & Assurance
Assumed knowledge quiz
Question 1
KenCorp Ltd (KenCorp) is a fitness equipment wholesaler that sells to retail shops on credit.
A recent sale to Sporting Mart was made on credit. Two days after the sale was recorded in the
accounting system, Sporting Mart returned all the goods due to incorrect stock being supplied
and received a credit note for the purchases. Identify the relevant debit and credit entries to
record the initial sale and subsequent return within the billing system of KenCorp (ignoring the
impact of GST imposed on the sale of goods).
Initial recording of sale
Subsequent return
Debit
Credit
Debit
Credit
(a)
Cash
Sales
Sales returns
Cash
(b)
Sales
Debtors
Debtors
Sales returns
(c)
Debtors
Sales
Sales returns
Debtors
(d)
Cash
Debtors
Debtors
Sales returns
Question 2
Spectra is a global fashion group of companies that acquires and manages boutique fashion
labels worldwide. In an attempt to break into the online retail market, Spectra recently acquired
AC Kenney, an online retailer specialising in cutting-edge men’s fashion. The acquisition
included a valuable customer distribution list. Spectra expects to derive benefit from this list
for up to three years. Which of the following best describes how the distribution list should be
treated once it has been recorded in the accounting records?
(a) It should be amortised on a systematic basis over its useful life, or on a straight line basis if
the usage pattern cannot be reliably determined and assessed for impairment at the end of
each reporting period.
(b) It should be assessed for impairment at the end of each reporting period.
(c) It should be assessed for impairment at the end of each reporting period and whenever
there is an indication of impairment.
(d) It should be amortised over the shorter of its useful life or three years, and assessed for
impairment whenever there is an indication of impairment.
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Question 3
Moroccan Spice Station (MSS) is an Australian-based wholesale importer of exotic foods and
spices. One of its biggest sellers is pre-packaged saffron, which it imports from the southern
region of Morocco. The products are ready to sell on delivery. MSS incurred the following costs
for 1kg of pre-packed saffron:
$
Purchase price
5,000
Import duties
500
Handling costs
300
Other direct costs
200
Storage costs
100
Two days after receiving the order, a global locust outbreak wiped out 50% of the world’s
saffron production, resulting in sale prices being tripled. MSS expects to sell its 1kg order of
saffron for $30,000 within a few days of receiving the spices.
What amount should be recorded for the purchase in the accounting system?
(a) $5,000.
(b) $6,000.
(c) $6,100.
(d) $15,000.
Question 4
Moto Brakes & Parts (MBP) is an automotive manufacturer with a production workforce of 300
full-time employees. The fortnightly payroll is $900,000, and payroll payments are made two
weeks in arrears. The last payroll run was on 20 June 20X2 for all wages up
to and including 20 June. It is now 30 June 20X2 and the payroll accountant is preparing monthend general journal entries. In the period from 20 June to 30 June, there were two full weekends
and MBP did not trade on those days.
Which general journal entries most closely represent the required month-end adjustments for
payroll?
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Debit
Credit
Amount
$
(a)
Wages accrual
Cash
900,000
(b)
Wages expense
Wages accrual
540,000
(c)
Prepaid wages
Wages expense
450,000
(d)
Wages expense
Prepaid wages
643,000
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Chartered Accountants Program
Audit & Assurance
Question 5
Bakehouse Delights is a family-owned and run bakery that supplies baked goods to major
supermarkets and independent grocers. It recently purchased an oven at a cost of $30,000 to
cope with an increased demand for its goods.
The decision to purchase the oven was directly connected to a five-year supply contract with
Bosco’s, a nationwide supermarket chain. The new oven will be used exclusively to bake
Bosco’s burger buns. Under this contract, Bakehouse Delights must supply Bosco’s with 10,000
burger buns per month in Years 1–3, increasing to 12,000 buns a month in Years 4–5. At the end
of the five-year contract, Bakehouse Delights plans to dispose of the oven at a residual value of
$2,000.
Use the units of production method to calculate the depreciation charge in the first month of
operation.
(a) $432.
(b) $463.
(c) $467.
(d) $500.
Question 6
Which of the following statements is incomplete with regard to the preparation of general
purpose financial statements (GPFS) in accordance with International Financial Reporting
Standards (IFRS)?
(a) GPFS are prepared to meet the needs of users who are not in a position to require an entity
to prepare reports tailored to their particular information needs.
(b) Preparing GPFS in accordance with IFRS ensures comparability both with an entity’s
financial statements for previous periods and with the financial statements of other entities.
(c) A complete set of financial statements includes a statement of financial position as at the
end of the period, a statement of profit or loss and other comprehensive income for the
period, and a statement of cash flows for the period.
(d) GPFS provide information about an entity’s assets, liabilities, equity, income, expenses
(including gains and losses), contributions by and distributions to owners, and cash flows.
Assumed knowledge quiz
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Audit & Assurance
Chartered Accountants Program
Question 7
PropertyGuru Limited (PropertyGuru) is in the business of buying rundown properties,
renovating them by outsourcing to subcontractors, and selling them for profit within six
months of purchase. It runs its business from a leased property in the suburbs, and has no
other significant items of property, plant and equipment. PropertyGuru is in the final stages of
preparing its GPFS, and is classifying its assets as current and non-current in preparation for the
year-end audit.
$
Cash and cash equivalents
100,000
Deferred tax assets
400,000
Trading property
1,200,000
Trade and other receivables
50,000
Provisions
70,000
What is the balance of PropertyGuru’s current assets at year end?
(a) $550,000.
(b) $1,350,000.
(c) $1,750,000.
(d) $1,820,000.
Question 8
Susie is a graduate auditor working on the audit of a large listed company. She has received
the company’s complete set of financial statements for the year, and queried the purpose of
preparing the statement of changes in equity for the period with her manager. Her manager has
responded accordingly as follows:
The statement of changes in equity comprises information about changes in net assets over a reporting
period. It is particularly useful to understand the reason behind the movements of net assets and to
identify the sources of these changes.
Which of the following is an unlikely source of movements in the statement of change in equity?
(a) Retrospective adjustments from changes in accounting policies, estimates and errors.
(b) Transactions with shareholders.
(c) Movements in comprehensive income.
(d) Reclassification of current assets and liabilities to non-current.
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Assumed knowledge quiz
Chartered Accountants Program
Audit & Assurance
Question 9
SMD Corporation (SMD) is a pharmaceutical research company that recently acquired
laboratory equipment, which was secured under a 10-year bank loan. SMD is preparing its
statement of cash flows for the year ended 30 June 20X3 and has asked you for assistance in
classifying its cash flows for the period.
Which of the following statements is most accurate with regard to classifying interest paid on
the 10-year loan?
(a) Interest paid is classified as an operating cash flow because it is used in the determination of
net profit or loss for the period.
(b) Interest paid is classified as a financing cash flow because it relates to a payment made to
secure financial resources (i.e. the 10-year loan).
(c) There is no consensus on the classification of interest paid. As long as it is classified in a
consistent manner from period to period, it may be classified as operating, investing or
financing activities.
(d) Interest paid is classified as an operating cash flow if it has been recognised as an expense in
net profit or loss for the period, or as a financing cash flow if it has been capitalised.
Question 10
An example statement of comprehensive income is shown below:
Continuing operations
$
Revenue
150,000
Cost of sales
(100,000)
Gross profit
50,000
Other income
5,000
Distribution expenses
(6,000)
Administrative expenses
(2,000)
Other expenses
(1,000)
Results from operating activities
46,000
Finance costs
(10,000)
Share of profit of equity-accounted associates
2,500
Profit before income tax
38,500
Tax expense
(11,550)
Profit from continuing operations
26,950
Loss from discontinued operations
(100)
Extraordinary items
(8,000)
Profit for the year
18,850
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Which of the following statements is true with regard to this example statement of
comprehensive income?
(a) Expenses have been classified according to the nature of expenses method.
(b) Loss from discontinued operations should not be disclosed as a separate line item as it
represents an immaterial amount when compared to profit from continuing operations.
(c) Extraordinary items should not be disclosed as a separate line item in the statement of
comprehensive income or in the notes.
(d) Share of profit of equity-accounted associates should not be disclosed as a separate line item
in the statement of comprehensive income or in the notes.
Question 11
The objectives of an audit of financial statements include all of the following, except for:
(a) Enhancing the degree of confidence of intended users in the financial statements.
(b) Providing an opinion on whether the financial statements are presented fairly, in all
material respects.
(c) Providing an opinion on whether the financial statements give a true and fair view in
accordance with the applicable financial reporting framework.
(d) Providing a degree of reliance in the financial statements to intended users when making
investment decisions.
Question 12
XYZ Limited (XYZ) has engaged JLGT Partners Inc. (JLGT) to conduct assurance procedures on
its year-end financial statements. Given that it is a listed entity with thousands of shareholders,
XYZ expects the assurance report to be worded in such a way that it provides its investors with
the highest level of independent verification of its GPFS.
What type of assurance engagement will JLGT perform to satisfy XYZ’s requirements?
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Type of assurance engagement
Type of assurance report
(a)
Reasonable
Positive form of expression
(b)
Limited
Positive form of expression
(c)
Reasonable
Negative form of expression
(d)
Limited
Negative form of expression
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Chartered Accountants Program
Audit & Assurance
Question 13
Assurance practitioners must abide by the fundamental principles of professional ethics in
order to provide investor confidence in the independent verification of GPFS.
ABC Pty Ltd (ABC) recently appointed Jones & David to audit its year-end financial statements.
One week before the audit was to begin, the audit manager for the engagement received a small
number of shares in ABC as the result of an inheritance.
Which of the following fundamental principles of professional ethics are at risk for the audit
manager in the scenario above?
(a) Professional behaviour.
(b) Objectivity.
(c) Professional competence and due care.
(d) Confidentiality.
Question 14
Obtaining sufficient appropriate audit evidence is necessary to support the auditor’s opinion
and report. Sufficiency is the measure of the quantity of evidence, whereas appropriateness is
the measure of the quality of evidence, its relevance and its reliability.
Which of the following generalisations about the reliability of evidence is false?
(a) Evidence is more reliable when it is obtained from independent sources outside the entity.
(b) Evidence that is generated internally is more reliable when the related controls are effective.
(c) Evidence is more reliable when it exists in paper form, as opposed to electronic form or in
other media.
(d) Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitised or otherwise
transformed into electronic form.
Question 15
Before commencing an audit, the auditors should obtain agreement from the entity’s
management that it acknowledges and understands its responsibility regarding all the items
listed below, except:
(a) Preparing the financial statements in accordance with the applicable financial reporting
framework.
(b) Maintaining internal controls to enable the financial statements to be prepared free of
material misstatement.
(c) Allowing access to all records, documents and other information requested by the auditors
in relation to assets held by directors, key management personnel and their spouses, in
order to assess related party transactions.
(d) Providing unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
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Question 16
In relation to audit planning, which of the following statements is false?
(a) Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan.
(b) Planning activities for initial audit engagements requires additional considerations by
comparison to recurring engagements; however, the purpose and objective of planning the
audit are the same.
(c) Planning is a discrete phase that begins prior to commencing an audit. For recurring
engagements, planning commences shortly after the completion of the previous period’s
audit.
(d) Adequate planning helps to ensure that:
•• Appropriate attention is devoted to important areas of the audit.
•• Potential problems are identified and resolved on a timely basis.
•• The audit engagement is properly organised and managed in order to be performed in
an effective and efficient manner.
Question 17
The Australian Wheat and Grain Corporation (AWGC) is a worldwide exporter
of Australian-grown crops. Due to its presence overseas and links with government- backed
farmers, AWGC is heavily governed by Australian laws and regulations. You are conducting
the year-end audit of AWGC, and are responsible for identifying material misstatements in the
financial statements due to non-compliance with laws and regulations.
In accordance with Auditing Standards, which of the following scenarios is the best indicator of
an entity’s non-compliance with laws and regulations?
(a) Payments for specified services and loans to related parties and government employees.
(b) Payments for goods or services made other than to the country from which the goods or
services originated.
(c) Weekly media commentary on AWGC’s share price in line with other entities in the
industry.
(d) Transactions with companies or entities registered in tax havens.
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Audit & Assurance
Question 18
The fundamental principles of professional ethics include five (5) of the following:
•• Integrity.
•• Objectivity.
•• Professional competence and due care.
•• Confidentiality.
•• Independence.
•• Professional behaviour.
The exception is:
(a) Objectivity.
(b) Confidentiality.
(c) Independence.
(d) Professional behaviour.
Question 19
BRZ Partners Inc. (BRZ) has commenced its first year-end audit of Sabora Limited (Sabora),
a global car manufacturer. Sabora’s board of directors (the Board) is responsible for overseeing
the company’s strategic direction and obligations related to Sabora’s accountability, including
the financial reporting process.
Which of the following statements regarding BRZ’s role in contributing to corporate governance
is not correct?
(a) BRZ is to communicate clearly to the Board their responsibilities in relation to the financial
statements audit, and provide them with an overview of the planned scope and timing of
the audit.
(b) BRZ is to provide the Board with timely observations arising from the audit that are
significant and applicable to the Board’s responsibility to oversee the financial reporting
process.
(c) BRZ is to promote effective three-way communication between itself, the Board and users of
the financial statements.
(d) BRZ is to obtain from the Board information that is relevant to the audit, such as identifying
appropriate sources of audit evidence.
Assumed knowledge quiz
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Question 20
Squished Limited (Squished) is a fruit juice manufacturer based in Melbourne. Squished’s
auditors visited the company’s head office and discussed the preliminary procedures with
management before beginning the audit. During the discussion, the auditors indicated they
would be spending the next week reviewing the components of internal control.
In particular, the auditors were interested in Squished’s business processes and accounting
system. Squished was unsure about what this meant, and received the following explanation
from the senior manager of the audit team:
Business processes are structured sets of activities designed to produce a specified output. They result
in transactions being recorded, processed and reported by the information system. For example, think
about Squished’s day-to-day sales, purchase and payroll processes.
Accounting systems include accounting software, electronic spreadsheets, and the policies and
procedures used to prepare periodic financial statements and the period-end financial statements and
disclosures. For example, think about the adjustments posted in the accounting system during year-end
stocktake procedures.
Based on this guidance from the auditor to management, which of the following procedures
could best be described as a business process?
(a) Transferring information from the sales processing systems to the general ledger.
(b) Calculating the periodic depreciation of manufacturing equipment.
(c) Appropriately reporting information required to be disclosed in the financial statements.
(d) Completing a customer sales order in the sales processing system.
Question 21
Which of the following processes is not a key stage in an audit engagement?
(a) Audit planning.
(b) Audit evidence: obtain representations.
(c) Opinion formulation and reporting activities.
(d) Presentation of audit findings at annual general meetings.
Question 22
Which of the following statements regarding materiality when planning an audit is not true?
(a) Misstatements, including omissions, are considered to be material if they, individually or
in the aggregate, could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
(b) Determining materiality involves the exercise of professional judgement. A percentage is
often applied to a chosen benchmark as a starting point in determining materiality for the
financial statements as a whole.
(c) Materiality is determined once, at the start or planning phase of an audit engagement. It is a
component of an audit that remains an unmoving benchmark.
(d) Common benchmarks that may be appropriate, depending on the circumstances of the
entity, include categories of reported income such as profit before tax, total revenue, total
expenses, gross profit, total equity or net assets.
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Audit & Assurance
Question 23
Empower Energy Limited (Empower) is a listed energy and utilities company that owns and
operates 30% of the electricity distribution and transmission network in Australia.
In the past five years, Empower has been involved in a campaign against the introduction of a
national carbon tax. This area is governed by federal legislation, and there is currently a lack of
authoritative guidance on the financial reporting requirements associated with introducing such
a tax.
In response to the pending carbon tax, Empower has changed several accounting policies in the
lead-up to the audit of the 30 June 20X3 financial statements.
NPR & Sons (NPR) has been auditing Empower for the past 10 years and has issued an
unqualified audit opinion on each occasion. NPR is now performing planning procedures for
the year-end audit. What are NPR’s responsibilities with regard to Empower’s accounting
policy changes?
(a) NPR does not have any responsibilities with regard to Empower’s selection and application
of accounting policies that relate to business decisions not within NPR’s direct control.
(b) NPR does not have any responsibilities with regard to Empower’s selection and application
of accounting policies related to the new tax, which relates to an area that currently lacks
authoritative guidance.
(c) NPR has a responsibility to understand Empower’s selection and application of accounting
policies, including the reasons for changes, but has no obligation to evaluate the
appropriateness of the policies.
(d) NPR has a responsibility to understand Empower’s selection and application of accounting
policies, including the reasons for changes to them, and to evaluate whether the policies are
appropriate for Empower’s business.
Question 24
ACP Mines Limited (ACP) is a leading mining company that specialises in the exploration and
export of rare earth metals. Due to the downturn in the global market, ACP has been struggling
to make budget and has already downgraded its profit forecast for the half- year. The financial
year end 30 June 20X3 has just passed and ACP has achieved profit targets despite negative
analyst reports. When questioned by ACP’s auditors about the company achieving seemingly
unrealistic profit targets, the financial controller responded that ‘it was a tough year but we
pulled through’. Bonuses for the year were paid out shortly after closing the year-end accounts.
Several senior members of management were paid significant bonuses for exceeding their profit
targets.
Do the auditors have overall responsibility for the prevention and detection of fraud at ACP?
(a) Yes. Under the Corporations Act 2001 (Cth), auditors have overall responsibility for the
prevention and detection of fraud.
(b) Yes. Maintaining professional scepticism throughout the audit enables the auditor to detect
fraudulent transactions and prevent future occurrences.
(c) No. The auditors are responsible for the detection of fraud, whereas prevention rests with
both those charged with governance and management.
(d) No. The primary responsibility for the prevention and detection of fraud rests with both
those charged with governance and management.
Assumed knowledge quiz
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Question 25
As part of year-end audit procedures, an auditor obtains evidence over the existence of a term
deposit balance by obtaining a confirmation letter from the audit client’s bank. Into which of the
following categories does this audit procedure fall?
(a) Tests of detail.
(b) Tests of control.
(c) Substantive analytical procedures.
(d) Enquiry.
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Assumed knowledge quiz
Chartered Accountants Program
Audit & Assurance
Assumed knowledge quiz solutions
Question 1
The correct answer is C.
The correct entries are:
Type of IT control affected
Dr
$
Debtors
Cr
$
x
Sales
x
Initial recording of sale
Account description
Dr
$
Sales returns
Cr
$
x
Debtors
x
Subsequent sales return
Debtors represent an asset account and Sales represent a revenue account.
When a credit sale is initially made, Debtors increase by the same amount as Sales. When goods
are returned, Debtors reduce by the amount of the initial sale and the opposing debit entry is
made to Sales returns.
Feedback for incorrect answer (a): The question states that the sale is made on credit. The debit
and credit entries in answer (a) represent a cash sale.
Feedback for incorrect answer (b): In this case, the debit and credit entries have been
incorrectly reversed. Candidates with a poor understanding of asset and revenue accounts will
most likely pick this option.
Feedback for incorrect answer (d): The entry under ‘Initial recording of sale’ represents the
collection of cash from Debtors, which is the entry after a credit sale is initially recorded in an
entity’s accounting system. The entry under ‘Subsequent return’ is incorrect.
For further information: AASB 118 Revenue and IAS 18 Revenue.
Question 2
The correct answer is (a).
An intangible asset with a finite useful life shall be allocated on a systematic basis over its
useful life (AASB 138 para. 97). Candidates should recognise that the distribution list had a
finite useful life from the portion of the question stating ‘It expects to derive benefit from this
list for up to three years’. An intangible asset with a finite useful life should also be tested for
impairment at the end of each reporting period. Unlike an intangible asset with an indefinite
useful life, there is no requirement to test for impairment outside of the annual (or more
frequent) reporting period.
Feedback for incorrect answer (b): The intangible asset has a finite useful life and must be
amortised.
Feedback for incorrect answer (c): The intangible asset has a finite useful life and must be
amortised. There is no requirement to test for impairment whenever there is an indication of
impairment, only at the end of each reporting period.
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Feedback for incorrect answer (d): There is no minimum or maximum useful life for an
intangible asset with a finite useful life. An amortised intangible asset is only required to be
tested for impairment at the end of each reporting period.
For further information: AASB 138 Intangible Assets, in particular, the Illustrative Examples; and
IAS 38 Intangible Assets.
Question 3
The correct answer is (b).
In accordance with IAS 2 Inventories, inventories shall be measured at the lower of cost and net
realisable value (NRV).
Cost of inventories is defined as ‘all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition’ (IAS 2 para. 10).
Net realisable value (NRV) is defined as ‘the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to make the
sale’ (IAS 2 para. 6).
In this scenario, NRV far exceeded the cost; hence, the amount to be recorded in the accounting
system had to be calculated.
The cost of purchase of inventories comprises the purchase price, import duties and other
taxes (other than those subsequently recoverable by the entity from the taxing authorities), as
well as transport, handling and other costs directly attributable to the acquisition of finished
goods, materials and services. Trade discounts, rebates and other similar items are deducted in
determining the costs of purchase.
Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition.
The items that should have been included in, or excluded from, cost are as follows:
$
Purchase price
5,000
Included
Import duties
500
Included
Handling costs
300
Included
Other direct costs
200
Included
Storage costs
100
Excluded
Storage costs are only included if the costs are necessary in the production process before
a further production stage. In this scenario, the products were identified as ready to sell on
delivery – hence, there was no indication of a further production stage.
Feedback for incorrect answer (a): The cost of inventories includes more than just the purchase
price.
Feedback for incorrect answer (c): The cost of inventories excludes storage costs, unless those
costs are necessary in the production process before a further production stage. There was
no further production stage in this scenario – hence, the storage costs should not be included
within cost.
Feedback for incorrect answer (d): The NRV exceeds cost. Inventories should be measured at
the lower of cost and NRV.
For further information: IAS 2 Inventories.
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Audit & Assurance
Question 4
The correct answer is (b).
On 20 June 20X2, the following entry would have been posted to recognise the monthly payroll
cash outflow:
Account description
Dr
$
Wages expense
Cr
$
900,000
Cash
900,000
While there were 10 calendar days between 20 June and 30 June, the scenario states that during
that period there were two full weekends. Therefore, only six working days need to be accrued.
The correct accrual entry would therefore be:
Account description
Dr
$
Wages expense
Cr
$
540,000
Accruals
540,000
Feedback for incorrect answer (a): This entry would only be correct if employees were paid
on the last day of each month for their arrears previously accrued. In addition, the amount of
$900,000 is incorrect.
Feedback for incorrect answer (c): The journal entry credits wages and debits prepaid wages.
This is incorrect as the wages are not prepaid.
Feedback for incorrect answer (d): The wages have not been accrued previously, nor have they
been prepaid. The journals and amount of the entry are incorrect.
For further information: AASB 137 Provisions, Contingent Liabilities and Contingent Assets and
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Question 5
The correct answer is (a).
The units of production method results in a charge based on the expected use or output of the
asset. Since the oven is to be used exclusively for Bosco’s contract and the expected output
over the five-year life of the oven is known, the depreciation charge in the first month can be
calculated as follows:
Units
Year 1: 10,000 buns × 12 months =
120,000
Year 2: 10,000 buns × 12 months =
120,000
Year 3: 10,000 buns × 12 months =
120,000
Year 4: 12,000 buns × 12 months =
144,000
Year 5: 12,000 buns × 12 months =
144,000
648,000
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Depreciation charge in first month of operation:
= (Units in first month ÷ total units) × (Cost – residual value)
= (10,000 units ÷ 648,000 units) × ($30,000 – $2,000)
= $432
Feedback for incorrect answer (b): The calculated depreciation charge of $463 does not take into
account the residual value.
Feedback for incorrect answer (c): The calculated depreciation charge of $467 is based on
straight line depreciation, that is: ($30,000 – $2,000) ÷ 60 months.
Feedback for incorrect answer (d): The calculated depreciation charge of $500 is based on
straight line depreciation and does not take into account the residual value, that is: $30,000 ÷ 60
months.
For further information: AASB 116 Property, Plant and Equipment and IAS 16 Property, Plant and
Equipment.
Question 6
The correct answer is (c).
Answer (c) is incomplete. A complete set of financial statements comprises:
•• A statement of financial position as at the end of the period.
•• A statement of profit or loss and other comprehensive income for the period.
•• A statement of changes in equity for the period.
•• A statement of cash flows for the period.
•• Notes, comprising a summary of significant accounting policies and other explanatory
information.
•• A statement of financial position as at the beginning of the earliest comparative period
when an entity:
–– applies an accounting policy retrospectively, or
–– makes a retrospective restatement of items in its financial statements, or
–– when it reclassifies items in its financial statements.
Feedback for incorrect answer (a): Answer (a) is a true statement. GPFS are for the benefit of
users who are unable to demand a set of specifically tailored financial statements.
Feedback for incorrect answer (b): Answer (b) is a true statement in accordance with IAS 1.
Feedback for incorrect answer (d): Answer (d) is a true statement. GPFS are a structured
representation of the financial position and financial performance of an entity. The objective
of GPFS is to provide information about the financial position, financial performance and cash
flows of an entity, which is useful to a wide range of users in making economic decisions.
To meet this objective, GPFS provide information about an entity’s: assets; liabilities; equity;
income and expenses, including gains and losses; contributions by, and distributions to, owners
in their capacity as owners; and cash flows.
For further information: IAS 1 Presentation of Financial Statements.
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Question 7
The correct answer is (b).
The value of $1,350,000 is calculated by summing cash and cash equivalents ($100,000), trading
property ($1,200,000), and trade and other receivables ($50,000).
An entity shall classify an asset as current when:
•• it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle
•• it holds the asset primarily for the purpose of trading
•• it expects to realise the asset within 12 months after the reporting period, or
•• the asset is cash or a cash equivalent, unless the asset is restricted from being exchanged or
used to settle a liability for at least 12 months after the reporting period.
An entity shall classify all other assets as non-current.
Since PropertyGuru is in the business of buying and selling houses for profit, all property that it
holds is considered to be held primarily for the purpose of trading.
Feedback for incorrect answer (a): The value of $550,000 is calculated by summing cash and
cash equivalents ($100,000), deferred tax assets ($400,000), and trade and other receivables
($50,000). In accordance with IAS 1, deferred tax assets shall not be classified as current assets.
Feedback for incorrect answer (c): The value $1,750,000 is calculated by summing cash and cash
equivalents ($100,000), deferred tax assets ($400,000), trading property ($1,200,000) and trade
and other receivables ($50,000). In accordance with the Standards, deferred tax assets shall not
be classified as current assets.
Feedback for incorrect answer (d): The value $1,820,000 is calculated by summing cash and
cash equivalents ($100,000), deferred tax assets ($400,000), trading property ($1,200,000),
trade and other receivables ($50,000) and provisions ($70,000). Deferred tax assets shall not be
classified as current assets and provisions are a liability; hence they should be excluded from
the summation.
For further information: IAS 1 Presentation of Financial Statements (IAS 1).
Question 8
The correct answer is (d).
Knowledgeable candidates should recognise that reclassifying current assets and liabilities as
non-current will have nil impact on net assets – hence, the effect of those adjustments will not
appear in the statement of changes in equity.
A statement of changes in equity includes the following information:
•• Total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests.
•• For each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with IAS 8.
•• For each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
–– profit or loss
–– other comprehensive income, and
–– transactions with owners in their capacity as owners, showing separately the
contributions by, and distributions to, owners, as well as changes in ownership interests
in subsidiaries that do not result in a loss of control.
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Feedback for incorrect answer (a): Answer (a) is true. Retrospective adjustments are recognised
in the statement of changes in equity in accordance with IAS 8.
Feedback for incorrect answer (b): Answer (b) is true. Transactions with owners include such
items as dividends distributed to shareholders, equity contributions and return of capital
during the period.
Feedback for incorrect answer (c): Answer (c) is true. It is highly likely that an entity will
report a net profit or loss for the period as a result of the total amount of income and expenses,
including gains and losses, generated by the entity’s activities during that period.
For further information: IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors.
Question 9
The correct answer is (c).
International Financial Reporting Standards (IFRS) do not specify the classification of cash
flows from interest and dividends paid and received. An entity is required to choose its own
policy for classifying interest and dividends paid as either operating or financing activities, and
interest and dividends received as either operating or investing activities. The presentation is
selected to present these cash flows in a manner that is most appropriate for the business or
industry, if applicable, and the method selected is applied consistently.
‘Financing activities’ are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.
‘Investing activities’ are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
‘Operating activities’ are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
Feedback for incorrect answers (a) and (b): Answers (a) and (b) are not the most accurate
statements because they do not acknowledge that there is flexibility in the classification of cash
flows, as long as the treatment is consistent from period to period.
Feedback for incorrect answer (d): The statement in answer (d) is inaccurate. The interest paid
will be included in operating or financing activities depending on SMD’s accounting policy
for presenting interest paid in the statement of cash flows. Classifying it as an operating or
financing activity is not linked to whether it is capitalised or treated as an expense.
For further information: IAS 7 Statement of Cash Flows.
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Question 10
The correct answer is (c).
An entity shall not present any items of income or expense as extraordinary items in the
statement(s) presenting profit or loss and other comprehensive income, or in the notes.
Feedback for incorrect answer (a): Answer (a) is false. Expenses have been classified using the
‘function of expense’ or ‘cost of sales’ method. This method classifies expenses according to
their function as part of cost of sales or, for example, the costs of distribution or administrative
activities.
Feedback for incorrect answer (b): Answer (b) is false. IAS 1 requires an entity to disclose a
single amount for the total of discontinued operations. The nature of the expense contributes to
the determination of materiality rather than the amount itself.
Feedback for incorrect answer (d): Answer (d) is false. IAS 1 requires an entity to disclose
its share of the profit or loss of associates and joint ventures accounted for using the equity
method.
For further information: IAS 1 Presentation of Financial Statements.
Question 11
The correct answer is (d).
The role of the auditor is not to directly enable investors to rely on financial statements. This
is because, due to the limitations of an audit engagement, the highest level of assurance that is
attainable is a reasonable level, on which investors cannot base their investment decisions.
The auditor’s opinion on the financial statements deals with whether the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting
framework. Such an opinion is common to all audits of financial statements. The auditor’s
opinion therefore does not, for example, assure the future viability of the entity or provide
assurance of the efficiency or effectiveness with which management has conducted the affairs of
the entity.
Feedback for incorrect answer (a), (b) and (c): Answers (a)–(c) are objectives of an audit
contained in ISA 200.
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. In the case of most general purpose financial reporting
frameworks, that opinion is based on whether the financial statements are presented fairly, in
all material respects, or give a true and fair view in accordance with the framework. An audit
conducted in accordance with ISAs and relevant ethical requirements enables the auditor to
form that opinion.
For further information: ISA 200 Overall Objectives of the Independent Auditor, and the Conduct of an
Audit in Accordance with International Standards on Auditing.
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Question 12
The correct answer is (a).
Under the International Framework para. 11:
The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the assurance engagement as the basis for a positive form
of expression of the assurance practitioner’s conclusion. Reasonable assurance means a high, but not
absolute, level of assurance.
Feedback for incorrect answer (b): XYZ’s requirements are for the highest level of independent
verification. A limited assurance engagement reduces the assurance engagement risk ‘to a
level that is acceptable in the circumstances of the assurance engagement, but where that risk
is greater than for a reasonable assurance engagement, as the basis for a negative form of
expression’: International Framework para. 11. The answer is also incorrect because of the type
of assurance report being issued. A limited assurance engagement must express the conclusion
in the negative form, while reasonable assurance engagements are only expressed in the
positive form.
Feedback for incorrect answer (c): A reasonable assurance engagement must express the
conclusion in the positive form.
Feedback for incorrect answer (d): XYZ’s requirements are for the highest level of independent
verification. A limited assurance engagement reduces the assurance engagement risk ‘to a
level that is acceptable in the circumstances of the assurance engagement, but where that risk
is greater than for a reasonable assurance engagement, as the basis for a negative form of
expression’: International Framework para. 11.
For further information: Differences between reasonable assurance engagements and limited
assurance engagements contained in the International Framework for Assurance Engagements
(International Framework).
Question 13
The correct answer is (b).
The audit manager should not allow bias, conflict of interest, or the undue influence of others
to override their professional or business judgement. The fact that the audit manager has an
ownership stake in ABC impedes their ability to make unbiased decisions.
Feedback for incorrect answer (a): Under IESBA Code para. 150.1:
The principle of professional behaviour imposes an obligation on all members to comply with relevant
laws and regulations and avoid any action or omission that the member knows or should know that
may discredit the profession. This includes actions or omissions that a reasonable and informed third
party, weighing all the specific facts and circumstances available to the member at that time, would be
likely to conclude adversely affects the good reputation of the profession.
While the audit manager withholding information about their share acquisition affects their
professional behaviour (and, hence, be seen to discredit the profession), it is not the most
relevant fundamental principle in this scenario.
Feedback for incorrect answer (c): Professional competence and due care relate to maintaining
‘professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional service’ based on current developments in practice, legislation
and techniques, and to acting ‘diligently and in accordance with applicable technical and
professional Standards’ (IESBA Code para. 130.1).
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Feedback for incorrect answer (d): Confidentiality imposes an obligation on all members to
refrain from (IESBA Code para. 140.1):
(i) Disclosing outside the firm or employing organisation, confidential information acquired as a
result of professional and business relationships without proper and specific authority or unless
there is a legal or professional right or duty to disclose; and
(ii) Using confidential information acquired as a result of professional and business relationships to
their personal advantage or the advantage of third parties.
For further information: The Code of Ethics for Professional Accountants (IESBA Code).
Question 14
The correct answer is (c).
The fact that a document is in paper form (as opposed to electronic form) does not increase its
reliability.
Any audit evidence is more reliable when it exists in documentary form, whether that be paper,
electronic, or in other media.
Feedback for incorrect answers (a), (b) and (d): Answers (a), (b) and (d) are all accurate
generalisations about the reliability of audit evidence. Refer to the International Framework for
more useful generalisations about the reliability of audit evidence.
For further information: International Framework for Assurance Engagements.
Question 15
The correct answer is (c).
Answer (c) is inaccurate because it implies that management has an obligation to provide access
to all information regardless of its relevance to the preparation of the financial statements.
This requirement is not contained in ISA 210. While the auditor can request additional
information from management for the purposes of the audit, the auditor does not have access to
private information relating to key management personnel and management.
Feedback for incorrect answers (a), (b) and (d): Answers (a), (b) and (d) are accurate statements
and contained in ISA 210.
For further information: ISA 210 Agreeing the Terms of Audit Engagements.
Question 16
The correct answer is (c).
Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit, and
continues until the completion of the current audit engagement.
Feedback for incorrect answer (a): Answer (a) is a true statement. In accordance with ISA 330,
planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan. Planning involves the engagement partner
and other key members of the engagement team, and thus the benefit of their experience and
insight, to enhance the effectiveness and efficiency of the planning process.
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Feedback for incorrect answer (b): Answer (b) is a true statement. In accordance with ISA 330
para. 6, the auditor shall perform the following procedures at the beginning of the current audit
engagement, whether it be an initial or recurring audit engagement:
•• perform procedures regarding the continuance of the client relationship and the specific
audit engagement
•• evaluate compliance with relevant ethical requirements relating to the audit engagement,
including independence, and
•• establish an understanding of the terms of the engagement.
•• Where the engagement is an initial audit, the following procedures should also be
performed:
•• procedures regarding the acceptance of the client relationship and the specific audit
•• engagement, and
•• when there has been a change of auditors, communication with the previous auditor,
in compliance with the relevant ethical requirements relating to the audit engagement.
Additional considerations for initial audit engagements are found in ISA 300.
Feedback for incorrect answer (d): Answer (d) is a true statement in accordance with ISA 300.
Adequate planning also assists in the proper assignment of work to engagement team members;
facilitates the direction and supervision of engagement team members and the review of their
work; and assists, where applicable, in coordination of work done by auditors of components
and experts.
For further information: ISA 300 Planning an Audit of Financial Statements and ISA 330 The
Auditor’s Responses to Assessed Risks.
Question 17
The correct answer is (b).
The example given is an indicator of non-compliance in accordance with ISA 250 (see
para. A13).
Feedback for incorrect answers (a), (c) and (d): Answers (a), (c) and (d) are not the best
indicators of non-compliance with laws and regulations, for the following reasons:
Answer (a) – a more appropriate indicator of non-compliance would be if the payments were
for unspecified services and loans, which point to conduct that is designed to conceal noncompliance.
Answer (c) – media commentary in itself is not an indicator of non-compliance. However,
adverse media commentary can be. In this scenario, weekly reporting of AWGC’s share price
represents a normal level of exposure to media commentary as it is in line with other entities in
the industry.
Answer (d) – transactions with companies or entities registered in tax havens in itself are not
indicators of non-compliance. However, unusual transactions with such companies would be
indicators of non-compliance.
For further information: ISA 250 Consideration of Laws and Regulations in an Audit of Financial
Statements.
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Question 18
The correct answer is (c).
Independence is encompassed in the fundamental principles of Objectivity and Integrity as
defined in APES 110 and the Handbook of the Code of Ethics for Professional Accountants – it
is not a separate fundamental principle as defined. Independence of mind and in appearance
is necessary to enable the expression of a conclusion, and to be seen to express a conclusion
without bias, conflict of interest, or undue influence of others.
Feedback for incorrect answer (a): Answer (a) is a fundamental principle (IESBA Code
para. 120.1):
The principle of Objectivity imposes an obligation on all [members] not to compromise their
professional or business judgement because of bias, conflict of interest or the undue influence of others.
Feedback for incorrect answer (b): Answer (b) is a fundamental principle (IESBA Code
para. 140.1):
The principle of confidentiality imposes an obligation on all [members] to refrain from:
(1) Disclosing outside the firm or employing organisation confidential information acquired as a result
of professional and business relationships without proper and specific authority or unless there is a
legal or professional right or duty to disclose; and
(2) Using confidential information acquired as a result of professional and business relationships to
their personal advantage or the advantage of third parties.
Feedback for incorrect answer (d): Answer (d) is a fundamental principle (IESBA Code
para. 150.1)
The principle of professional behaviour imposes an obligation on all [members] to comply with relevant
laws and regulations and to avoid any action or omission that the [member] knows or should know
may discredit the profession. This includes actions or omissions that a reasonable and informed third
party, weighing all the specific facts and circumstances available to the [member] at that time, would be
likely to conclude adversely affect the good reputation of the profession.
For further information: Handbook of the Code of Ethics for Professional Accountants (IESBA Code)
and APES 110 Code of Ethics for Professional Accountants (APES 110).
Question 19
The correct answer is (c).
To answer the question, candidates must first establish who is charged with governance at
Sabora. In accordance with ISA 260, those charged with governance means the person(s) or
organisation(s) responsible for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. This includes overseeing the financial reporting
process.
The background information specifies that Sabora’s board is responsible for overseeing the
strategic direction and obligations related to Sabora’s accountability, including the financial
reporting process; hence, the Board is considered to be charged with governance over Sabora.
The objective of the auditor is to promote effective two-way communication between the
auditor and those charged with governance. There is no requirement to communicate with
users of the financial statements; hence the notion of ‘effective three-way communication’ is not
a requirement of ISA 260 or corporate governance practice.
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Feedback for incorrect answers (a), (b) and (d): Answers (a), (b) and (d) are all objectives of
the auditor in contributing to corporate governance. Refer to the objectives outlined in ISA 260
para. 9.
(a) Refer to ISA 260.
(b) Refer to ISA 260.
(d) Refer to ISA 260. Examples of information from those charged with governance include
assistance in: understanding the entity and its environment; identifying appropriate sources of
audit evidence; and in providing information about specific transactions or events.
For further information: ISA 260 Communication with Those Charged with Governance.
Question 20
The correct answer is (d).
Completing a customer sales order involves recording and processing several transactions in
the day-to-day operations of Squished. This procedure falls into the following description of a
business process:
Initiate, record, process, and report entity transactions (including events/conditions) and
maintain accountability for the related assets, liabilities and equity.
(Contrast this with the definition of an accounting system, as outlined below.)
An information system that is relevant to financial reporting objectives includes the entity’s
business processes and accounting system, defined as follows:
•• Business processes (sales, purchases, payroll) – are structured sets of activities designed
to produce a specified output. They result in transactions being recorded, processed and
reported by the information system.
•• Accounting system – includes accounting software, electronic spreadsheets, and the policies
and procedures used to prepare periodic financial statements and the period- end financial
statements and disclosures.
Refer to ISA 315 for guidance.
Feedback for incorrect answers (a), (b) and (c): Answers (a)–(c) all relate to the operation and
control of accounting systems.
(a) Transferring data from the sales processing system to the general ledger is not a business
process because it does not result in a new transaction (i.e. it is merely a transfer of
information).
(b) Calculating depreciation relates to capturing information for events/conditions other than
transactions.
(c) Disclosing information in the financial statements has nothing to do with day-to-day
transactions; hence, it relates to the accounting system.
For further information: ISA 315 (Revised) Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment.
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Question 21
The correct answer is (d).
The key stages in an audit engagement include the following:
•• Pre-engagement activities.
•• Audit planning.
•• Audit evidence – tests of controls.
•• Audit evidence – substantive testing.
•• Audit evidence – obtain representations.
•• Opinion formulation and reporting activities.
•• Continuous activities.
The auditor’s objective in the audit of financial statements is to obtain reasonable assurance that
no material misstatements, whether caused by fraud or error, exist in the financial statements.
The key output is a suitably worded audit report based on the audit findings. There is no
requirement for the auditor to present findings at annual general meetings. For a list of good
principles surrounding effective communication to those charged with governance, refer to
ISA 260.
Feedback for incorrect answers (a), (b): and (c): Answers (a)–(c) are all key stages of an audit.
They fall within the phases of risk assessment, risk response and reporting, as covered by the
relevant International Standards on Auditing (ISAs).
For further information: Refer to the individual ISAs covering the three phases of an audit
engagement: risk assessment, risk response and reporting. ISA 260 Communication with Those
Charged with Governance.
Question 22
The correct answer is (c).
Materiality is not simply determined once at the start or planning phase of an audit
engagement. It is a component of an audit that is always open to change, depending on the
results of audit procedures and/or new information that is discovered during an audit. For
example, if, during the audit, it appears as though actual financial results are likely to be
substantially different from the anticipated period-end financial results that were used initially
to determine materiality for the financial statements as a whole, the auditor revises that
materiality.
Feedback for incorrect answers (a), (b) and (d): Answers (a), (b) and (d) are all key factors
influencing the assessment of materiality when planning an audit.
For further information: ISA 320 Materiality in Planning and Performing an Audit.
Question 23
The correct answer is (d).
The auditor’s responsibility is to identify and assess the risks of material misstatement in the
financial statements, through understanding the entity and its environment, including the
entity’s internal control.
Encompassed within ‘understanding the entity and its environment’ is the requirement for the
auditor to understand the entity’s selection and application of accounting policies, including
the reasons for changes to them. The auditor shall evaluate whether the entity’s accounting
policies are appropriate for its business and consistent with the applicable financial reporting
framework and accounting policies that are used in the relevant industry.
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An understanding of the entity’s selection and application of accounting policies may
encompass such matters as:
•• The methods the entity uses to account for significant and unusual transactions.
•• The effect of significant accounting policies in controversial or emerging areas on which
there is a lack of authoritative guidance or consensus.
•• Changes in the entity’s accounting policies.
•• New financial reporting Standards and laws and regulations that will impact on the entity,
and when and how the entity will adopt their requirements.
Feedback for incorrect answer (a): The auditor’s responsibility is to identify and assess risks of
material misstatement in the financial statements, which includes understanding the entity’s
selection and application of accounting policies.
Feedback for incorrect answer (b): A lack of authoritative guidance in controversial or
emerging areas does not preclude the auditor from gaining an understanding of the accounting
policies. In such circumstances, the auditor should use their professional judgement to evaluate
the effect of accounting policy changes on the financial statements.
Feedback for incorrect answer (c): NPR has a responsibility to evaluate whether Empower’s
accounting policies are appropriate for its business and consistent with the applicable financial
reporting framework and accounting policies that are used in the relevant industry.
For further information: ISA 315 (Revised) Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment.
Question 24
The correct answer is (d).
Primary responsibility for the prevention and detection of fraud at an entity rests with
both those charged with governance and management. It is important that management,
overseen by those charged with governance, places a strong emphasis on:
• Fraud prevention, which may reduce opportunities for fraud to take place.
• Fraud deterrence, which could persuade individuals not to commit fraud because of the
likelihood of detection and punishment.
This involves a commitment to creating a culture of honesty and ethical behaviour, which can
be reinforced by the active oversight of those charged with governance. This oversight includes
considering the potential for override of controls or other inappropriate influences over the
financial reporting process – for example, efforts by management to manage earnings in order
to influence analysts’ perceptions of the entity’s performance and profitability.
An auditor conducting an audit in accordance with Auditing Standards is responsible for
obtaining reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error. Owing to the inherent limitations
of an audit, there is an unavoidable risk that some material misstatements of the financial
statements may not be detected, even though the audit is properly planned and performed in
accordance with Australian Auditing Standards. To that effect, the auditors cannot detect and
are not responsible for the detection of all instances of fraud.
Feedback for incorrect answer (a): The Corporations Act 2001 (Cth) does not dictate overall
responsibility for the detection and prevention of fraud.
Feedback for incorrect answer (b): Primary responsibility for the prevention and detection of
fraud at an entity rests with both those charged with governance and management. However,
professional scepticism of the auditor is still an important function of fraud detection. The
auditor shall maintain professional scepticism throughout the audit, recognising the possibility
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that a material misstatement due to fraud could exist, notwithstanding the auditor’s past
experience of the honesty and integrity of the entity’s management and those charged with
governance. Although the auditor cannot be expected to disregard past experience of the
honesty and integrity of the entity’s management and those charged with governance, the
auditor’s professional scepticism is particularly important in considering the risks of material
misstatement due to fraud because there may have been changes in circumstances.
Feedback for incorrect answer (c): The response to answer (c) is correct but the reasoning is
incorrect. Primary responsibility for the prevention and detection of fraud at an entity rests with
both those charged with governance and management.
For further information: ISA 200 Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with International Standards on Auditing and ISA 240 The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements.
Question 25
The correct answer is (a).
Answer (a) is correct. A term deposit balance represents an asset balance for which the
‘existence’ assertion can be verified through an external confirmation. An external confirmation
represents audit evidence obtained by the auditor as a direct written response to the auditor
from a third party (the confirming party), in paper or electronic form, or other media. External
confirmation procedures are often relevant when addressing assertions associated with certain
account balances and their elements.
Feedback for incorrect answer (b): Tests of controls are designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements
at the assertion level. The procedure described in the background scenario does not test the
operating effectiveness of an account balance, nor is it required.
Feedback for incorrect answer (c): Analytical procedures involve evaluating financial
information through the analysis of plausible relationships within both financial and nonfinancial data. Analytical procedures also encompass such investigation as is necessary into
identified fluctuations or relationships that are inconsistent with other relevant information, or
that differ from expected values by a significant amount. Performing an analytical procedure
as audit evidence over the existence of an asset balance is unnecessary and does not provide
sufficient appropriate audit evidence. An example of performing an analytical procedure with
the term deposit balance that is beneficial is if the auditor wanted to assess the relationship of
term deposit interest revenue with the prevailing term deposit interest rates and term deposit
balance throughout the year.
Feedback for incorrect answer (d): Enquiry consists of seeking information from
knowledgeable persons, both financial and non-financial, within the entity or outside the entity.
For further information: ISA 500 Audit Evidence.
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