ICAEW ARF Obtaining assurance evidence: practice questions with answers

Question 1

ISA (UK) 230 sets the standard for how complete audit documentation must be. The documentation must be sufficient to enable which person to understand the procedures performed, the evidence obtained and the significant matters and conclusions?

1. A The engagement partner who signs the auditor's report on the financial statements
2. B Any member of the engagement team who worked on that particular audit
3. C An experienced auditor who has had no previous connection with the audit
4. D A member of the client's audit committee who holds an accounting qualification

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Answer: C. ISA (UK) 230 requires documentation sufficient to enable an experienced auditor, having no previous connection with the audit, to understand:

- the nature, timing and extent of the procedures performed
- the results of those procedures and the evidence obtained
- significant matters arising, the conclusions reached and the significant professional judgements made.

The test is deliberately set from the viewpoint of an outsider, so the file must stand on its own without anyone needing to explain it. People who worked on the audit (including the partner) know more than the file shows, so they are not the benchmark.

Question 2

Oxley Kane LLP audits Sandbeck Swim Centres Ltd. On one morning in November, a trainee watches two members of staff open the post together and record every cheque received in a log before it goes to the cashier. What is the main limitation of this evidence about the control?

1. A Observation is a form of enquiry, so it cannot give the auditor any evidence about how controls operate
2. B Evidence obtained by observation is oral evidence, so it is less reliable than evidence in a written document
3. C It shows the control operating only while the trainee watched, and staff may act differently when observed
4. D Observation can be used to obtain evidence about physical assets only, not about how controls are operated

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Answer: C. ISA (UK) 500 notes that observation provides evidence about the performance of a process or procedure, but only at the point in time when the observation takes place, and that being observed may affect how the process is performed.

So one morning's observation does not show that the control operated throughout the year. The auditor would usually combine it with other procedures, such as inspecting the post log for a sample of days across the period, to get evidence about the whole period.

Question 3

Brightwater Online Ltd sells downloadable design templates. It processed about 3 million low-value orders this year. Each order is initiated, priced, recorded and paid for automatically, and no documents exist outside the IT system. Which statement about testing revenue is most appropriate?

1. A Tests of controls are never compulsory; a substantive-only approach is always possible if enough items are tested
2. B Substantive procedures for revenue are not needed, because testing the automated controls takes their place
3. C Enquiry of the IT manager is sufficient, because automated controls always operate in the same way
4. D Relevant controls, including IT controls, will probably need testing, as substantive work alone may not suffice

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Answer: D. ISA (UK) 330 requires tests of controls in two situations:

1. when the auditor's risk assessment expects controls to be operating effectively (the auditor plans to rely on them), or
2. when substantive procedures alone cannot provide sufficient appropriate evidence at the assertion level.

The second applies where large volumes of routine transactions are processed automatically with little or no documentation outside the system. The auditor would test the automated controls and the general IT controls that support them. Substantive procedures are still required, because revenue is material.

Question 4

You are attending the year-end inventory count at Brockley Builders Merchants Ltd's warehouse. The engagement senior has asked you to obtain evidence that the count records are complete. Which procedure should you perform?

1. A Select items from the count sheets and find them in the warehouse, checking the quantities recorded
2. B Select items on the warehouse shelves and trace them to the count sheets, checking the quantities recorded
3. C Observe whether counters work in pairs and mark each bay once it has been counted
4. D Record the number of the last goods received note issued before the count starts

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Answer: B. To test completeness, start with what physically exists and check it has been recorded: select items from the floor to the count sheets and agree the quantities. The opposite direction, sheets to floor, tests existence.

Observing the counting procedures (ISA (UK) 501) helps the auditor judge whether management's count can be relied on, and recording goods received note numbers gives cut-off information, but neither directly shows that every item present was counted.

Question 5

Ingleby Boilers Ltd gives a two-year warranty on every boiler it sells. At the year end the directors have provided £180,000 for future warranty repairs, calculated as 3% of the last two years' sales. Which procedure gives the best evidence on the valuation of the provision?

1. A Compare the provision with recent claims experience and with the warranty claims actually received and settled after the year end
2. B Obtain a written representation from the directors that the provision is their best estimate of the cost of future claims
3. C Agree the provision to the nominal ledger and trial balance, and recalculate 3% of the last two years' sales
4. D Inspect a sample of sales contracts to confirm that each boiler sold carries a two-year warranty

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Answer: A. A warranty provision is an accounting estimate, measured at the best estimate of the cost of settling the obligation (IAS 37; FRS 102 section 21). The key question is whether the 3% rate is reasonable.

The best evidence comes from testing the assumption against what actually happens: comparing the rate with recent claims history, and reviewing claims received and settled after the year end for boilers sold before it. Recalculating 3% of sales tests only the arithmetic, inspecting contracts supports the obligation's existence, and a written representation cannot replace this evidence.

Question 6

Lyndon Freight Ltd has a year end of 31 March 2027. Audit fieldwork ended on 2 May 2027, the auditor's report is expected to be signed on 14 June 2027, and the signed financial statements will be filed on 28 June 2027. What date should the directors' letter of representation bear?

1. A 31 March 2027
2. B 2 May 2027
3. C 14 June 2027
4. D 28 June 2027

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Answer: C. Under ISA (UK) 580, written representations are dated as near as practicable to, but not after, the date of the auditor's report. They are addressed to the auditor and cover all periods referred to in the report.

Here that is 14 June 2027. Earlier dates would leave a gap before the report is signed, and a later date would mean the auditor had signed without the representations.