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ICAEW ACA (Associate Chartered Accountant), Next Generation syllabus · Assurance and Risk Fundamentals

ICAEW ARF The concept, process and need for assurance: practice questions with answers

6 free exam-style questions on The concept, process and need for assurance for ICAEW ARF Assurance and Risk Fundamentals. Try each one, then open the answer to read the explanation. Fincora has 30 original questions on this syllabus area.

Question 1

Ridgeway Haulage Ltd has asked Penrose & Daly LLP to carry out a set of procedures, specified by Ridgeway's lender, on the company's aged receivables listing. Penrose & Daly will report the procedures performed and the factual findings only, and the lender will draw its own conclusions. What level of assurance does this engagement provide?

  1. A Reasonable assurance, because the lender has specified the procedures in detail
  2. B Limited assurance, expressed as a negative-form conclusion on the listing
  3. C No assurance, because the firm reports factual findings and gives no conclusion
  4. D Limited assurance, because the work covers only one balance in the accounts
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Answer: C. This is an agreed-upon procedures engagement (ISRS 4400). The practitioner performs procedures agreed with the engaging party and reports the factual findings, but expresses no conclusion, so it provides no assurance. Users such as the lender evaluate the findings themselves. Compilation engagements (ISRS 4410) also provide no assurance. By contrast, a reasonable assurance engagement ends in a positive-form opinion, and a limited assurance engagement in a negative-form conclusion.

Question 2

Which of the following statements about the parties to an assurance engagement is correct?

  1. A The responsible party may be one of the intended users, but cannot be the only one
  2. B The practitioner may also act as the responsible party for the subject matter
  3. C Every intended user must be named individually in the engagement letter
  4. D The engaging party must always be the same person as the responsible party
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Answer: A. ISAE 3000 requires a three-party relationship: the practitioner, the responsible party and the intended users. The responsible party can be one of the intended users, but not the only one, otherwise there would be no third party whose confidence the report enhances. The practitioner cannot be the responsible party, as that would remove independence. Intended users may be identified by name or as a class, and the engaging party may or may not be the responsible party.

Question 3

Larkspur Brewing Ltd has invited Fenwick Abbott LLP to become its auditor in place of the current auditor. When Fenwick Abbott asks for permission to contact the current auditor, Larkspur's finance director refuses. What should Fenwick Abbott do?

  1. A Decline the appointment, because it cannot obtain professional clearance
  2. B Contact the current auditor anyway, because clearance is a professional duty
  3. C Accept the appointment, but perform more substantive testing in the first year
  4. D Accept the appointment, provided the client agrees to a higher audit fee
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Answer: A. Before accepting an audit, the proposed auditor asks the client's permission to communicate with the outgoing auditor (professional clearance) to learn of any professional reasons not to accept. If the client refuses permission, that is a warning sign about its integrity or about matters it wishes to hide, and the firm should decline the appointment (ICAEW Code, changes in professional appointments). The firm cannot contact the outgoing auditor without permission because of the duty of confidentiality.

Question 4

Before fieldwork starts on the audit of Wrexford Plastics Ltd, the engagement partner holds a discussion with the whole engagement team. What is the main purpose of this discussion?

  1. A To agree the audit fee and the billing timetable to be proposed to the client
  2. B To allocate the budgeted hours between team members for each audit area
  3. C To consider where the accounts could be materially misstated, including by fraud
  4. D To decide which members of the team will attend the client's year-end meetings
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Answer: C. ISA (UK) 315 and ISA (UK) 240 require the engagement partner and key team members to discuss the susceptibility of the entity's financial statements to material misstatement, including how and where they might be misstated by fraud. The discussion lets experienced members share knowledge of the client, helps less experienced members understand the risks, encourages professional scepticism, and helps the team see how the results of their work may affect other areas.

Question 5

Why does an auditor set performance materiality below overall materiality for the financial statements?

  1. A To make sure that management corrects every individual misstatement the team finds
  2. B To reduce the risk that uncorrected and undetected misstatements exceed materiality
  3. C To reduce the number of items that need to be tested in each area of the audit
  4. D To set the level below which misstatements need not be recorded by the team
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Answer: B. Performance materiality is set at an amount (or amounts) below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole (ISA (UK) 320). It is used when designing the nature, timing and extent of further audit procedures, and a lower figure generally means more work. It is different from the 'clearly trivial' threshold below which misstatements need not be accumulated.

Question 6

Which of the following decisions made during an audit depends mainly on professional judgement rather than on a fixed requirement?

  1. A Addressing the auditor's report to the members of the company
  2. B Including the senior statutory auditor's name in the signed report
  3. C Evaluating whether management's warranty provision is reasonable
  4. D Not dating the auditor's report before the directors approve the accounts
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Answer: C. Professional judgement is the application of relevant training, knowledge and experience in making informed decisions where the circumstances call for them (ISA (UK) 200). It is essential for materiality, assessing risks, deciding the nature, timing and extent of procedures, evaluating evidence and evaluating management's estimates, such as a warranty provision, which involve uncertainty and subjectivity. Matters fixed by law or standards, such as to whom the report is addressed, who signs it and the earliest date it can bear (ISA (UK) 700; Companies Act 2006), do not depend on judgement.

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