Chartered Accountancy, Institute of Chartered Accountants of Pakistan (Scheme 2025) · Audit and Assurance Essentials
ICAP CAF-8 Audit evidence and internal controls: practice questions with answers
4 free exam-style questions on Audit evidence and internal controls for ICAP CAF-8 Audit and Assurance Essentials. Try each one, then open the answer to read the explanation. Fincora has 15 original questions on this syllabus area.
Question 1
The auditor selects a sample of goods dispatch notes from the warehouse's sequentially numbered file and traces each one to the related sales invoice and to its posting in the sales ledger. Which assertion does this procedure mainly test?
- A Completeness of revenue
- B Occurrence of revenue
- C Existence of trade receivables
- D Classification of revenue
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Answer: A. The direction of testing decides the assertion (ISA 500; assertions in ISA 315 (Revised 2019)):
- Tracing from source documents (dispatch notes) to the accounting records tests completeness: every dispatch should lead to an invoice and a ledger entry. An unrecorded dispatch means understated revenue.
- Vouching from recorded entries back to supporting documents tests occurrence (transactions) or existence (balances): every recorded sale should be supported by a genuine dispatch.
Starting from a sequentially numbered dispatch file gives a complete population of goods sent out, so this procedure mainly tests the completeness of revenue.
Question 2
What is the main purpose of stratifying a population before selecting an audit sample under ISA 530?
- A To give every sampling unit in the whole population an equal chance of being selected for audit testing
- B To eliminate sampling risk by testing every item in the population above the tolerable misstatement
- C To identify anomalies in advance so that they can be excluded when misstatements are projected
- D To reduce variability within each sub-population, so that sample size can be cut without increasing sampling risk
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Answer: D. ISA 530 (application material on stratification): audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-populations that share an identifying characteristic, such as monetary value. The objective is to reduce the variability of items within each stratum, which allows sample size to be reduced without increasing sampling risk.
In practice, the auditor might test all items above a set value and sample the remaining strata. Misstatements found in each stratum are projected separately and then combined to estimate the misstatement in the whole population (ISA 530 para 14).
Question 3
Which of the following is an application control rather than a general IT control?
- A New software versions are tested by IT staff and approved by users before being moved into the live environment.
- B The sales module rejects any invoice entered with a customer code that does not exist in the customer master file.
- C Copies of the ERP database are backed up every night and stored securely at a separate location.
- D Network passwords must be changed every 60 days, and users are locked out after three failed log-in attempts.
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Answer: B. General IT controls support the IT environment as a whole and the continued operation of application controls (ISA 315 (Revised 2019)): access security, program change management, IT operations (back-ups, job scheduling) and system development or acquisition.
Application controls apply to the processing of transactions within a particular application: input validation (validity, range, format checks), sequence and completeness checks, batch totals, matching, and exception reports.
Rejecting an invoice with a non-existent customer code is an input validity check in the sales application, so it is an application control.
Question 4
Basholi Holdings Limited owns 70% of Basholi Dairy Limited, the audit client, and 35% of Thalwar Feeds Limited, over which it has significant influence. During the year ended 31 December 2026 Basholi Dairy entered into the four transactions below. Which one is with a related party of Basholi Dairy, so that the auditor must consider whether it is on arm's-length terms and fully disclosed?
- A Purchases of packaging from Kundal Packaging Limited, because Basholi Dairy buys 60% of its packaging from that supplier
- B A term loan from Sufaid Koh Bank Limited, because the bank finances the company and can influence its business decisions
- C Purchases of cattle feed from Thalwar Feeds Limited, because Thalwar is an associate of Basholi Dairy's parent company
- D Sales of milk to Pirwadhai Mills Limited, because its chairman, who owns no shares in either company, is also a Basholi Dairy director
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Answer: C. Step 1: identify the related party (IAS 24, background to the CAF-8 related-parties outcome). An entity is related to the reporting entity if, among other things, it is an associate of a member of the group of which the reporting entity is a member (IAS 24 para 9(b)(ii)). Basholi Dairy is a subsidiary of Basholi Holdings, and Thalwar Feeds is Basholi Holdings' associate, so Thalwar is a related party of Basholi Dairy.
IAS 24 para 11 confirms that the following are not related parties on those grounds alone: two entities that simply have a director or other member of key management personnel in common (para 11(a)); providers of finance in the course of their normal dealings with the entity (para 11(c)(i)); and a customer or supplier with whom the entity transacts a significant volume of business, simply because of the resulting economic dependence (para 11(d)).
Step 2: why it raises risk. Related-party transactions may not be on arm's-length terms (here, feed prices could be set to shift profit within the group), may be used to conceal fraud or be driven by the parent's interests, and must be disclosed with their amounts, terms and balances. The auditor should inspect the purchase agreements and approvals, compare prices with independent suppliers, and check that the disclosure is complete.
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