Chapter 3: Process of assurance: planning the

assignment
1 Which three of the following are objectives of audit planning?
A To determine the scope of the engagement
B To ensure appropriate attention is devoted to the important areas of the audit
C To identify potential problems and resolve them on a timely basis
D To assign work to members of the audit team LO 1f

2 With respect to ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement
Through Understanding of the Entity and Its Environment, which three of the following
procedures must be used in understanding the entity and its environment?
A Inquiries of management and others within the entity
B Inquiries of third parties
C Analytical procedures
D Observation and inspection LO 1f

3 Which three of the following constitute analytical procedures?

A Consideration of comparable information for prior periods
B Consideration of relationships between elements of financial information that are
expected to conform to a predicted pattern
C Consideration of whether a balance has been calculated correctly
D Consideration of similar industry information LO 1f

4 Which three of the following are auditors helped to decide by setting a preliminary
materiality threshold?
A What audit staff to assign to the audit
B How many items to examine
C Whether to use sampling
D What level of misstatement is likely to lead to the auditor not being able to give an
unmodified opinion LO 1f

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 5 Which three of the following would normally be included in the overall audit strategy?
A Details of economic factors and industry conditions
B The results of initial analytical procedures
C Confirmation of management's responsibility for the financial statements
D Identification of specific audit risks LO 1f

6 In each of the following cases, select whether inherent risk is higher or lower than normal.
The company operates a profit-related pay scheme.
A Inherent risk higher than normal
B Inherent risk lower than normal
The business of the company is cash-based.
C Inherent risk higher than normal
D Inherent risk lower than normal
Financial statements contain balances with straightforward financial accounting
requirements.
E Inherent risk higher than normal
F Inherent risk lower than normal LO 1f

7 For each of the following statements about materiality, select whether they are true or false.
Materiality may depend on the size of the error in the context of its omission or
misstatement.
A True
B False
Materiality should be considered when planning audit procedures and when evaluating
discovered misstatements.
C True
D False
Materiality is always expressed as a proportion of profits.
E True
F False LO 1f

12 Assurance: Question Bank ICAEW 2020

 8 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples, select the type of risk illustrated.
The organisation is seeking to raise finance for a new venture.
A Inherent
B Control
C Detection
The organisation has a number of estimates in its financial statements.
D Inherent
E Control
F Detection LO 1f

9 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples, select the type of risk illustrated.
The organisation has a high turnover of staff in the accounts department.
A Inherent
B Control
C Detection
The auditor will be using samples in testing.
D Inherent
E Control
F Detection LO 1f

10 Which two of the following would be used in understanding the entity in accordance with
ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement Through
Understanding of the Entity and Its Environment?
A Industry, regulatory and other external factors
B A preliminary review of internal controls
C The results of tests of details
D The results of a review of events after the date of the financial statements LO 1f

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 11 For each of the following statements, select whether they are true or false in respect of the
concept of materiality.
Materiality should be calculated at the planning stage of all audits.
A True
B False
Once established, the materiality level initially set cannot be revised during the course of
the audit.
C True
D False
Materiality will influence the audit opinion given.
E True
F False LO 1f

12 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples, select the type of risk illustrated.
Senior management regularly override the system of controls.
A Inherent
B Control
C Detection
Directors' pay is related to company profitability.
D Inherent
E Control
F Detection LO 1f

13 Which three of the following would increase inherent risk?

A Sample sizes have been calculated incorrectly by the auditor and are too small
B A significant number of balances are based on estimates
C The financial statements include complex transactions
D Audit staff are inexperienced
E The company is seeking to raise finance LO 1f

14 Assurance: Question Bank ICAEW 2020

 14 As part of his overall risk assessment an auditor has concluded that detection risk must be
low.
For each of the following, select the appropriate consequence of this.
Materiality
A Higher
B Lower
Sample sizes
C Bigger
D Smaller LO 1f

15 For each of the following situations, select the most appropriate approach which should be
used by the assurance firm.
The audit of a new client, recently started up, with few employees in its accounting
department
A Tests of control only
B Substantive procedures only
C A mix of tests of control and substantive procedures
The audit of a long-standing client with a sophisticated IT system and an internal audit
department
D Tests of control only
E Substantive procedures only
F A mix of tests of control and substantive procedures LO 3f

16 As part of your analytical procedures on the financial statements of Dreamy Desserts Ltd
you have identified that the gross profit margin has fallen from 27% to 24%.
Which two of the following could be a valid explanation for this decrease?
A Unusually high sales at the end of the year resulted in lower levels of closing inventory
as compared to the previous year
B Increased competition resulted in sales prices being cut
C A bank overdraft resulted in a higher interest expense than in previous years
D There was a significant change in the mix of products sold LO 1f/3g

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 17 In each of the following cases, select whether inherent risk is higher or lower than normal.
The company has recently listed on the local stock exchange with high profit expectations
from analysts.
A Inherent risk higher than normal
B Inherent risk lower than normal
Inventory is the largest balance on the statement of financial position.
C Inherent risk higher than normal
D Inherent risk lower than normal
The company operates in a slow-moving, stable industry.
E Inherent risk higher than normal
F Inherent risk lower than normal LO 1f

18 For each of the following statements, select whether they are true or false in respect of the
concept of materiality.
Materiality depends only on the monetary amount of an item.
A True
B False
Materiality may depend on either the nature of an item or its monetary amount.
C True
D False
Materiality is a matter of professional judgement.
E True
F False LO 1f

19 Audit risk can be split into three components: inherent risk, control risk and detection risk.
For each of the following examples, select the type of risk illustrated.
The organisation has few employees in its accounting department.
A Inherent
B Control
C Detection
The organisation operates in a fast-moving, high-tech environment.
D Inherent
E Control
F Detection LO 1f

16 Assurance: Question Bank ICAEW 2020

 20 Which two of the following options are signs of overtrading?
A Inventory decreasing
B Cash decreasing
C Payables decreasing
D Receivables increasing LO 1f

21 Deteriora Ltd's quick ratio has fallen from 1.9:1 to 1.6:1.

Which one of the following might help to explain this decline?
A The allowance for receivables has been reduced
B Credit control has been poor
C The entity has purchased a property for cash
D Inventory levels have fallen LO 1f

22 An electrical store and a cake shop have the same mark-up on cost. However, the gross
profit margin of the electrical store is significantly higher than that of the cake shop.
Which one of the following is a possible reason for this?
A The cake shop's revenue is increasing, while that of the electrical shop is decreasing.
B The cake shop has a higher level of wastage of inventory than the electrical store.
C The electrical shop takes advantage of trade discounts for bulk buying.
D The cake shop has a higher turnover of inventory than the electrical store. LO 1f

23 Thatch plc's current ratio this year is 1.33:1 compared with 1.25:1 last year.
Which two of the following would be possible explanations of this?
A Thatch paid its payables earlier than usual out of a bank overdraft
B Thatch made an unusually large sale immediately before the year end
C Thatch made an unusually large purchase of goods for cash immediately before the
year end, and these goods remain in inventory
D Thatch paid its payables earlier than usual out of a positive cash balance LO 1f

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 24 Which one of the following statements correctly describes the principal purpose of an
external audit of a limited company?
A To help in the preparation of the company's financial statements
B To prevent fraud within the company
C To examine and express an opinion on the company's financial statements
D To help the directors in improving the company's financial reporting process LO 1i

25 Which one of the following best describes the principal difference between fraud and
error?
A Fraud may result in the financial statements being material misstated
B Fraud is an intentional act whereas error is unintentional
C A misstatement can be material whether it is caused by fraud or by error
D Fraud may be the result of negligence whereas error is unintentional LO 1i

26 Which two of the following are true in respect of related party transactions?
A Related party transactions tend to be low-risk to the auditor
B Disclosure of related party transactions is unlikely to be material to the financial
statements
C Related party transactions must be completely disclosed in the financial statements
D There may be a significant control risk in relation to related party transactions LO 1f

27 Rasvi LLP has been informed by its client, Wilson Ltd, that it has discovered that a payroll
fraud was in operation during the previous financial year, a year in respect of which Rasvi
LLP gave a 'clean' auditor's opinion.
Wilson Ltd says that Rasvi LLP was responsible for preventing the fraud. A review of the
previous year's audit working papers shows that Rasvi LLP failed to perform any procedures
at all in relation to the payroll.
For each of the following statements, select whether the statement is true or false.
Rasvi LLP was responsible for preventing the fraud
A True
B False
Rasvi LLP failed to discharge its responsibilities as auditor
C True
D False LO 1f, i

18 Assurance: Question Bank ICAEW 2020

 28 Which two of the following are true of the auditor's objectives in relation to fraud, in line
with ISA (UK) 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial
Statements?
A The auditor performs the audit with the aim of deterring fraud.
B The auditor must identify and assess the risks of material misstatement due to fraud.
C The auditor must obtain evidence regarding the risks of material misstatement due to
fraud.
D The auditor must only obtain evidence regarding the risks of material misstatement
due to error. LO1i

ICAEW 2020 Chapter 3: Process of assurance: planning the assignment 19