AA ICAEW EXAM QUESTIONS AND ANSWERS
Name 5 actions that can increase objectivity and independence. - Answers- Rotation of partners.
- Independence declarations completed annually (or periodically).
- Engagement quality control review to consider adequacy of the documentation of conclusion on...
Describe what analytical procedures do and three ways they can be used. - Answers✓✓They
compare balances with previous periods, month by month, or with industry data/forecasts.
- Can be used to compare manual vs system generated journal.
- Can be used to compare journal entries year on year.
- Can be used to analyse margins and sales and highlight negative margins.
What are the limitations of analytical procedures (4)? - Answers✓✓- require good knowledge of
the business.
- may be prone to performing analytics mechanically and lack of professional scepticism.
- reliable data for the analytic may not be available.
- lack of comparability if the business is growing or changing.
What is the purpose of walkthroughs? - Answers✓✓- they are designed to establish that internal
controls exist.
- for the audit team to gain an understanding of the control.
- they help to decide the audit approach, whether controls can be relied upon.
- they cannot be used as audit evidence.
What is the purpose of tests of controls (3)? - Answers✓✓- they are designed to obtain sufficient
audit evidence of operating effectiveness.
- the auditor is to rely on controls when determining extent of substantive procedures.
- substantive procedures alone are not sufficient audit evidence.
What is the third party test? - Answers✓✓when considering whether the requirements of the
ethical standard have been met, evaluation should be made with reference to the perspective of
an objective, reasonable and informed third party.
Name 5 criticisms of external auditors. - Answers✓✓- lack of audit quality/scepticism.
- lack of competition due to dominance of big four.
- lack of independence.
- non-audit services provided to clients.
What type of actions/transactions indicate money laundering and what steps should be taken if
this issue arises? - Answers✓✓- large periodic transactions of the same amount, being billed to
and from overseas locations.
- report to money laundering officer at the firm as activity represents proceeds of crime.
- report to the national crime agency as it is an offence not to report.
- avoid tipping off the client as it would be a criminal offence to do so.
How should a question which suggest an ethical dilemma/situation be answered? - Answers✓✓-
first explain what the question presents (e.g. conflict of interest, overdue fees, opinion shopping,
long association).
- then discuss the ethical threats that will arise from the situation (e.g. management threat,
advocacy, familiarity, self-interest etc.).
- then discuss any safeguards that could be applied to these threats.
- then come to conclusion.
What are the safeguards to management threat? - Answers✓✓- have an informed management
(with knowledge of area so can evaluate advice given by auditor instead of just taking opinion as
gospel, and there auditor effectively making the decision).
- only perform work of a technical/mechanical nature only (not judgemental).
What are PIE clients? - Answers✓✓- an issuer whose transferable securities are admitted to
trading on a UK regulated market.
- a credit institution.
- a person who would be an insurance undertaking.
If warranties have been deemed a risky area in the audit, how could they be tested (5 ways). -
Answers✓✓· Enquire with management about the basis for the estimate of the warranty
provision
· Compare prior year provisions with actual claims made to ascertain the accuracy of
managements estimates
· Review the level of returns post year end and compare this with the assumptions made about
returns
· Review listing of repair costs incurred and compare this with the assumptions made
· Check the movement in the provision has been appropriately recorded in the statement of profit
or loss
If going concern has been deemed a risky area in the audit, how could they be tested (5 ways). -
Answers✓✓· Obtain cash flow forecast for at least a year from the reporting date and assess
reasonableness
· Perform sensitivity analysis on key components of forecast such as revenue, interest rates
· Review cash flow forecast to determine whether entity can pay debts and will comply with
bank covenants
· Obtain written representations from management regarding future plans and their feasibility
· Inspect bank correspondence for evidence of banking relationship including covenants
If management override of controls has deemed to be very high risk, how could this be tested? (5
ways) - Answers✓✓· Substantiate journal entries and investigate reconciling items
· Review significant accounting estimates and judgement for bias
· Investigate transactions outside of the ordinary course of business
· Review whistle-blowing arrangements
· Review internal auditor's report
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