Testbank

to accompany

Audit and assurance

1st edition
by

Leung et al.

© John Wiley & Sons Australia, Ltd 2019

 Chapter 4: Quality and standards of assurance engagements

Chapter 4: Quality and standards of assurance engagements

Multiple choice questions

1. Under the Framework for Assurance Engagements which of these is one of the types of
assurance engagements?

a. Partial assurance.
b. Absolute assurance.
*c. Reasonable assurance.
d. All are types of assurance engagements.

The correct option is c.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

2. An assurance engagement as compared to a non-assurance engagement, requires:

*a. an opinion to be provided.

b. a positive not a negative opinion.
c. the assurance practitioner to reduce the assurance risk to a level that is appropriate to
the engagement.
d. all of the above are required.

The correct option is a.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

3. It is incorrect that the Framework for Assurance Engagements:

a. is based on the International Framework issued by the IFAC.

b. defines and describes the elements of an assurance engagement.
c. shows the concepts of an assurance engagement.
*d. establishes standards.

The correct option is d.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

© John Wiley & Sons Australia, Ltd 2019 4.2

Testbank to accompany Auditing and assurance 1e

4. Which of these possible engagements by a firm with their accountants is an assurance

engagement?

*a. An assessment of the internal control system.

b. Preparing financial reports.
c. A management consulting service.
d. All are assurance engagements.

The correct option is a.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

5. A negative opinion in a limited assurance engagement:

a. is not as strong an opinion as a positive opinion.

b. normally is not based on detailed substantive or control testing.
c. expresses the opinion that nothing has come to the attention of the practitioner to
suggest that the outcome is not in compliance with the criteria.
*d. all of the above are true concerning negative opinions.

The correct option is d.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

6. The suitability of criteria is the basis on which the information about the subject matter is
prepared and measured. It is normally based on:

a. relevance and reliability.

b. neutrality and completeness.
c. understandability.
*d. all of the above.

The correct option is d.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

7. Auditors may be asked to give an audit opinion on only one part of a financial report
based on historical financial information. These include all of the following except for:

a. a statement of financial position.

*b. forecast information in support of a bank loan application.
c. accounts receivable.
d. provision for income taxes.

The correct option is b.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

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 Chapter 4: Quality and standards of assurance engagements

8. The assurance engagement that the normal auditing standards (ASAs 100-799) apply to
is:

*a. an audit of annual general purpose financial reports.

b. a part only of a financial report, rather than the full report.
c. a summarised financial report.
d. they apply to all of the above.

The correct option is a.

Learning objective 4.1 ~ appreciate the framework on assurance engagements other than
those relating to general purpose financial report audits.

9. When an auditor performs a review of an interim financial report which of the following
steps would not be part of the review?

a. Review of ratios and trends.

*b. Testing of the computer controls.
c. Reading the minutes of the shareholders' meetings.
d. Inquiry of management.

The correct option is b.

Learning objective 4.2 ~ discuss assurance engagements for historical financial information
other than those relating to general purpose financial report audits.

10. During a review of a financial report, the auditor would be least likely to:

a. read the financial report and consider its conformance with generally accepted
accounting principles.
b. obtain reports from other accountants who reviewed a portion of the total entity.
*c. obtain written confirmation from management regarding loans to officers.
d. perform analytical procedures designed to identify relationships that appear to be
unusual.

The correct option is c.

Learning objective 4.2 ~ discuss assurance engagements for historical financial information
other than those relating to general purpose financial report audits.

11. Which of these is not an assurance engagement?

a. A review of historical financial information.

b. A performance audit.
*c. A consulting engagement to help an organisation meet its tax obligations.
d. All are assurance engagements.

The correct option is c.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

© John Wiley & Sons Australia, Ltd 2019 4.4

Testbank to accompany Auditing and assurance 1e

12. According to a KPMG 2016 survey:

a. the dollar value of the typical fraud has increased.

b. the number of instances of detected fraud has increased.
*c. the total dollar value lost to fraud has increased.
d. the total dollar value lost to fraud has decreased.

The correct option is c.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

13. A forensic audit in an organisation with an electronic environment may feature:

a. investigating employee emails and addresses, log-on times and messages.

b. searching for duplicate numbers of payments or receipts.
c. scanning lists of suppliers.
*d. all of the above.

The correct option is d.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

14. In a continuous audit client information is released in a very short timeframe, and
auditors’ reports on that information follow the release almost immediately. One of the
issues for auditors is:

a. there is enough time for the auditor to gather evidence.

*b. the auditor cannot rely on normal audit procedures.
c. the auditor cannot use fully automated audit software.
d. the auditor cannot check the internal control system.

The correct option is b.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

15. Performance engagements may give rise to:

a. limited assurance.
b. reasonable assurance.
*c. either a or b.
d. limited assurance, reasonable assurance or complete assurance.

The correct option is c.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

© John Wiley & Sons Australia, Ltd 2019 4.5

 Chapter 4: Quality and standards of assurance engagements

16. Evidence should be obtained for which of the following in a prospective financial
information assurance engagement report (PFI) such as a forecast or projection?

*a. That the assumptions used by management are appropriate.

b. That the PFI was prepared at the same time as the historical financial statements.
c. That the PFI gives a true and fair view.
d. Evidence should be obtained for all of the above.

The correct option is a.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

17. A set of official guidelines published by the United Nations Environmental program is
known as:

*a. the Global Reporting Initiative.

b. the World Sustainability Guidelines.
c. triple bottom line reporting.
d. the AA1000 Assurance Standard.

The correct option is a.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

18. In research conducted by CPA Australia and the University of Sydney it was found that in
Australia:

a. 80% of companies in the private sector had their sustainability reports audited or
verified.
b. just under 15% of companies in the private sector had their sustainability reports
audited or verified.
*c. 60% of companies in the private sector had their sustainability reports audited or
verified.
d. less than 25% of companies in the private sector had their sustainability reports
audited or verified.

The correct option is c.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

© John Wiley & Sons Australia, Ltd 2019 4.6

Testbank to accompany Auditing and assurance 1e

19. Which of the following was not identified in a research study by Hargroves and Smith as
a principle of sustainable development?

a. Equal opportunity.
b. Ensuring intergenerational equity.
c. Conservation of biodiversity.
*d. All were identified as principles of sustainable development.

The correct option is d.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

20. Performance engagements investigate:

a. compliance with regulations and contractual obligations.

b. the causes and effects of possible fraudulent activities.
c. the full range of organisational sustainability performance.
*d. the economy, efficiency and effectiveness of business activities.

The correct option is d.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

21. Which of the following factors is a driver for the current electronic environment?

a. The increasing amount of interconnectivity among organisations.

b. The reliance of business on technology.
c. The complexity of the information economy.
*d. All of the above.

The correct option is d.

Learning objective 4.4 ~ use examples to illustrate the scope of assurance engagements other
than those relating to historical financial information.

22. The ISO 9000 series is concerned with:

a. audit requirements of specific businesses.

b. environmental management.
c. marketing management.
*d. quality management.

The correct option is d.

Learning objective 4.5 ~ appreciate some of the professional quality standards applicable to
assurance engagements.

© John Wiley & Sons Australia, Ltd 2019 4.7

 Chapter 4: Quality and standards of assurance engagements

23. The ISO 14000 series is concerned with:

a. quality management.
b. audit requirements of specific businesses.
*c. environmental management.
d. marketing management.

The correct option is c.

Learning objective 4.5 ~ appreciate some of the professional quality standards applicable to
assurance engagements.

24. The seven quality management principles outlined by ISO 9000 do not include:

a. leadership.
*b. demonstrate conformance.
c. engagement of people.
d. process approach.

The correct option is b.

Learning objective 4.5 ~ appreciate some of the professional quality standards applicable to
assurance engagements.

25. The three-pronged approach developed by ISO 14000 to meet the needs of its
stakeholders include:

a. standardised sampling and testing methods, environmental management system

standards and a systematic approach to managing business processes.
b. standardised sampling and testing methods, technical reports and a systematic
approach to managing business processes.
*c. standardised sampling and testing methods, environmental management system
standards and technical reports.
d. none of the above.

The correct option is c.

Learning objective 4.5 ~ appreciate some of the professional quality standards applicable to
assurance engagements.

© John Wiley & Sons Australia, Ltd 2019 4.8

Testbank to accompany Auditing and assurance 1e

26. Which of the following mechanisms and standards is not included as a self-regulatory
control with which professional accountants and auditors must comply?

a. Compulsory continuing professional development.

b. Compulsory professional indemnity insurance.
c. Character checking on entry to the profession.
*d. Minimal ethical rulings and codes of ethics.

The correct option is d.

Learning objective 4.5 ~ appreciate some of the professional quality standards applicable to
assurance engagements.

© John Wiley & Sons Australia, Ltd 2019 4.9

 Chapter 4: Quality and standards of assurance engagements

Short answer questions

27. Define an assurance engagement and list its characteristics.

Correct answer:
An assurance engagement is ‘an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement for a subject matter against
criteria’.
An assurance engagement has the following characteristics:
• An identifiable subject matter which is capable of consistent evaluation or
measurement against a set of identified and suitable criteria; the subject matter should
be in a form suitable for the gathering of evidence
• A set of suitable criteria, available to the intended user(s)
• Sufficient evidence in support of the practitioner’s conclusion
• A written assurance report of the practitioner’s conclusion, in a form appropriate to
either an audit-level engagement or a review-level engagement.

Reference: Learning objective 4.1 ~ appreciate the framework on assurance engagements

other than those relating to general purpose financial report audits.

28. What is a forensic audit, and (briefly) what would the auditor be looking for? When might
it be used? What would an audit involving the electronic environment feature?

Correct answer:
A forensic audit investigates the causes and effect of possibly fraudulent activities or system
failures that may be the consequences of fraud. The forensic auditor may look for evidence of
fraud and document system failures, and identify the extent of losses incurred.

A forensic audit may be used in response to a claim against a company as a result of

intentional or unintentional failures of electronic systems for processing transactions. An
insurer may use a forensic audit to evaluate the liability of a claim.

An audit involving the electronic environment might feature:

 Comparisons of employee emails and addresses, log-on times and messages.
 Searching for duplicate numbers on payments or receipts.
 Scanning lists of suppliers, customers and inventory movements.
 Analysing the sequence of transactions to identify the intervention by unauthorised
personnel.
 Finding users of the same addresses and signalling phantom users.

Reference: Learning objective 4.4 ~ use examples to illustrate the scope of assurance
engagements other than those relating to historical financial information.

© John Wiley & Sons Australia, Ltd 2019 4.10

Testbank to accompany Auditing and assurance 1e

29. What is continuous auditing and where might it be used? What are some of the problems
associated with the continuous audit?

Correct answer:
Continuous auditing is a process or method that enables independent auditors to provide
written assurance on subject matter using a series of auditor’s reports issued simultaneously
with the occurrence of events underlying the subject matter.

It might be used for financial statements available on demand via a website, for specific
financial information in conjunction with a debt covenant agreement, compliance with
published policies and practices regarding e-commerce transactions, or for the effectiveness
of controls operating in key systems or processes.

Issues include: there is little or no time to gather audit evidence for verification or
substantiation. The auditor cannot rely on normal audit procedures, so a well-controlled
application system is vital.

Reference: Learning objective 4.4 ~ use examples to illustrate the scope of assurance
engagements other than those relating to historical financial information.

30. Research conducted by CPA Australia and the University of Sydney identified a number
of observations in relation to firms providing sustainability reporting. Outline the main
findings of the research.

Correct answer:
Not all companies reporting sustainability-type information used a recognised framework like
the GRI. 60% of the companies in the private sector had their sustainability reports audited
and verified. The majority of these companies, however, included a reference to their discrete
report in the annual report. Australian companies listed on the stock exchange were more
likely to produce an integrated report in lieu of the sustainability report rather than replacing
the annual report.
Larger, multi-national firms in all jurisdictions showed higher levels of sustainability
disclosures, with governance and environment ranking the highest. Companies operating in
the materials and energy industry produced more sustainability information than other
sectors. Whereas, human rights, society and product responsibility had the least disclosures.
UK companies produced more diverse sustainability information covering more GRI
indicators than companies in Hong Kong and Australia. In Australia, most environment
disclosures are in the resources sector. Industry membership influences sustainability
reporting behaviour, particularly where there is a requirement to report on certain activities.
The analyses of the association between sustainability disclosure and financial performance
show the following:
 the higher scores of sustainability disclosures were positively associated with higher
levels of operating cash flow to total assets, return on equity, return on assets and
market capitalisation.
 sustainability disclosures, however, were found to be negatively associated with the
quick and gearing ratios.
 profitability and cash flow return are strongly correlated with GRI scores, including
analyst projections of future return on equity (ROE).

© John Wiley & Sons Australia, Ltd 2019 4.11

 Chapter 4: Quality and standards of assurance engagements

Reference: Learning objective 4.4 ~ use examples to illustrate the scope of assurance
engagements other than those relating to historical financial information.

31. Briefly outline the difference between compliance engagements and performance
engagements.

Correct answer:
Organisations may have obligations to follow requirements imposed by law or regulation, by
contract or internally imposed through accounting policies and procedures. Compliance
engagements provide assurance that regulations, contractual obligations or other requirements
have been complied with. An example of this would be reporting on whether an entity has
complied with certain aspects of a bank loan agreement relating to interest payments and
maintenance of predetermined financial ratios.

Performance engagements involve obtaining and evaluating evidence about the efficiency,
economy and effectiveness of an entity’s operating activities in relation to specified
objectives. The organisation may wish for any of their processes to be investigated to ensure
they are maximising performance. The difficulties for the auditor in these engagements relate
to the appropriateness of the subject matter and the suitability of the criteria. The auditor
needs to determine if the activity being tested (the subject matter) is capable of consistent
measurement to ensure that procedures can be applied to allow sufficient and appropriate
evidence to be obtained. The other issue is the criteria against which the activity is to be
measured; it may be difficult to establish what actually constitutes appropriate benchmarks
against which to compare the activity

Reference: Learning objective 4.4 ~ use examples to illustrate the scope of assurance
engagements other than those relating to historical financial information.

32. Describe the differences between a reasonable assurance engagement and a limited
assurance engagement.

Correct answer:
The objective of both a reasonable and a limited assurance engagement is the reduction in
assurance engagement risk to a level that is acceptable to the circumstances of the
engagement. A reasonable assurance engagement will have a lower level of acceptable
engagement risk as the basis for a positive form of the practitioner's conclusion.

Both forms of engagement use evidence gathering procedures to obtain sufficient appropriate
evidence. However, a reasonable assurance engagement will require more procedures in
order to support the positive form of expression of the practitioner’s conclusion.

The main difference between the two engagements is in the assurance report. A reasonable
assurance engagement will have a positive form of expression of the conclusion. A limited
assurance engagement will have a negative form of the expression of the conclusion. The
procedures necessary to support the positive expression result in a higher level of assurance
for the reasonable assurance engagement.

© John Wiley & Sons Australia, Ltd 2019 4.12

Testbank to accompany Auditing and assurance 1e

Reference: Learning objective 4.1 ~ appreciate the framework on assurance engagements

other than those relating to general purpose financial report audits.

© John Wiley & Sons Australia, Ltd 2019 4.13