Assurance ICAEW CFAB Question Bank 2021 PDF

The Institute of Chartered Accountants in England and Wales Assurance Question Bank For exams in 2021 icaew.com Assurance The Institute of Chartered Accountants in England and Wales e-ISBN: 978-1-5097-3488-7 ISBN: 978-1-5097-3363-7 Previous ISBN: 9...

The Institute of Chartered Accountants in England and Wales Assurance Question Bank For exams in 2021 icaew.com Assurance The Institute of Chartered Accountants in England and Wales e-ISBN: 978-1-5097-3488-7 ISBN: 978-1-5097-3363-7 Previous ISBN: 978-1-5097-2728-5 First edition 2007 Fourteenth edition 2020 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, graphic, electronic or mechanical including photocopying, recording, scanning or otherwise, without the prior written permission of the publisher. The content of this publication is intended to prepare students for the ICAEW examinations, and should not be used as professional advice. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Contains public sector information licensed under the Open Government Licence v3.0 Originally printed in the United Kingdom on paper obtained from traceable, sustainable sources. The publishers are grateful to the IASB for permission to reproduce extracts from the International Financial Reporting Standards including all International Accounting Standards, SIC and IFRIC Interpretations (the Standards). The Standards together with their accompanying documents are issued by: The International Accounting Standards Board (IASB) 30 Cannon Street, London, EC4M 6XH, United Kingdom. Email: [email protected] Web: www.ifrs.org Disclaimer: The IASB, the International Financial Reporting Standards (IFRS) Foundation, the authors and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise to the maximum extent permitted by law. Copyright © IFRS Foundation All rights reserved. Reproduction and use rights are strictly limited. No part of this publication may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IFRS Foundation. Contact the IFRS Foundation for further details. The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the ‘Hexagon Device’, ‘IFRS Foundation’, ‘eIFRS’, ‘IAS’, ‘IASB’, ‘IFRS for SMEs’, ‘IASs’, ‘IFRS’, ‘IFRSs’, ‘International Accounting Standards’ and ‘International Financial Reporting Standards’, ‘IFRIC’, ‘SIC’ and ‘IFRS Taxonomy’ are Trade Marks of the IFRS Foundation. Further details of the Trade Marks including details of countries where the Trade Marks are registered or applied for are available from the Licensor on request. © ICAEW 2020 Contents The following questions are exam-standard. Unless told otherwise, these questions are the style, content and format that you can expect in your exam. Title Page Question Answer 1 Concept of and need for assurance 1 93 2 Process of assurance: obtaining an engagement 5 97 3 Process of assurance: planning the assignment 9 99 4 Process of assurance: evidence and reporting 17 105 5 Introduction to internal control 21 109 6 Revenue system 31 115 7 Purchases system 35 119 8 Employee costs 39 123 9 Internal audit 43 127 10 Documentation 47 131 11 Evidence and sampling 51 133 12 Written representations 59 139 13 Substantive procedures – key financial statement figures 63 141 14 Codes of professional ethics 73 149 15 Integrity, objectivity and independence 77 153 16 Confidentiality 87 159 Appendix: Mock Exam guidance notes 165 ICAEW 2021 Contents iii Exam This exam will consist of 50 questions with equal marks, adding up to 100 marks. The questions are of the following types: Multiple-choice – select 1 from 4 options A, B, C or D (see Chapter 1 Q3) Multiple-response – select 2 or more responses from 4 or more options (see Chapter 1 Q1) In this Question Bank you will select only one option per question unless told otherwise. The exam is 1.5 hours long and at least 55 marks are required to pass this exam. Our website has the latest information, guidance and exclusive resources to help you prepare for this exam. Find everything you need, from exam webinars, sample exams, errata sheets and the syllabus to examiner and tutor-written articles at icaew.com/examresources if you are studying the ACA and icaew.com/cfabstudents if you are studying ICAEW CFAB. iv Assurance ICAEW 2021 Professional skills Professional skills are essential to accountancy and your development of them is embedded throughout the ACA qualification. The level of competency in each of the professional skills areas required to pass each module exam increases as ACA trainees progress upwards through each Level of the ACA qualification. The professional skills embedded throughout this Question Bank provide the opportunity to develop the knowledge and professional skills required to successfully pass the exam for this module. During your question practice, remain mindful that you should be demonstrating each of the four professional skills within your answers. You are advised to familiarise yourself with the full ACA professional skills development grids which can be found at icaew.com/examresources. The following advice will help you demonstrate each of the professional skills when completing your answers to questions in this Question Bank. Questions in the Assurance module are rapid fire, plus they can be complex and test the syllabus in a non-sequential order, so each one requires a good skillset to answer correctly. Below are the key skills required in the Assurance exam that you will need to master. In creating this, try to be as module specific as possible given the style/format of the module exam and how students are expected to demonstrate professional skills in this subject. Professional skills focus: Assimilating and using information The Assurance exam requires you to attempt 50 questions in 90 minutes, meaning you have 108 seconds for each question. Being disciplined, reading both the scenario and the requirement carefully and keeping track of time will mean that you work effectively within time constraints which should offer you the best chance of passing. Professional skills focus: Structuring problems and solutions Each scenario will be different, so you need to practise a wide variety of questions in order to be able to identify and apply relevant technical knowledge and skills to analyse a specific problem. Some questions might require you to select appropriate courses of action using an ethical framework, so your knowledge of the chapters on the fundamental ethical principles must be complete. Professional skills focus: Applying judgement You should get used to analysing your performance in the questions you attempt in order to ensure you understand why the correct answer is indeed correct. This will help you to identify inconsistencies and contradictory information the next time you attempt questions from the same area so that you are prepared for the exam. Professional skills focus: Concluding, recommending and communicating In order to be successful in the Assurance exam, you have to be able to apply technical knowledge to support reasoning and conclusions – this will only happen if you learn the terms. ICAEW 2021 Introduction v vi Assurance ICAEW 2021 Question Bank viii Assurance ICAEW 2021  Chapter 1: Concept of and need for assurance 1 Which three of the following are key elements of a general assurance engagement? A A user B A subject matter C Suitable criteria D An assurance file LO 1a 2 Which three of the following describe aspects of the expectations gap with respect to the external audit? A Users do not understand the meaning of the audit opinion B Users are not aware of the limitations of the audit process C Users do not appreciate that reasonable assurance is a low level of assurance D Users do not understand what the audit process involves LO 1d 3 Which two of the following are limitations of the provision of assurance? A Assurance work is carried out by people independent of the entity B Sampling is used in assurance work C Client systems have inherent limitations D Unqualified staff may be used on assurance engagements LO 1a 4 In any assurance engagement there are three parties involved: the responsible party, the practitioner and the user. In respect of given subject matter state which party: determines the suitable criteria? A User B Practitioner C Responsible party provides an opinion on whether the subject matter complies with the criteria? D User E Practitioner F Responsible party LO 1c 5 Which one of the following statements best describes the evidence obtained and the opinion given in a reasonable assurance engagement? A Sufficient appropriate evidence and a negatively worded opinion B Sufficient appropriate evidence and a positively worded opinion C A lower level of evidence and a negatively worded opinion D A lower level of evidence and a positively worded opinion LO 1a/h ICAEW 2021 1: Concept of and need for assurance 1 6 For each of the following statements, select whether they are true or false. A statutory audit gives reasonable assurance that the financial statements give a true and fair view. A True B False A negative assurance conclusion gives a limited level of assurance. C True D False Reasonable assurance is absolute assurance of the correctness of the subject matter. E True F False LO 1a 7 Jones LLP is the external auditor of Blue plc, a listed company. The directors of Blue plc have requested that Jones LLP carry out a review engagement assessing the effectiveness of its corporate governance policies against the UK Corporate Governance Code. For the above review engagement, select which part of the engagement description constitutes the subject matter, which describes the suitable criteria and which party is the responsible party. The subject matter A Blue plc’s corporate governance policies B The UK Corporate Governance Code The suitable criteria C Blue plc’s corporate governance policies D The UK Corporate Governance Code The responsible party E Jones LLP F The directors of Blue plc LO 1a/c 8 For each of the following statements relating to the provisions of the Companies Act 2006, select whether they are true or false. An individual or firm is eligible for appointment as statutory auditor if the individual or firm is a member of a recognised supervisory body and is eligible for appointment under the rules of that body. A True B False A person may not act as a statutory auditor of a company if that person is an officer or employee of the company. C True D False LO 1a 9 Which one of the following best describes the concept of assurance? Assurance refers to: A an assurance firm’s high level of satisfaction as to the reliability of an assertion being made by one party for the use of another party 2 Assurance ICAEW 2021  B an assurance firm’s satisfaction as to the reliability of an assertion being made by one party for the use of another party C a user’s satisfaction as to the reliability of an assertion being made by another party D an assurance firm’s limited level of satisfaction as to the reliability of an assertion being made by one party for the use of another party LO 1a 10 Which three of the following are benefits of an assurance report on financial information? An assurance report: A enhances the credibility of the information being reported on B reduces the risk of management bias in the information being reported on C attests to the correctness of the information being reported on D draws the attention of the user to deficiencies in the information being reported on LO 1b 11 In any assurance engagement there are three parties involved: the responsible party, the practitioner and the user. For each of the following select which party: prepares the subject matter? A Responsible party B Practitioner C User gathers evidence on the subject matter? D Responsible party E Practitioner F User LO 1c 12 The following is an extract from an independent accountant’s unmodified report on a profit forecast: ‘Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.’ Which one of the following best describes the type of assurance provided by this statement? A Positive assurance expressed negatively B Negative assurance expressed positively C High level of assurance expressed negatively D Limited level of assurance expressed negatively LO 1a 13 In the context of a statutory audit which three of the following are commonly cited examples of misunderstandings that contribute to the expectation gap? The belief that: A the auditor’s report certifies the financial statements as correct B the auditor’s principal duty is to detect fraud C the auditor is employed by the directors D the auditor checks all transactions LO 1d ICAEW 2021 1: Concept of and need for assurance 3 14 The level of assurance provided by an assurance engagement will depend on the type of engagement. For each of the following examples, select the level of assurance which would be given. Statutory audit A Absolute B Reasonable Review of financial information C Reasonable D Limited Report on profit and cash flow forecasts E Reasonable F Limited LO 1a 15 The Companies Act 2006 requires all companies to be audited, but allows small companies an exemption from this requirement where they meet certain criteria. Small Ltd has an annual turnover of £10 million, total assets of £5.1 million, and 101 employees. Assuming no special circumstances exist, is Small Ltd required to have an audit in the UK? A Yes B No Tiny Ltd has an annual turnover of £15 million, total assets of £5.2 million, and 99 employees. Assuming no special circumstances exist, is Tiny Ltd required to have an audit in the UK? C Yes D No Little Ltd has an annual turnover of £5 million, total assets of £4.9 million, and 45 employees. Assuming no special circumstances exist, is Little Ltd required to have an audit in the UK? E Yes F No LO 1a 4 Assurance ICAEW 2021  Chapter 2: Process of assurance: obtaining an engagement 1 Which two of the following are auditors always required to do on being invited to accept an audit engagement? A Ensure they are professionally qualified to act B Ensure they have adequate existing resources to carry out the audit C Obtain references for key personnel within the entity to be audited D Communicate with the predecessor auditors to discover any reasons they should not accept appointment LO 1e 2 Which two of the following might indicate that an assurance client could have higher than normal inherent or control risk? A Poor recent performance B Strong internal controls C Unusual transactions D The existence of an internal audit department LO 1f 3 Claret LLP, an assurance firm, has the following two clients among its client portfolio. For each client, select whether inherent risk is high or low. Tulip Ltd is planning to list on the local stock exchange within the next two years. A High risk B Low risk Dhalia Ltd is currently facing financial difficulties and is seeking alternative forms of finance. C High risk D Low risk LO 1f 4 Which three of the following are benefits of an engagement letter in respect of assurance services? A Clearly defines the extent of the assurance provider’s responsibilities B Provides written confirmation of the acceptance of the engagement C Confirms the scope of the engagement D Certifies the assurance provider’s opinion LO 1e 5 Which three of the following procedures should be carried out after the audit firm has decided to accept appointment as auditor? A Ensure that the outgoing auditors’ removal/resignation has been properly conducted B Ensure that a resolution has been passed at the general meeting to appoint the new auditors C Perform checks to ensure that there are no legal or ethical reasons why the new audit firm cannot act as auditor D Submit a letter of engagement to the directors LO 1e ICAEW 2021 2: Process of assurance: obtaining an engagement 5 6 For each of the following statements, select whether they are true or false in respect of the audit engagement letter. The engagement letter should be sent before acceptance of appointment. A True B False The engagement letter should be sent after the appointment of the auditor but before the commencement of the audit. C True D False The engagement letter should be sent after the commencement of the audit but before the signing of the auditor’s report. E True F False An engagement letter should be sent to all new clients. G True H False LO 1e 7 Which one of the following correctly describes the period for which client identification documents must be kept under money laundering regulations? A For a minimum of five years and until five years have elapsed since the relationship with the client has ceased B For a minimum of seven years and until seven years have elapsed since the relationship with the client has ceased C For a minimum of five years and until seven years have elapsed since the relationship with the client has ceased D For a minimum of seven years and until five years have elapsed since the relationship with the client has ceased LO 3a 8 Which two of the following must be included in the engagement letter? A The responsibilities of the auditor B Arrangements regarding the planning and performance of the audit C The form of any reports D Basis on which fees are computed LO 1e 9 Which three of the following are purposes of a letter of engagement? A Setting out the form of any report to be issued B Providing constructive suggestions to management concerning improvements in internal control C Documenting and confirming acceptance of the appointment D Narrowing the expectations gap E Providing evidence on matters where other evidence is not expected to exist LO 1e 6 Assurance ICAEW 2021 10 Which one of the following best describes professional scepticism? The assurance provider should: A not believe anything that management tells him B not believe anything that management tells him, without obtaining supporting evidence C apply a questioning mind to the information and evidence he obtains D always assume the worst outcome in cases of uncertainty LO 1i 11 Which two of the following must be included in the engagement letter? A The scope of the audit B The reporting framework that is applicable for the financial statements being prepared C Details of client identification procedures to be performed in relation to Money Laundering Regulations D A statement that, in accordance with the Companies Act 2006, the auditor’s liability cannot be restricted LO 1e ICAEW 2021 2: Process of assurance: obtaining an engagement 7 8 Assurance ICAEW 2021  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 1g 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 ICAEW 2021 3: Process of assurance: planning the assignment 9 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 1g 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 10 Assurance ICAEW 2021  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 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 1g 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 ICAEW 2021 3: Process of assurance: planning the assignment 11 14 As part of their 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 1f 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 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 12 Assurance ICAEW 2021 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 1g 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 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? ICAEW 2021 3: Process of assurance: planning the assignment 13  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 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 1b/j 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 1j 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. 14 Assurance ICAEW 2021  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 1c/j 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. LO1j ICAEW 2021 3: Process of assurance: planning the assignment 15 16 Assurance ICAEW 2021  Chapter 4: Process of assurance: evidence and reporting 1 Which three of the following are procedures that could be used by assurance providers to provide evidence relating to a balance in the financial statements? A Walk-through procedure B Test of control C Test of detail D Analytical procedure LO 3b 2 Which two of the following are valid comments about the quality of assurance evidence? A Evidence from external sources is more reliable than evidence obtained from the entity’s records. B Evidence from internal sources is more reliable when related internal controls operate effectively. C Evidence from internal sources is more reliable than evidence created by the assurance provider. D Photocopies are more reliable than facsimiles. LO 3e 3 Which three of the following are assertions used by the auditor about classes of transactions? A Occurrence B Existence C Completeness D Cut-off E Rights and obligations LO 3d/f 4 Which three of the following statements are valid? A Positive (reasonable) assurance will be given on a statutory audit assignment. B Positive (reasonable) assurance requires more rigorous work to be undertaken than negative assurance does. C Positive (reasonable) assurance will be given on a review assignment. D Negative assurance is assurance given in the absence of any indications to the contrary. LO 1a 5 Which two of the following describe manifestations of the expectations gap? A Users blaming the auditors for a fraud discovered in a company subsequent to an audit B Users discovering that the directors refuse to cooperate in providing the auditor with the evidence he requests C Shareholders approving the appointment of the auditor at an annual general meeting D Users relying on the audited financial statements as a fair valuation of the company LO 1d ICAEW 2021 4: Process of assurance: evidence and reporting 17 6 The level of assurance given by an assurance engagement will depend on the type of engagement. For each of the following examples, select the level of assurance you would expect to be given. Statutory audit A Absolute B Reasonable C Limited Report on prospective financial information D Absolute E Reasonable F Limited Report on review of interim financial information G Absolute H Reasonable I Limited LO 1a 7 For each of the following situations, select the most appropriate approach which should be used by the assurance firm in the given circumstances. The audit of a client where controls have been assessed as deficient A Tests of controls only B Substantive procedures only C A mix of tests of controls and substantive procedures The audit of a client where controls have been assessed as strong D Tests of controls only E Substantive procedures only F A mix of tests of controls and substantive procedures LO 3f 8 The following are types of test that might be carried out by an assurance provider. For each example, select the financial statement assertion that is being tested. Review of the financial statements using a Companies Act checklist A Existence B Completeness C Classification Tracing non-current assets which have been observed in use back to the non-current asset register D Existence E Completeness F Classification LO 3d/f 9 Which three of the following are assertions used by the auditor about account balances at the period end? A Existence B Accuracy, valuation and allocation C Cut-off 18 Assurance ICAEW 2021  D Completeness LO 3d/f 10 For each of the following statements, select whether they are true or false in respect of substantive procedures. The auditor must carry out substantive procedures on all material items. A True B False The auditor only carries out substantive procedures if the results of tests of controls are inconclusive. C True D False Substantive procedures include both analytical procedures and tests of details. E True F False LO 3d 11 Two types of procedures used in gathering evidence are tests of controls and substantive procedures. For each of the following examples, select the type of procedure illustrated. Observation of opening the post A Test of control B Substantive procedure Calculation of the gross profit margin and comparison with that of the previous accounting period C Test of control D Substantive procedure Reviewing invoices paid for evidence of authorisation E Test of control F Substantive procedure LO 3b 12 Two types of procedures used in gathering evidence are tests of controls and substantive procedures. For each of the following examples, select the type of procedure illustrated. Observation of inventory counting at the year end A Test of control B Substantive procedure Calculation of the quick ratio and comparison with that of the previous accounting period C Test of control D Substantive procedure Inquiring into the operation of the purchases transaction cycle E Test of control F Substantive procedure LO 3b ICAEW 2021 4: Process of assurance: evidence and reporting 19 13 Smith plc is required to apply ISA (UK) 701, Communicating Key Audit Matters in the Independent Auditor’s Report. Which two of the following could be key audit matters? A Areas of high audit risk B Areas in relation to which the auditor expresses a separate opinion C Areas of significant auditor judgement D Significant transactions or events LO 1h 14 Which two of the following describe manifestations of the expectations gap? A Potential shareholders using the statement of financial position as a fair valuation of the entity B Users discovering that the audit firm relies on the audited entity for its fee C Users believing that the audit firm must not sell other services to the audited entity D Users believing that the amounts in the financial statements are stated precisely LO 1d 15 Which two of the following would be included in an assurance report? A Statement of directors’ responsibilities B Identification of the criteria C Auditor’s opinion D Title LO 1h 16 The following are items that might be included in an auditor’s report. For each item, select whether it is reported on explicitly, or only by exception. Whether the financial statements are in agreement with the accounting records and returns A Explicit B By exception Whether the financial statements give a true and fair view of the state of the company’s affairs at the end of the financial year C Explicit D By exception Whether details of directors’ emoluments and other benefits have been correctly disclosed in the financial statements E Explicit F By exception LO 1h 20 Assurance ICAEW 2021  Chapter 5: Introduction to internal control 1 ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment states that an internal control system in an organisation consists of five components: the control environment, the entity’s risk assessment process, the information system, control activities and monitoring of controls. For each of the following examples, select the component which it illustrates. The process of preparing the financial statements A Control environment B Information system C Control activities Locking the inventory storeroom D Control environment E Information system F Control activities LO 2d 2 In each of the following three cases, select whether control risk is higher or lower than normal. The company has an established and well-resourced internal audit function. A Control risk is higher than normal B Control risk is lower than normal The company has a history of reviewing financial performance on a regular basis at board level. C Control risk is higher than normal D Control risk is lower than normal Purchase invoices are not authorised before payment. E Control risk is higher than normal F Control risk is lower than normal LO 2b 3 Which three of the following statements about audit committees are correct? A At least 50% of the members of an audit committee must be non-executive directors B Listed companies are required to have an audit committee C Audit committees are considered to be good practice for all large companies D If a company has an internal audit function, the chief internal auditor should sit on the audit committee E Audit committees are an important aspect of a company’s control environment LO 2b 4 According 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 are aspects of an entity’s control environment? A The attitude of the directors to internal controls B The attitude of staff to internal controls C The awareness of internal control issues in the company D The actions of senior management in relation to internal controls LO 2d ICAEW 2021 5: Introduction to internal control 21 5 Which one of the following is not part of an entity’s risk assessment process? A Identify relevant business risks B Estimate the impact of risks C Assess the likelihood of occurrence D Decide upon actions to manage the risks E Report the process to the auditors LO 2b 6 For each of the following statements about the information system in a company, select whether they are true or false. The information system comprises only the IT system of a company. A True B False The information system includes the process of preparing the financial statements, such as the production of journals. C True D False LO 2b 7 The following are examples of internal controls which operate at Badweather plc. For each example, select the type of control activity which it illustrates. The financial controller counts petty cash on a monthly basis. A Authorisation B Information processing C Physical control There are two keys to the locked finance department safe: one held by the finance director and the other by the managing director. D Authorisation E Information processing F Physical control LO 2e 8 The following are examples of internal controls which operate at Castle Ltd. For each example, select the type of control activity which it illustrates. The financial controller conducts a monthly review of authorisation controls over dispatch notes. A Performance review B Information processing C Segregation of duties The receivables ledger clerk posts invoices to the receivables ledger. The cash clerk posts cash receipts to the receivables ledger. D Performance review E Information processing F Segregation of duties LO 2e 22 Assurance ICAEW 2021 9 The following are examples of computer controls which operate at Goody plc. For each example, select the type of computer control which it illustrates. Storing extra copies of programs and data files off-site A General B Application Programmes to check data fields on input transactions C General D Application Manual checks to ensure that input data were authorised E General F Application LO 2e 10 Which one of the following would be the simplest way of recording a straightforward system not subject to a great deal of change annually? A Flowchart B Narrative notes C Questionnaire D Family tree LO 2i 11 Which three of the following would be the best sources of information about a company’s systems? A The company’s procedures manual B The internal audit function’s system notes C The prior year audit file D Inquiries made of company staff E The company’s website LO 2i 12 Most entities make use of IT systems for financial reporting and operational purposes. Controls operating in an IT environment can be split into general controls and application controls. Which one of the following is an application control? A Training staff in new IT procedures B Taking back-up copies of programs C Maintenance agreements over IT equipment D Cyclical reviews of all master files LO 2e 13 Which two of the following represent inherent limitations of a system of internal controls? A Lack of controls over the purchases system B Lack of understanding of the purposes of controls C Lack of staff to ensure segregation of duties ICAEW 2021 5: Introduction to internal control 23  D The possibility that staff members will collude in fraud LO 2f 14 Which two of the following are authorisation control activities? A A bank reconciliation signed by the finance director B A cheque payment run approved by the finance director C A review of the sales ledger clerk by the finance director D A trial balance compiled by the finance director LO 2e 15 With regards to internal control systems in small entities, select whether each of the following statements is true or false. Smaller companies are more likely to be successful in the implementation of segregation of duties controls. A True B False Management override is more likely to take place in smaller companies. C True D False LO 2f 16 ISA (UK) 315 states that an internal control system in an organisation consists of five components: the control environment, the entity’s risk assessment process, the information system, control activities and monitoring of controls. For each of the following examples, select the component which it illustrates. Training programme for all staff A Control environment B Control activity C Monitoring of controls Review of actual performance against budget D Control environment E Control activity F Monitoring of controls LO 2d 17 For each of the following statements, select whether they are true or false in respect of the limitations of any system of internal control. The cost of implementing controls may be more expensive than the cost of any potential risk arising. A True B False The effectiveness of many controls rely on the integrity of those applying them. C True D False Internal controls are only applied to material items. E True 24 Assurance ICAEW 2021  F False Standard controls may not be designed to deal with unusual transactions. G True H False LO 2f 18 For each of the following statements, select whether they are true or false in respect of business risk. Business risk is the risk inherent to the company in its operations. A True B False Business risk is of no relevance to the auditor. The auditor is only concerned with audit risk. C True D False Management are responsible for identifying and controlling business risks. E True F False LO 2b 19 The following are examples of internal controls which operate at Elm plc. For each example, select the type of control activity which it illustrates. The financial controller reconciles the payables ledger with supplier statements on a monthly basis. A Performance review B Information processing The payables ledger clerk posts invoices to the payables ledger. The cash clerk posts cash payments to the payables ledger. C Segregation of duties D Performance review LO 2e 20 The following are examples of computer controls which operate in the payroll system at Dobson Ltd. For each example, select the type of computer control which it illustrates. Password protection limiting access to data A General B Application Range checks on payroll processing C General D Application Manual checks to ensure that timesheets are authorised before details are processed E General F Application LO 2e 21 Which three of the following are general controls? A Disaster recovery procedures ICAEW 2021 5: Introduction to internal control 25  B Back-up copies of programs stored at an alternative safe location C Procedures for resubmission of rejected data D Staff training in the use of new/revised programs LO 2e 22 Peach plc is a large organisation with a complex accounting and information system. Critical to an understanding of the system are the reporting lines and relationships between different departments. In this situation which one of the following methods is most likely to be used by the auditor to record the system of document flow? A Narrative notes B Flowcharts C Questionnaires D Organisational charts LO 2i 23 Which two of the following are reasons why organisations need to have effective systems of control? To help the organisation in: A minimising business risks B maximising its profitability C managing its assets and liabilities D cutting down the time needed for the audit E complying with laws and regulations LO 2a 24 An effective system of internal control requires segregation of basic functions. Which three of the following functions should ideally be segregated? A Authorisation of transactions B Preparation of financial statements C Custody or handling of assets D Budgetary control E Recording of transactions LO 2b 25 An audit committee is a committee with responsibility for audit-related matters. Which one of the following could be members of an effective audit committee? A Executive directors only B Non-executive directors only C Non-executive directors and internal auditors D Non-executive directors and external auditors LO 2b 26 ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment states that an internal control system in an organisation consists of five 26 Assurance ICAEW 2021  components: the control environment, the entity’s risk assessment process, the information system, control activities and monitoring of controls. For each of the following examples, select which component is illustrated. The entity’s organisational structure A Control environment B Control activity C Monitoring of controls Review by management of monthly bank reconciliations D Control environment E Control activity F Monitoring of controls LO 2d 27 The following are examples of internal controls which operate at Fairweather plc. In each example select which control activity is illustrated. The financial accountant signs the bank reconciliation, which was prepared by a member of his staff. A Authorisation B Performance review The finance director compares monthly expenditure on consumables to budgeted expenditure. C Authorisation D Performance review LO 2e 28 Most entities make use of IT systems for financial reporting and operational purposes. Controls operating in an IT environment can be split into general controls and application controls. Which one of the following is an application control? A Use of passwords B Testing of new systems C Authorisation of data for input D Disaster recovery plan LO 2e 29 Which two of the following reduce password effectiveness? A Frequent changes of passwords B User selection of passwords C Automatic disconnection after failed attempts to access system D Disciplinary offence if passwords revealed E Displaying the password on screen LO 2f 30 ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and Its Environment states that an internal control system in an organisation consists of five components: the control environment, the entity’s risk assessment process, the information system, control activities and monitoring of controls. For each of the following examples, select which component is illustrated. The entity’s internal audit function ICAEW 2021 5: Introduction to internal control 27  A Control environment B Control activity C Monitoring of controls The audit committee D Control environment E Control activity F Monitoring of controls LO 2d 31 For each of the following internal controls, which is the principal limitation? The preparation of an accounts payable reconciliation A Human error B Collusion Authorisation of new starters in a wages system in which duties are segregated C Human error D Collusion LO 2f 32 For each of the following statements about audit committees, select whether the statement is true or false. Audit committees are responsible for recommending the appointment of the external auditor A True B False One of the roles of the audit committee is to review the integrity of formal announcements relating to the company’s performance C True D False LO 2b 33 Which two of the following are controls over input completeness? A Document counts B Manual check to ensure input was by authorised personnel C Screen warning to prevent logout before processing is complete D Programmed matching of input to an expected input control file LO 2e 34 For each of the following internal controls, select whether a preventive or a detective control is being described. Segregation of duties between raising and authorisation of purchase orders A Preventive B Detective Monthly reconciliation of payables ledger with supplier statements C Preventive D Detective Restricting users to read-only access of key folders on internal network 28 Assurance ICAEW 2021  E Preventive F Detective LO 2e 35 The following are examples of computer controls which operate at Mesa plc. For each example, select the type of computer control which it illustrates. Approval of new applications by a sample of users and by management A General B Application Virus checks on software on employees’ computers C General D Application A check that all data entered in a field contains the correct number of digits E General F Application LO 2e ICAEW 2021 5: Introduction to internal control 29 30 Assurance ICAEW 2021  Chapter 6: Revenue system 1 Which three of the following are risks associated with the sales system? A Orders may be taken from customers who are not able to pay B Goods may be despatched but not invoiced C The full credit period offered might not be taken D Money might be received at the premises but not banked LO 2c 2 Which two of the following controls best mitigate the risk that customers might not be able to pay? A Authorisation of credit terms to customers B Obtaining customers’ signatures on delivery documentation C Regular preparation of trade receivables statements D Checking the ageing of the current receivables ledger balance before to accepting orders LO 2f 3 The following describes the processes which make up the sales system in operation at Sheraton and Co. For each process, select whether it represents a strength or a deficiency of the system. Orders are placed by telephone. When a call is received, the person receiving the order checks the customer’s credit status and that the customer’s current balance is below the maximum level, checks that the item is in inventory, and then immediately inputs the order into the system. A Strength B Deficiency The order automatically generates a message to the distribution centre which despatches the goods and to the accounts department, which immediately raises an invoice and sends it to the customer. C Strength D Deficiency Customer queries are dealt with by reception staff. E Strength F Deficiency LO 2g 4 Select whether each of the following statements is true or false. In the sales system, the following duties should be segregated: Recording sales and access to remittances from customers A True B False Credit control and invoicing C True D False LO 2b 5 The external auditor at Reading Ltd has identified the following deficiencies within that organisation’s sales system. ICAEW 2021 6: Revenue system 31  For each deficiency, select the most likely consequence which might arise as a result of that deficiency. Overdue accounts are not followed up. A Invoiced sales might not be properly recorded B Credit notes might not be properly recorded C Debts might be included on the receivables ledger that are not collectable Invoices are not in numerical sequence. D Invoiced sales might not be properly recorded E Credit notes might not be properly recorded F Debts might be included on the receivables ledger that are not collectable LO 2f/g 6 Which two of the following are risks associated with the sales system? A Orders may be taken from customers who are not able to pay B Invoices may be cancelled by valid credit notes C Goods may be received but not invoiced D Sales might be recorded in the wrong customer accounts LO 2c 7 Bourne Ltd operates a number of control procedures in its sales system. Assuming that all controls are operating effectively, which one of the following control procedures is most likely to ensure that customers are invoiced for goods despatched? A Use of pre-printed sequentially numbered sales order documentation B Matching of sales orders with despatch records C Matching of despatch records with sales invoices D Requiring customers to sign for goods received LO 2f 8 The following deficiencies have been identified in two separate sales systems. For each deficiency, select the most likely consequence which might arise as a result of that deficiency. Despatch documentation is not sequentially pre-numbered. A Sales may be made to customers who cannot pay B Invoices may not be raised for all goods despatched C Customers may not pay promptly Customers are not required to evidence receipt of goods. D Sales may be made to customers who cannot pay E Invoices may not be raised for all goods despatched F Customers may not pay promptly LO 2f/g 9 Which two of the following are objectives of the sales ordering part of the sales system? A Sales are only made to credit worthy customers B Goods are correctly invoiced C Cut-off is correct 32 Assurance ICAEW 2021  D Orders can be fulfilled LO 2c 10 The following describes processes which make up the sales system at Raffles Ltd. For each process, select whether it represents a strength or a deficiency of the system. Orders are placed by telephone. On receipt of a call, following credit checks and checks of the inventory level, the order is immediately entered onto the system. A Strength B Deficiency The order generates a despatch record which is sent to the warehouse, and an invoice which is sent to accounts receivable. Goods in inventory are despatched immediately and the despatch record is amended manually for unavailable goods. C Strength D Deficiency A copy of any despatch records with incomplete orders is placed in an ‘unfulfilled orders’ file. This file is reviewed daily and the order filled as soon as inventory is available. E Strength F Deficiency LO 2g 11 Which one of the following is a control objective relating to the sales system? A Credit notes are only issued for valid reasons. B Sales invoices are checked to goods despatched records by accounts staff. C Customer accounts are scrutinised to see if credit limits have been observed. D Orders are made only to authorised suppliers. LO 2e 12 Which one of the following controls would provide the most positive assurance regarding the completeness of the sales figure recorded in the financial statements of a manufacturing company? A Segregation of duties between the preparation of goods despatched records and the preparation of the sales invoices B The issue of pre-numbered sales invoices for every sales transaction and internal checking for completion of processing C The use of a pre-numbered goods despatched record for every sales transaction and internal checking for completeness of processing D Authorisation of all sales invoices by the sales manager before processing LO 2g 13 Which one of the following populations should the auditor start from when testing for the completeness of reported sales of a manufacturing company? A Sales receipts B Sales invoices C Goods despatch records D Receipts from customers LO 3d/f ICAEW 2021 6: Revenue system 33 14 Which one of the following is a control objective relating to the revenue system? A Credit notes are only issued for valid reasons B Sales invoices are checked to Goods Despatched Notes by accounts staff C Customer accounts are scrutinised to determine whether credit limits have been observed D Orders are made only from authorised suppliers LO 2e 15 Which one of the following controls would provide the most assurance regarding the completeness of the revenue figure in the financial statements of a manufacturing company? A Segregation of duties between the preparation of goods despatched notes and the preparation of the sales invoices B The issue of pre-numbered sales invoices for every sales transaction and internal checking for completion of processing C The use of a pre-numbered goods despatched note for every sales transaction and internal checking for completeness of processing D Authorisation of all sales invoices by the sales manager prior to processing LO 2g 16 Which two of the following are risks directly associated with recording in the revenue system? A Sales are included in the wrong customer accounts B Goods are recorded incorrectly C Goods may be despatched but not invoiced for D Credit notes might not be properly recorded LO 2c 34 Assurance ICAEW 2021  Chapter 7: Purchases system 1 For each of the following examples, select the type of internal control activity which it represents. Monthly management accounts are compared to budget and differences investigated. A Authorisation B Performance review C Information processing Numerical sequence checks are undertaken on goods received records. D Authorisation E Performance review F Information processing LO 2e 2 The auditor of Twickenham Ltd has identified the following deficiencies within that organisation’s accounting system. For each deficiency, select the most likely consequence which might arise as a result of that deficiency. Goods inwards are not checked. A Accepting inferior quality goods B False invoices could be paid C Services received are not accurately recorded Invoices are not checked to original orders. D Accepting inferior quality goods E False invoices could be paid F Services received are not accurately recorded LO 2f/g 3 The following describes processes which make up the purchases system at Hawthorns and Co. For each process, select whether it represents a strength or a deficiency of the system. Orders are placed by department heads, usually by telephone, when they determine a service is required. A Strength B Deficiency Invoices for services are checked against the service provider’s proof of delivery of service, which is requested from every service provider. C Strength D Deficiency Payments are made by direct transfer. The direct transfer list is authorised by the financial controller, who checks the payments to supporting documents, such as the invoice or service agreement. E Strength F Deficiency LO 2g 4 Redesign Ltd is a large property management company which makes use of the services of many different contractors for building, design and decorating services. ICAEW 2021 7: Purchases system 35  Which two of the following internal controls are most likely to prevent services being used for the private purposes of employees? A Purchase orders are processed by the buying department following authorisation by the production director B Purchase requisitions must be signed by two team members for any given project C Purchase orders should only be placed with authorised contractors D Purchase invoices are matched to authorised purchase orders LO 2f 5 The organisational structure at Molyneux Ltd is as follows. The production department is headed by Jack Frost, whose deputy is Tiny Tim. Jack Frost reports to the managing director, Nicholas Clause. There are several other departments (sales and marketing, accounting, purchasing, human resources and internal audit). Which one of the following statements reflects the ideal situation with regard to purchase ordering? A Jack Frost and Tiny Tim should make purchase orders as production needs dictate. B Jack Frost should make purchase orders, although Tiny Tim could make requisitions as production needs dictate. C Jack Frost and Tiny Tim should requisition materials as production needs dictate, but orders should be placed by the purchasing department, having been authorised by the purchasing director. D Jack Frost and Tiny Tim should requisition materials as production needs dictate but orders should be placed by the purchasing department, having been authorised by Nicholas Clause. LO 2g 6 Grey Ltd has recently discovered that it has been paying invoices in respect of goods which had been returned as faulty before acceptance. It is company policy to record goods only if they have been accepted. Which one of the following controls would have prevented this from occurring? A Matching of purchase invoices with goods received records B Matching of purchase invoices with orders C Comparison of supplier statements with payables ledger accounts D Date stamping purchase invoices on receipt LO 2f 7 The following are examples of deficiencies in the purchases system of Burns Ltd. For each example, select the type of internal control activity which would improve the system. Errors have been made in the calculation of discounts receivable. A Authorisation B Physical controls C Information processing There has been increasing levels of theft from the main distribution centre. D Authorisation E Physical controls F Information processing LO 2f 8 The auditor has identified the following deficiencies within Rainer Ltd’s accounting system. 36 Assurance ICAEW 2021  For each deficiency, select the most likely consequence which might arise as a result of that deficiency. Purchase of goods from unauthorised suppliers A Payment to fictitious suppliers B Purchase of inferior goods C Prompt payment discounts not obtained Purchase ledger clerks permitted to amend standing data on the payables master file D Payment to fictitious suppliers E Purchase of inferior goods F Prompt payment discounts not obtained LO 2f/g 9 Which three of the following are control activities relating to the purchases system? A All orders are authorised by a senior staff member B Blank order forms are kept in a secure location with restricted access C All goods and services received are accurately recorded D Order forms are sequentially pre-numbered LO 2g 10 The following describes processes in the purchases system at Woggle Ltd. For each process, select whether it represents a strength or a deficiency of the system. New inventory is ordered over the telephone by the company buyer, who initiates orders herself and maintains a record of telephone orders. A Strength B Deficiency When goods are subsequently received, the buyer has sole responsibility for checking the quantity of goods received to the record of telephone orders. C Strength D Deficiency Invoices from suppliers are sent to the buyer for authorisation, before being forwarded to the Accounts Department for entry into the accounting records and subsequent payment. E Strength F Deficiency LO 2g 11 Deficiencies have been identified in the following areas of Pogo Ltd’s purchases system. For each deficiency, select the risk which is most likely to arise. A lack of segregation of duties in relation to the ordering process A Unauthorised purchases may be made for personal use B The company may not take advantage of the full period of credit extended Records of goods received are not kept. C Goods may be misappropriated for private use D Goods and services might not be obtained on the most advantageous terms The payment listing produced by the accounting system is only read by the payments clerk. E Invoices may not be recorded resulting in non-payment ICAEW 2021 7: Purchases system 37  F Invoices are paid at the wrong time LO 2f 12 Deficiencies have been identified in the following areas of Loot Ltd’s purchases system. For each deficiency, select the risk which arises most immediately. Comparisons are not made of goods received notes with purchase orders A Unauthorised purchases may be made for personal use B Entries to the payables ledger are not made to the correct accounts Supplier terms are not regularly monitored C Goods and services may be obtained from unauthorised suppliers D Goods and services may not be obtained on the most advantageous terms Pre-numbered goods received notes are not used to record the arrival and acceptance of goods. E Goods and services received may not be accurately recorded F Goods and services received may not result in liabilities being recorded correctly LO 2f 13 The following are descriptions of processes in the purchases system at Pontipines plc. For each process, select whether it represents a strength or a deficiency of the system. Blank order forms are readily available from a tray in the finance department A Strength B Deficiency Buyers have a free choice of suppliers, in order to obtain the best terms C Strength D Deficiency Order forms are prepared only when a pre-numbered purchase requisition has been received E Strength F Deficiency LO 2g 14 Which two of the following describe control activities in the purchases system of Wottinger Ltd? A A purchase ledger clerk checks all supplier invoices against the order and the goods received record B All orders for goods and services are properly authorised and duly processed C All goods and services received are accurately recorded D All purchase order forms are sequentially pre-numbered LO 2g 38 Assurance ICAEW 2021  Chapter 8: Employee costs 1 Hire Company Ltd uses a lot of temporary employees. Which one of the following controls would best ensure that employees are only paid for work they have performed? A Temporary staff records should be maintained for each member of temporary staff. B Temporary staff should complete work schedules, authorised by their supervisor. C Temporary staff pay should be authorised by the human resources manager. D Temporary staff should be paid by direct transfers to their bank accounts. LO 2f 2 Tulips Ltd has a number of staff on maternity leave claiming statutory maternity pay. Which three of the following controls would best ensure that the correct payments are made to employees? A The payroll should be checked back to individual employee personnel records B Payroll totals should be compared to adjusted budgets on a monthly basis C Total tax deductions should be reconciled with tax returns D BACS transfer lists should be authorised by the head of personnel LO 2f 3 For each of the following statements, select whether they are true or false in respect of internal controls over payroll. Requiring employees to clock in and out of work helps to ensure that they are paid at the correct rate. A True B False Reviewing wages paid against wages budgeted helps to ensure that employees are being paid the correct amounts. C True D False Changes in pay rates should be authorised by senior management. E True F False LO 2f 4 Stamford plc employs a number of trainee staff, at six monthly intervals. All trainees must complete a probationary period of six months before progressing to the next level of traineeship. The accountant providing assurance on the efficiency of the operation of controls has identified the following deficiencies within Stamford Ltd’s payroll system. For each deficiency, select the most likely consequence which might arise as a result of that deficiency. Employees are not given a personnel file until they have completed their six month probationary period. A Employees may be paid the wrong amounts B The computerised payroll may contain miscalculations Many employees work overtime but there is no system for authorising the levels of overtime claimed. ICAEW 2021 8: Employee costs 39  C Employees may be paid the wrong amounts D The computerised payroll may contain miscalculations LO 2f/g 5 The following describes the processes in the payroll system at Wembley Ltd. For each process, select whether it represents a strength or a deficiency of the system. Employees are given individual security codes to punch into the main door key pad. This key pad also monitors the hours worked by employees, a sample of which are checked against data from headcounts during the day. A Strength B Deficiency The payroll is prepared by a payroll clerk from hours worked information on a standard payroll IT package. The payroll is checked to individual records automatically by the system. The payroll is approved by the financial controller. C Strength D Deficiency Wages are paid by bank transfer, which is authorised by the financial controller. E Strength F Deficiency LO 2g 6 Workworld Ltd has a computerised payroll system. All employees are paid by BACS directly into their bank account. Which two of the following controls will be most effective at ensuring that payment is made to the correct employee? A Authorisation of overtime worked B A sample of calculations performed by the payroll package are manually reperformed each month C The BACS list is reviewed by the chief accountant together with supporting payroll documentation D The print out from the bank is agreed to the BACS list and any discrepancies investigated LO 2f 7 Which two of the following features in the payroll system of Tyne plc could result in the employee costs figure in the financial statements being misstated? A Rates of pay are negotiated at a local level, there is no central control B The payroll clerk can amend standing data on the payroll system without authorisation of a senior member of staff C Personnel records are not kept up to date D The payroll department receives confirmation of new employees in writing LO 2g 8 For each of the following statements about internal controls over payroll, select whether they are true or false. The payroll should be checked back to individual employee personnel records on a regular basis. A True B False 40 Assurance ICAEW 2021  Leavers and joiners should be authorised by a senior member of staff. C True D False Reperformance of calculations is unnecessary where the payroll system is computerised. E True F False LO 2f 9 Spoon Ltd is a company that is expanding rapidly and is regularly taking on new employees. The payroll is processed in-house in the accounts department using a PC. The financial controller is worried that fictitious employees could be included on the payroll by a dishonest employee from the accounts department. Which one of the following internal controls is most likely to prevent fictitious employees from being added to the payroll? A Payroll standing data periodically printed out and checked on a line-by-line basis to independently held employee details B Use of hierarchical passwords over standing data files C Pre-authorisation of all amendments to payroll standing data by an independent official D Supervision of the wages payout by an independent official LO 2f 10 Which two of the following control procedures will reduce the risk of unauthorised disclosure of payroll data? A Exception reporting of high amounts of net pay B Access controls C Back-up procedures D Encryption of data E Independent review of payroll LO 2f 11 Deficiencies have been identified in the following areas of a company’s wages system. For each deficiency, select the risk which is most likely to arise. Details of wages are not regularly checked to the personnel file. A Pay might not be recorded correctly in the general ledger B The company may pay employees who have left Regular reconciliations of the payroll to timesheets are not performed. C Pay might not be recorded correctly in the general ledger D The various elements of pay might not be calculated correctly Regular reconciliations of the wages and salaries control account are not performed. E Payments might be made incorrectly F The various elements of pay might not be calculated correctly