26. In traditional directional testing, which pairing of account type and the primary test performed is correct?

A) Assets: overstatement; liabilities: understatement; income: understatement; expenses: overstatement
B) Assets: understatement; liabilities: overstatement; income: overstatement; expenses: understatement
C) Assets: overstatement; liabilities: overstatement; income: understatement; expenses: understatement
D) Assets: understatement; liabilities: understatement; income: overstatement; expenses: overstatement

Correct: A difficult ISA 500

In a double entry system, debit entries (assets and expenses) are tested for overstatement and credit entries (liabilities, income and equity) are tested for understatement. If no misstatements are found, all items can be concluded to be fairly stated. However, many corporate scandals have involved overstated income, so the true risks must be assessed instead of automatically applying a formula.

27. The auditor of Noakhali Rice Mills Ltd wants to test the completeness of revenue, that is, whether any despatches were not invoiced. Which population should the sample be drawn from?

A) Entries in the sales ledger, traced back to the despatch notes that support them
B) Sales invoices that have been posted, traced back to the customer orders
C) Despatch notes, traced forward to sales invoices and to the sales ledger
D) Year-end receivables balances, confirmed directly with the customers

Correct: C difficult ISA 500

To test for understatement or omission, the sample must be drawn from a reciprocal population that can include omitted items. For revenue that population is the despatch notes, provided all despatches are captured on despatch notes at the point of despatch. Selecting from the sales ledger or posted invoices cannot find an invoice that was never raised, and confirming receivables tests existence.

28. The auditor of Tangail Jute Mills Ltd wants a reciprocal population to test the understatement of accounts payable. Which of the following is NOT a suitable population?

A) Subsequent disbursements made after the year end
B) The payables ledger balances listed at the year end
C) Goods received reports that have not been matched to invoices
D) Statements received from suppliers during the year

Correct: B difficult ISA 500

For testing payables for understatement, ISA 500 suggests populations such as subsequent disbursements, unpaid invoices, suppliers' statements and unmatched receiving reports. These can reveal liabilities that were never recorded. The listed year-end ledger balances are the recorded figure itself, so an unrecorded liability cannot be selected from it.

29. An audit of Barishal Shipping Ltd is being carried out largely from home. Which response is appropriate for obtaining evidence remotely?

A) Accept that inventory counts need not be observed when the audit is performed remotely
B) Reduce professional scepticism, since client staff are working in unusually difficult circumstances
C) Reduce the audit fee, because a remote audit always takes less time than an in-person one
D) Use alternative procedures such as video observation of counts, and secure portals for documents

Correct: D difficult ISA 500

Obtaining evidence remotely may be more difficult, so auditors consider how to make up for the lack of physical proximity, using alternative procedures where necessary, for example observing an inventory count using drones or video, and engaging with client staff by video calls. Secure solutions such as VPNs and web portals protect client documentation. Professional scepticism must continue, and remote audits may take longer, not shorter.

30. At year end, Comilla Ceramics Ltd recorded a provision of CU 3,500,000 for a lawsuit. Before the auditor's report is signed, the claim is settled for CU 4,200,000. Which statement describes the most direct audit response and the effect?

A) Review events up to the date of the report; the provision is understated by CU 700,000
B) Develop a point estimate with a proprietary model; the provision is understated by CU 700,000
C) Test controls over management's estimate; the provision is overstated by CU 700,000
D) Review events up to the date of the report; the provision is overstated by CU 700,000

Correct: A complex ISA 540 (Revised)

Where a settlement is reached after the year end but before the report is signed, the auditor can use the evidence of the agreement to establish the correct figure, and there is usually no need to use the other methods of auditing an estimate. The correct provision is CU 4,200,000, so the recorded provision of CU 3,500,000 is understated by CU 700,000.

31. An auditor tests receivables of Bogura Tiles Ltd by monetary unit sampling. The receivables ledger totals CU 600,000 and the sampling interval is set at performance materiality of CU 30,000. How many CU1 sampling points will be selected from the ledger?

A) 20
B) 30
C) 18
D) 200

Correct: A complex ISA 530

The number of sampling points is the population divided by the interval: 600,000 / 30,000 = 20. Any balance of CU 30,000 or more is certain to be selected.

32. Under monetary unit sampling with a sampling interval of CU 40,000, which of the following receivables balances is certain to be selected?

A) A balance of CU 38,000
B) A balance of CU 41,000
C) A balance of CU 12,000
D) A balance of CU 2,500

Correct: B difficult ISA 530

Every balance equal to or larger than the sampling interval contains at least one selected CU1, so it is selected automatically. A balance of CU 41,000 exceeds CU 40,000.

33. An auditor uses systematic selection on 840 purchase invoices to obtain a sample of 60. The random start is invoice number 6. Which invoice will be the fifth item selected?

A) 48
B) 70
C) 62
D) 76

Correct: C complex ISA 530

The interval is 840 / 60 = 14. Starting at 6 the items are 6, 20, 34, 48 and 62, so the fifth is invoice 62.

34. What is the main weakness of selecting a block of 50 consecutive purchase invoices for testing?

A) Consecutive invoices always give a larger sample than random selection requires
B) Block selection cannot be used for testing whether a control has been applied
C) Items in a block are certain to include the largest invoices in the year
D) Errors found may not be projected if limited to one part of the year

Correct: D difficult ISA 530

Sequence or block selection may produce a sample that is not representative of the population, particularly if misstatements occurred only during a certain part of the period, so errors found cannot be projected onto the rest.

35. Which statement correctly describes statistical sampling?

A) It uses random selection and probability theory to evaluate the results
B) It is the same as haphazard selection, provided the sample is large
C) It tests only the largest items so that no error can be missed in the ledger
D) It is a method that is used only to test controls and never to test balances

Correct: A difficult ISA 530

Statistical sampling has two characteristics: random selection of the sample items and the use of probability theory to evaluate sample results, including measurement of sampling risk. A sampling approach without both is non-statistical.

36. Which statement about haphazard selection is correct?

A) It is the same as random selection and may be used in statistical sampling
B) It must not be used when the auditor carries out statistical sampling
C) It always gives a sample that represents items of every size in the ledger
D) It is a method that selects items at a fixed interval from a random start

Correct: B difficult ISA 530

Haphazard selection may be an alternative to random selection if the auditor is satisfied the sample is representative, with care to avoid bias towards easily located items. It should not be used for statistical sampling.

37. Which of the following would cause the sample size for a test of details to decrease?

A) An increase in the auditor's assessment of the risk of material misstatement
B) An increase in the amount of misstatement the auditor expects to find
C) An increase in tolerable misstatement
D) An increase in the assurance the auditor wants from the sample

Correct: C difficult ISA 530

A higher tolerable misstatement lowers the sample size. A higher assessed risk, a higher expected misstatement and a higher desired level of assurance all increase it.

38. In a test of controls on Khulna Plastics Ltd, the auditor expects a higher rate of deviation than last year. What is the effect on the sample?

A) The sample falls, because the auditor will rely less on the controls
B) The sample size is unchanged, because it depends only on the number of items
C) A smaller sample is enough, as errors are easier to find in a poor system
D) The sample rises, and if the rate is too high the controls may not be tested

Correct: D difficult ISA 530

An increase in the expected rate of deviation increases the sample size. If the expected rate of deviation is unacceptably high, the auditor will normally decide not to perform tests of controls.

39. The test objective is to ensure that only genuine employees are paid at Rajshahi Silk Ltd. From which population should the auditor draw the sample?

A) The payroll records, agreeing names to HR records
B) The HR records, agreeing names to the payroll
C) The bank statements, agreeing amounts to the ledger
D) The prior year payroll, agreeing totals to this year

Correct: A difficult ISA 530

The sample must start from the payroll and be agreed to HR records. Starting from the HR records only shows that genuine employees are paid, and would not find fictitious employees added to the payroll.

40. What is an anomaly in audit sampling?

A) Any misstatement the auditor finds in the sample that is larger than materiality
B) A misstatement demonstrably not representative of those in the population
C) A deviation that the client has already corrected before the auditor's visit
D) A sampling unit that the auditor decided to leave out of the population

Correct: B difficult ISA 530

An anomaly is a misstatement or deviation that is demonstrably not representative of misstatements or deviations in the population. The auditor must be certain, so extra work is needed to prove it.

41. An auditor tests CU 60,000 of a receivables population of CU 600,000 and finds an overstatement of CU 1,800 in the sample. Tolerable misstatement is CU 15,000. What is the projected misstatement and the implication?

A) CU 1,800, which is far below tolerable misstatement, so no action is needed
B) CU 10,800, which is below tolerable misstatement, so no action is needed
C) CU 18,000, above tolerable misstatement, so sampling risk is reassessed
D) CU 180,000, which is above tolerable misstatement and the total population

Correct: C complex ISA 530

The sample covers one tenth of the population, so the projection is 1,800 x (600,000 / 60,000) = CU 18,000. This exceeds tolerable misstatement of CU 15,000, so the auditor must reassess sampling risk and consider extending procedures.

42. Which uncorrected misstatement should the auditor treat as material even though it is below overall materiality?

A) A misposting between two supplier accounts that leaves the total payables balance unchanged
B) A cut-off error in the accrual for stationery that is clearly trivial in the context of the audit
C) A missing bank reconciliation for a month in which the cashier was on holiday
D) An error which is the reason that the directors' bonus targets are met

Correct: D difficult ISA 450

Misstatements that affect compliance with covenants or regulation, mask a change in trends, or increase management's compensation, such as meeting bonus targets, may be material by nature even if lower than materiality. A missing reconciliation is a control matter.

43. Which procedure gives the most persuasive evidence that a control operated as management described it?

A) Reperformance of the control by the audit staff
B) Inspection of the controls handbook of the entity
C) Inquiry of the staff who operate the control each day
D) Observation of the control being carried out by one member of staff

Correct: A difficult ISA 500

Reperformance is carried out by the assurance provider, so it is strong evidence. Inquiry, observation (which proves operation only when watched) and inspection of a handbook are less persuasive.

44. In directional testing, what is the primary test for income accounts?

A) Overstatement, because income is recorded as a debit balance
B) Understatement, because a credit balance may be omitted
C) Valuation, because income depends mostly on estimates alone
D) Presentation, because income is shown only in the notes

Correct: B difficult ISA 500

Debits (assets and expenses) are tested for overstatement and credits (income, liabilities, equity) for understatement. For income, omitted items cannot be found by starting from the ledger figure, so a reciprocal population such as despatch notes is used.

45. When using test data as a test of controls, which approach does the workbook describe as much safer?

A) Real data entered in the live system on the last day of the year
B) Dummy data entered in the live system, reversed afterwards by audit staff
C) Dummy data run against a verified copy of the client's system
D) Real data selected at random from the invoices of the previous year

Correct: C difficult ISA 500

The options for test data are dummy data (which must be reversed with great care), real data (which may not contain all the errors needed), and dummy data against a verified copy of the client's system, which is much safer.

46. An auditor inspects the fixed asset register of Khulna Steel Ltd and sees each machine on the factory floor. Which weakness limits this evidence?

A) Machines cannot be seen by the auditor in a factory
B) Assets not used daily could be hidden from the auditor
C) Inspection proves the company has full rights over the machines
D) Inspection shows the valuation of each machine in the register

Correct: B difficult ISA 500

Inspecting assets recorded in the register confirms existence but not rights, obligations or valuation. Seeing recorded assets gives evidence of completeness only for what the auditor can see, since assets not used daily could be hidden or off site.

47. Which of the following is the least persuasive source of evidence of the cost of inventory?

A) A purchase invoice from the third party supplier
B) A bank statement showing the payment to a supplier
C) Inspection of a sales invoice raised by the client
D) A confirmation received direct from the supplier

Correct: C difficult ISA 500

Documents created by third parties give better evidence than those created by the client. A purchase invoice is a better source than a sales invoice, which the entity prepared itself.

48. An auditor runs dummy invoices through the live accounting system of the client. What is the main danger?

A) The results can never be compared with those expected
B) Test data cannot be used on a system that is computerised
C) The system will reject every invoice that is entered into it
D) The effects of the dummy data may not be fully reversed

Correct: D difficult ISA 330

If dummy data is used in the live system, the auditor must be very careful to reverse all of its effects. Running dummy data against a verified copy of the client's system is much safer.

49. Which of the following procedures could audit software carry out, and why?

A) Extract all items over a set amount, because no judgement is needed
B) Decide whether a provision is reasonable, because it is mechanical
C) Judge whether the directors are honest, because it is data driven
D) Decide the opinion to be given, because it is a repeated step

Correct: A difficult ISA 500

Audit software interrogates the client's system, extracting samples to criteria, calculating ratios, checking casts and following items through the system. If a test does not require judgement it can almost certainly be carried out by software.

50. Which analysis using data analytics would help the auditor identify a potential fraud risk?

A) Counting the number of pages in the printed ledger
B) Matching usernames to transactions for odd postings
C) Checking the date on which the audit file was closed
D) Totalling the audit hours spent on each area of the audit

Correct: B difficult ISA 240

Analysing usernames against transactions can test segregation of duties, and show postings that are unexpected for a user's role, which may indicate a fraud risk. Round-sum entries near period ends or descriptions like 'adjust' can also be extracted.