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AA: Review and reporting

26 free practice questions on review and reporting, Section E of the ACCA Audit and Assurance (AA) question bank. Topics include Purpose of subsequent events review, Auditor responsibilities, Subsequent events procedures, Adjusting vs non-adjusting events, Going concern concept, Importance of going concern reviews. Each question carries its syllabus reference and a worked explanation. Practise them in the quiz with instant feedback, or read every question with its answer further down this page.

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All 26 review and reporting questions

The same questions the quiz above draws on, in syllabus order, each with its answer and worked explanation. All 26 are multiple choice.

Question 1 · Syllabus ref E1a · Purpose of subsequent events review

What is the primary purpose of a subsequent events review performed by the auditor?

  1. To identify cost savings the client could make after the year end
  2. To identify events occurring after the balance sheet date that may require adjustment to, or disclosure in, the financial statements
  3. To confirm that all post-year-end transactions have been recorded in the new financial year
  4. To assess whether the client's business model is viable for the coming year
Show answer and explanation

Answer: B. The subsequent events review identifies post-year-end events that affect the financial statements — option B. Under IAS 10, some post-year-end events provide additional evidence of conditions existing at the year end (adjusting events) and require the financial statements to be amended; others are new conditions (non-adjusting events) that may require disclosure only. Option A relates to cost management, not audit. Option C relates to accounting completeness in the new period. Option D relates to going concern assessment, which is a separate (though related) audit area.

Question 2 · Syllabus ref E1b · Auditor responsibilities — subsequent events

Under ISA 560, what are the auditor's responsibilities in relation to subsequent events between the balance sheet date and the date of the auditor's report?

  1. The auditor has no responsibility for events occurring after the balance sheet date
  2. The auditor must perform procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor's report that require adjustment or disclosure have been identified
  3. The auditor only reviews events that management has brought to their attention
  4. The auditor is responsible for events that occur after the auditor's report has been signed indefinitely
Show answer and explanation

Answer: B. Between the balance sheet date and the date of the auditor's report, the auditor has an active responsibility to perform subsequent events procedures — option B. ISA 560 requires the auditor to perform procedures designed to identify events in this window that require adjustment or disclosure. This is a proactive obligation, not a passive one. Option A is incorrect — ISA 560 explicitly creates this responsibility. Option C is insufficient — the auditor cannot rely solely on management to identify relevant events. Option D overstates the responsibility — after the auditor's report is signed, the auditor's responsibility is more limited.

Question 3 · Syllabus ref E1c · Subsequent events procedures

Which is an appropriate subsequent events procedure?

  1. Testing the entire population of transactions for the period after the year end
  2. Reviewing minutes of board and management meetings held after the year end, enquiring of management about events that could affect the financial statements, and reviewing post-year-end management accounts
  3. Issuing the audit report before any subsequent events review is performed
  4. Relying entirely on written representations from management as the sole procedure
Show answer and explanation

Answer: B. Reviewing board minutes, enquiring of management, and reviewing post-year-end management accounts are all standard subsequent events procedures — option B. ISA 560 suggests procedures including: enquiring of management; reading the latest available post-year-end interim financial statements; reading correspondence from lawyers; reviewing minutes of meetings. Option A (testing all post-year-end transactions) would be disproportionate and is not required. Option C (issuing the report before the review) violates ISA 560. Option D (relying solely on representations) is insufficient where more reliable evidence is available.

Question 4 · Syllabus ref E1c · Adjusting vs non-adjusting events

After the year end but before the auditor's report is signed, a major customer announces it has entered administration and is unlikely to pay its outstanding balance of £180,000 owed at the year end. The client's profit before tax is £450,000. Which correctly describes the accounting and audit treatment?

  1. This is a non-adjusting event — disclose only, no adjustment required
  2. This is an adjusting event under IAS 10 — it provides evidence of a condition existing at the year end (the receivable's recoverability was already doubtful); the financial statements should be adjusted to write down the receivable or increase the allowance for irrecoverable debts by £180,000, which is material (40% of PBT)
  3. The auditor should immediately withdraw from the engagement
  4. This event occurred after the year end so it has no financial statement implications
Show answer and explanation

Answer: B. Customer insolvency after the year end is a classic adjusting event — option B. Under IAS 10, an adjusting event provides evidence of conditions that existed at the balance sheet date. The customer's financial difficulties were developing during the year — the administration after the year end is evidence that the receivable was already impaired at the year end, not a new condition. The auditor must request management to adjust the financial statements. At £180,000 against PBT of £450,000 (40%), the item is clearly material. Option A is incorrect — this meets the definition of an adjusting event. Option C (withdrawal) is disproportionate. Option D is incorrect — adjusting subsequent events have direct financial statement implications.

Question 5 · Syllabus ref E2a · Going concern concept

Which best describes the going concern basis of accounting?

  1. The entity will be profitable in all future accounting periods
  2. The financial statements are prepared on the assumption that the entity will continue in operational existence for the foreseeable future and will not need to liquidate or materially curtail its operations
  3. The entity's assets are all stated at current market value
  4. The entity will generate positive cash flows in every future period
Show answer and explanation

Answer: B. The going concern assumption means the entity is expected to continue operating and will not need to liquidate or curtail operations materially — option B. Under this basis, assets are carried at historical cost (or revalued amounts) rather than liquidation values, and liabilities are classified as current or non-current based on normal operating expectations. If going concern is not appropriate, the financial statements would need to be prepared on an alternative basis with assets potentially written down to recoverable amounts. Options A, C and D are not the definition of going concern.

Question 6 · Syllabus ref E2b · Importance of going concern reviews

Why is the going concern review an important part of audit completion procedures?

  1. Because it allows the auditor to assess whether the client's strategy is commercially sound
  2. Because if the going concern basis is inappropriate, the financial statements may be fundamentally misstated — assets may be overstated, liabilities under-reported, and the classification between current and non-current may be incorrect
  3. Because the going concern review allows the auditor to identify cost savings for the client
  4. Because ISAs require the going concern review to be performed before planning the audit
Show answer and explanation

Answer: B. If the going concern assumption is incorrectly applied, the financial statements are fundamentally misleading — option B. Under the going concern basis, assets are carried at historical cost rather than break-up values; non-current liabilities are classified separately from current liabilities; intangible assets are amortised rather than written off. If the entity is not a going concern, assets should be written down, all liabilities become current, and the basis of preparation must change. This makes the going concern assessment one of the most consequential audit judgements. Option A relates to commercial strategy assessment. Option C is not an audit objective. Option D is incorrect — going concern is an audit completion procedure.

Question 7 · Syllabus ref E2c · Management vs auditor going concern responsibilities

Which correctly describes the respective responsibilities of management and the auditor regarding going concern?

  1. The auditor is responsible for assessing going concern; management has no role
  2. Management is responsible for assessing whether the going concern basis is appropriate when preparing financial statements; the auditor is responsible for evaluating management's assessment and concluding whether sufficient appropriate evidence has been obtained
  3. Both management and the auditor independently reach a going concern conclusion, and the more pessimistic view prevails
  4. The auditor guarantees that the entity will continue as a going concern for at least 12 months following the audit report date
Show answer and explanation

Answer: B. Management has primary responsibility for the going concern assessment — option B. Under IAS 1, management must assess the entity's ability to continue as a going concern. The auditor's role under ISA 570 is to evaluate whether management's assessment is appropriate, whether the assessment covers an adequate period, and whether sufficient appropriate evidence supports the conclusions. Option A reverses responsibility. Option C is not how audit standards operate. Option D is incorrect — the auditor provides no guarantee about future viability.

Question 8 · Syllabus ref E2d · Going concern indicators

Which is an indicator that an entity may not be a going concern?

  1. The entity paid a large dividend to shareholders during the year
  2. The entity's bank has indicated it may not renew a significant overdraft facility on which the entity is dependent, and the entity has no alternative financing arrangements
  3. The entity changed its depreciation policy from straight-line to reducing balance
  4. The entity recruited 50 new staff members during the year
Show answer and explanation

Answer: B. Threatened withdrawal of banking facilities on which the entity depends is a significant going concern indicator — option B. Without the overdraft, the entity may be unable to fund its operations. ISA 570 identifies examples of indicators including: net liability or net current liability position; inability to repay borrowings; adverse key financial ratios; substantial operating losses; and inability to obtain financing. Option A (dividend payment) is not a going concern indicator — it suggests the entity had distributable profits. Option C (depreciation policy change) is an accounting policy matter. Option D (recruiting staff) suggests expansion.

Question 9 · Syllabus ref E2e · Going concern procedures

An auditor has identified a material uncertainty about an entity's ability to continue as a going concern due to significant net current liabilities. Which audit procedure is most appropriate?

  1. Immediately issue an adverse audit opinion
  2. Review management's cash flow forecasts for the next 12 months, assess the reasonableness of the key assumptions, and review evidence of any planned financing arrangements or asset disposals
  3. Accept management's verbal assurance that the going concern issue has been resolved
  4. Review the prior year's audit working papers only
Show answer and explanation

Answer: B. When going concern uncertainty exists, the auditor must examine management's plans and assess their feasibility — option B. ISA 570 requires the auditor to review management's assessment, evaluate whether the identified period is appropriate, challenge the assumptions underlying cash flow forecasts, and consider whether management's plans are achievable. Option A (immediate adverse opinion) is not appropriate — an adverse opinion for going concern is only issued if the going concern basis is inappropriate but used; if there is a material uncertainty properly disclosed, the opinion may be unmodified with a material uncertainty paragraph. Option C (verbal assurance only) is insufficient. Option D (prior year papers) will not provide evidence about current going concern risks.

Question 10 · Syllabus ref E2f · Going concern disclosures

When there is a material uncertainty about going concern that is properly disclosed in the financial statements, which should the auditor's report contain?

  1. A qualified opinion because the material uncertainty affects the financial statements
  2. An adverse opinion because the going concern assumption may be inappropriate
  3. An unmodified opinion AND a separate Material Uncertainty Related to Going Concern (MURGC) paragraph that draws attention to the disclosure and states clearly that the auditor's opinion is not modified
  4. An emphasis of matter paragraph without any reference to going concern in the opinion
Show answer and explanation

Answer: C. Adequate disclosure of a material going concern uncertainty results in an unmodified opinion plus a MURGC paragraph — option C. Under ISA 570, when the going concern basis is appropriate and adequate disclosure has been made, the auditor: (1) issues an unmodified opinion; and (2) includes a MURGC paragraph drawing attention to the note and stating clearly that the opinion is not modified. The MURGC paragraph is not an emphasis of matter paragraph — it is a specifically required form of communication for going concern uncertainties. Option A (qualified) is wrong — qualification requires inadequate disclosure or misstatement. Option B (adverse) would apply only if going concern is inappropriate. Option D is incorrect — ISA 570 requires the MURGC paragraph, not an emphasis of matter.

Question 11 · Syllabus ref E2g · Reporting implications of going concern

Management has determined that a material uncertainty exists regarding going concern and has included adequate disclosure of this uncertainty in the financial statements. Which type of audit opinion is appropriate?

  1. Adverse opinion, because the material uncertainty calls the financial statements into doubt
  2. Qualified opinion, because the going concern disclosure is a limitation on audit scope
  3. Unmodified opinion with a separate Material Uncertainty Related to Going Concern (MURGC) paragraph
  4. Modified opinion with an emphasis of matter paragraph
Show answer and explanation

Answer: C. When going concern disclosure is adequate, the opinion is unmodified but includes a MURGC paragraph — option C. ISA 570 requires this specific paragraph when the going concern basis is appropriate and adequate disclosure is made. The paragraph draws attention to the uncertainty without modifying the opinion — it includes a clear statement that the opinion is NOT modified. Option A (adverse) would only be appropriate if the going concern basis was inappropriate. Option B (qualified) is not appropriate for a going concern matter where disclosure is adequate. Option D is incorrect — an emphasis of matter paragraph is not used for material uncertainties related to going concern; ISA 570 specifically requires the MURGC paragraph.

Question 12 · Syllabus ref E3a · Written representations

Which best describes the purpose of written representations obtained by an auditor?

  1. Written representations replace all other forms of audit evidence
  2. Written representations provide audit evidence about matters for which other evidence cannot reasonably be expected, and confirm management's acknowledgement of its responsibilities for the financial statements
  3. Written representations are only required for small entities that lack formal accounting records
  4. Written representations are the most reliable form of audit evidence available
Show answer and explanation

Answer: B. Written representations serve as audit evidence for judgemental matters and confirm management's responsibilities — option B. Under ISA 580, management representations are required to: (1) confirm that management has fulfilled its responsibility for preparing the financial statements; (2) confirm that all relevant information has been provided; and (3) provide evidence on specific matters where other reliable evidence is not available (such as management's intent to hold an investment). Option A is incorrect — representations cannot substitute for other evidence where such evidence is available. Option C is incorrect — representations are required for all audits. Option D is incorrect — representations from management are actually among the less reliable forms of evidence.

Question 13 · Syllabus ref E3b · Reliability of written representations

Which correctly describes a limitation of written representations as audit evidence?

  1. Written representations are legally binding and therefore completely reliable
  2. Written representations come from management — the same party that prepares the financial statements — so they cannot provide high-quality independent evidence and should be corroborated by other procedures wherever possible
  3. Written representations are always too brief to provide useful audit evidence
  4. Written representations are only reliable if prepared by external lawyers
Show answer and explanation

Answer: B. Written representations come from management and therefore lack independence — option B. This is their fundamental limitation: management has an inherent interest in the financial statements being presented in a particular way. ISA 580 acknowledges that the reliability of representations depends on the integrity of management. Where corroborating evidence is available, it should be obtained and representations used as a supplement. Option A is incorrect — representations are not legally binding in the way external confirmations are. Options C and D are incorrect — length and preparer are not the relevant limitations.

Question 14 · Syllabus ref E3c · When written representations are needed

For which of the following matters would written representations from management be most appropriate and necessary?

  1. The depreciation rate applied to vehicles — 25% straight-line
  2. The value of a subjective estimate such as a provision for restructuring costs, where management confirms their intentions and belief that the estimate is reasonable
  3. The balance on the company's bank account, which has been independently confirmed by the bank
  4. The number of employees at the year end, which can be verified from HR records
Show answer and explanation

Answer: B. Written representations are appropriate for judgemental matters and management's intentions — option B. A restructuring provision requires management to have a formal plan and commitment; the provision's value depends on management's estimates of costs and timings. Where the auditor cannot independently verify management's intentions or the reasonableness of subjective estimates, representations become necessary. Option A (depreciation rate) is an accounting policy that can be evaluated by reviewing the entity's policy and performing calculations. Option C (bank balance) is confirmed by independent external evidence. Option D (employee numbers) is verifiable from records.

Question 15 · Syllabus ref E4a · Importance of overall review

Why is an overall review of the financial statements performed at the audit completion stage?

  1. To prepare the financial statements on behalf of the client
  2. To form an overall conclusion as to whether the financial statements as a whole are consistent with the auditor's understanding of the entity and to ensure that adequate evidence has been obtained to support the opinion
  3. To identify new audit risks that should be included in planning documentation
  4. To calculate the final audit fee based on the complexity of the financial statements
Show answer and explanation

Answer: B. The overall review provides a final check that the financial statements are consistent with the auditor's knowledge and that sufficient evidence has been gathered — option B. At the completion stage, the auditor considers: Do the financial statements make sense in light of everything learned during the audit? Are all significant matters resolved? Has sufficient appropriate evidence been obtained for each material assertion? Do the financial statements comply with the applicable framework? Option A is incorrect — preparing statements is management's responsibility. Option C is incorrect — new risks identified at completion should be addressed, but the review is not primarily designed to identify new planning issues. Option D is incorrect.

Question 16 · Syllabus ref E4b · Overall review procedures

Which is an appropriate procedure an auditor would perform as part of their overall review of the financial statements?

  1. Re-performing all audit tests from scratch to confirm earlier conclusions
  2. Reading the financial statements and considering whether they appear reasonable in the context of the understanding of the entity obtained during the audit, and checking that significant matters identified have been properly reflected
  3. Asking management to amend any disclosures the auditor finds verbose
  4. Issuing the audit report before completing the overall review to meet the client's deadline
Show answer and explanation

Answer: B. The overall review involves reading the financial statements and confirming consistency with audit findings — option B. This final analytical review asks: do the financial statements make sense? Are they consistent with the auditor's understanding? Have all significant audit matters been properly reflected? Have all required disclosures been made? Option A (re-performing all tests) would be disproportionate and impractical. Option C (amending disclosures) is management's role — the auditor evaluates whether disclosures are adequate. Option D (issuing before completion) would result in an audit report without the required procedures being completed.

Question 17 · Syllabus ref E4c · Uncorrected misstatements

During the final review stage, an auditor identifies three individually immaterial misstatements not corrected by management, with an aggregate effect that is material. Which correctly describes the auditor's response under ISA 450?

  1. Ignore the misstatements as each is individually below materiality
  2. Communicate the aggregate misstatements to management and request correction; if uncorrected, consider the implications for the audit opinion
  3. Average the misstatements and assess the average against planning materiality
  4. Report each individual misstatement to regulatory authorities
Show answer and explanation

Answer: B. Under ISA 450, the auditor must consider the aggregate of uncorrected misstatements — option B. Even though each individual misstatement is below materiality, the aggregate may be material. ISA 450 requires the auditor to communicate all uncorrected misstatements to management and request correction. If management refuses and the aggregate is material, the auditor must consider whether a modification of the audit opinion is appropriate. Option A incorrectly applies only individual materiality. Option C (averaging) is not an ISA 450 approach. Option D (regulatory report) is not required for uncorrected misstatements.

Question 18 · Syllabus ref E4d · Effect of uncorrected misstatements — complex scenario

At audit completion, the schedule of uncorrected misstatements shows three items: (1) £45,000 overstatement of inventory; (2) £30,000 understatement of depreciation; (3) £15,000 understatement of an accrual. Planning materiality is £60,000; performance materiality is £45,000. Management has refused to adjust any of the items. Which correctly evaluates the position?

  1. No action needed — all three items are below planning materiality
  2. Each misstatement individually does not exceed performance materiality; however the aggregate (£90,000) exceeds planning materiality of £60,000 — the auditor must consider whether the financial statements are materially misstated and, if management maintains its refusal, consider the implication for the audit opinion
  3. Only item (1) is material and requires a qualification
  4. The auditor should average the three misstatements
Show answer and explanation

Answer: B. The aggregate of £90,000 exceeds planning materiality of £60,000 — option B. While each individual misstatement is below planning materiality (though items 1 and 2 exceed performance materiality of £45,000), ISA 450 requires the auditor to evaluate the aggregate. £90,000 exceeds the £60,000 planning materiality threshold, meaning the aggregate is material. The auditor must communicate this to management and request correction. If management refuses, the auditor must consider whether to qualify the opinion. Note also that items 1 and 2 individually exceed performance materiality — the auditor would have been expected to request their correction during fieldwork. Option A incorrectly applies only individual materiality. Option C ignores the aggregate. Option D is not an accepted ISA 450 approach.

Question 19 · Syllabus ref E5a · Elements of the auditor's report

Which of the following must be included in the independent auditor's report under ISA 700?

  1. The names and qualifications of all audit team members
  2. A title, an addressee, an opinion paragraph, a basis for opinion paragraph, and the auditor's signature and date
  3. The client's full financial statements reproduced within the report
  4. A detailed list of all audit procedures performed
Show answer and explanation

Answer: B. ISA 700 requires specific elements in the auditor's report — option B. The basic elements include: title; addressee; opinion section (including the opinion paragraph); basis for opinion section; key audit matters (for listed entities); responsibilities of management; auditor's responsibilities; signature of the auditor; auditor's address; and the date of the auditor's report. Option A (listing all team members) is not a requirement. Option C (reproducing financial statements) is not part of the auditor's report itself. Option D (listing all procedures) is not required — the report describes the auditor's responsibilities at a high level.

Question 20 · Syllabus ref E5b · Unmodified audit opinion — wording

Which correctly describes the wording used in an unmodified audit opinion under ISA 700?

  1. We certify that the financial statements are accurate in all respects
  2. In our opinion, the financial statements give a true and fair view of the financial position of the entity as at the balance sheet date and of its financial performance for the year then ended in accordance with the applicable framework
  3. We confirm that the financial statements are free from all fraud and error
  4. We are satisfied that the financial statements comply with all legal requirements
Show answer and explanation

Answer: B. The unmodified opinion uses true and fair view language — option B. ISA 700 specifies that for a true and fair view framework, the opinion states that the financial statements give a true and fair view of the financial position and performance in accordance with the applicable framework. Option A (certify and accurate in all respects) is incorrect — auditors provide an opinion, not a certification, and absolute accuracy is not the standard. Option C (free from all fraud and error) overstates assurance. Option D (all legal requirements) is too broad and is not the standard wording.

Question 21 · Syllabus ref E5b · Circumstances for unmodified opinion

Which of the following circumstances would result in an unmodified audit opinion?

  1. The auditor has been unable to obtain sufficient evidence about a material balance due to a fire destroying the client's records
  2. The financial statements give a true and fair view in accordance with the applicable financial reporting framework and the auditor has obtained sufficient appropriate audit evidence
  3. The financial statements contain a material misstatement that management has refused to correct
  4. The auditor has a significant financial interest in the audit client
Show answer and explanation

Answer: B. An unmodified opinion is issued when the financial statements give a true and fair view and sufficient evidence has been obtained — option B. This is the standard clean opinion. Option A describes a scope limitation (inability to obtain sufficient evidence) which would result in a qualified opinion (if material but not pervasive) or a disclaimer of opinion (if material and pervasive). Option C (material uncorrected misstatement) would result in a qualified or adverse opinion. Option D (financial interest) is an independence matter — if independence is compromised, the auditor should not issue any opinion.

Question 22 · Syllabus ref E5c · Modified opinions — qualified vs adverse

An audit client has capitalised development costs of £2.5m in its statement of financial position. The auditor believes the criteria for capitalisation under IAS 38 have not been met and the amount should have been expensed. The client has refused to adjust. Total assets are £8m. Which type of modified opinion should the auditor issue?

  1. Disclaimer of opinion, because the auditor is unable to form an opinion
  2. Adverse opinion, because the misstatement affects every element of the financial statements
  3. Qualified opinion (except for), because the misstatement is material but not pervasive — it affects the statement of financial position and profit or loss but does not undermine the financial statements as a whole
  4. Unmodified opinion with an emphasis of matter paragraph
Show answer and explanation

Answer: C. A qualified except for opinion is appropriate when the misstatement is material but not pervasive — option C. The £2.5m represents 31% of total assets (£2.5m / £8m), which is material. However, the misstatement is isolated to capitalised development costs — it does not permeate the financial statements in a way that renders them misleading as a whole. An adverse opinion (option B) would be issued only if the misstatement is so pervasive that the financial statements as a whole are misleading. A disclaimer (option A) is issued when the auditor cannot obtain sufficient evidence — this is a disagreement, not a scope limitation. An emphasis of matter (option D) cannot be used for material misstatements.

Question 23 · Syllabus ref E5c · Adverse vs qualified opinion distinction

What distinguishes an adverse opinion from a qualified (except for) opinion?

  1. An adverse opinion is issued when the auditor cannot obtain sufficient evidence; a qualified opinion is issued when there is a disagreement
  2. Both opinions are issued for material misstatements, but an adverse opinion is issued when the effects of the misstatement are so material and pervasive that a qualification is insufficient to describe the misleading nature of the financial statements as a whole
  3. An adverse opinion is only issued for fraud; a qualified opinion is used for all other misstatements
  4. An adverse opinion requires the auditor to resign; a qualified opinion allows the audit to continue
Show answer and explanation

Answer: B. The distinction is pervasiveness — option B. Both a qualified opinion and an adverse opinion arise from material misstatements (disagreements), but: a qualified opinion is used when the misstatement is material but NOT pervasive — users can understand the rest of the financial statements; an adverse opinion is used when the misstatement is so pervasive that the financial statements as a whole are misleading. Pervasive means the effects are not confined to specific elements, represent a substantial proportion of the statements, or affect disclosures fundamental to users' understanding. Option A describes the scope limitation route (disclaimer vs qualified). Option C is incorrect — the type of misstatement does not determine the opinion type. Option D is incorrect.

Question 24 · Syllabus ref E5d · Impact of modified opinion on auditor's report

When an auditor issues a qualified audit opinion, how does this affect the auditor's report?

  1. The opinion paragraph is omitted entirely
  2. The basis for modified opinion section describes the matter giving rise to the modification and precedes the opinion section; the opinion paragraph uses the phrase except for followed by the effect on the financial statements
  3. The report is unchanged — only a letter to management is required
  4. The auditor's report is signed by a different partner to reflect the modification
Show answer and explanation

Answer: B. A modified opinion requires specific changes to the report structure — option B. Under ISA 705, when the opinion is modified: (1) a Basis for Qualified Opinion section is added, describing the matter giving rise to modification and quantifying the effect where practicable; (2) this section is placed before the opinion section; (3) the opinion paragraph uses the language except for the effects of the matter described in the Basis for Qualified Opinion section, the financial statements give a true and fair view. Option A is incorrect — the opinion paragraph is always present. Option C is incorrect — a separate management letter does not substitute for the report modification. Option D is incorrect — there is no requirement to change the signing partner.

Question 25 · Syllabus ref E5e · Key audit matters and emphasis of matter

Which correctly distinguishes between an emphasis of matter paragraph and a key audit matter section in an auditor's report?

  1. Emphasis of matter and key audit matters are interchangeable terms for the same disclosure
  2. An emphasis of matter paragraph draws attention to a matter that is fundamental to users' understanding but does not modify the opinion; key audit matters communicate those matters that required significant auditor attention and are required for listed entities only
  3. Key audit matters replace the emphasis of matter paragraph in all auditor's reports
  4. An emphasis of matter paragraph is used only for going concern uncertainties
Show answer and explanation

Answer: B. Option B correctly distinguishes the two. An emphasis of matter paragraph (ISA 706) draws attention to a matter that is appropriately presented or disclosed in the financial statements but is fundamental to users' understanding — it does not modify the opinion. Key audit matters (ISA 701) communicate those matters of most significance in the audit — they are required for listed entity audits and describe the audit process, not signals of problems. Option A is incorrect — they serve different purposes. Option C is incorrect — both can exist in the same report. Option D is incorrect — going concern material uncertainties require a specific MURGC paragraph, not an emphasis of matter.

Question 26 · Syllabus ref E2e · Professional judgement in going concern

An audit senior has identified a transaction that does not comply with the client's accounting policy. The audit manager suggests the departure is immaterial and not worth pursuing. Which best describes how professional judgement should be applied?

  1. Accept the manager's view — managers are always right about materiality judgements
  2. Evaluate whether the departure is truly immaterial using an independent assessment, considering both quantitative and qualitative factors; if it may be material or indicative of a broader issue, it should be investigated and potentially reported to those charged with governance
  3. Ignore all departures from accounting policy as long as they have not been identified in prior years
  4. Automatically qualify the audit report for any departure from accounting policy
Show answer and explanation

Answer: B. Professional judgement requires independent evaluation of materiality — option B. The audit senior should not simply defer to the manager's view without applying their own judgement. Materiality has both quantitative (is the amount significant?) and qualitative dimensions (could the departure indicate fraud, a systematic control failure, or a trend?). Even a small departure from accounting policy could be indicative of wider issues. ISA 450 requires the auditor to accumulate misstatements and assess their aggregate effect. Option A fails the independence and professional judgement requirement. Option C fails ISA 450. Option D is disproportionate.

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