Scenario-Based MCQs on ISA 200 (40 Questions)
Scenario 1:
A manufacturing company’s financial statements include significant estimates related to inventory valuation. During the audit, the auditor discovers management has not provided adequate evidence for the assumptions used.
Question:
What principle should the auditor apply in this scenario?
A) Absolute assurance
B) Professional skepticism
C) Independence
D) Reasonable assurance
Answer: B) Professional skepticism
Explanation: The auditor must maintain a questioning mindset and
critically assess the sufficiency and appropriateness of evidence provided by
management.
Scenario 2:
During the audit of a retailer, management insists on excluding certain sales from the audit scope, citing confidentiality concerns.
Question:
How should the auditor respond?
A) Proceed with the audit and exclude the sales as requested.
B) Accept management's reasoning without further action.
C) Consider this a scope limitation and assess its impact on the audit opinion.
D) Issue an unmodified opinion regardless of the scope limitation.
Answer: C) Consider this a scope
limitation and assess its impact on the audit opinion.
Explanation: If management imposes restrictions, the auditor must
evaluate whether the limitation affects their ability to gather sufficient
appropriate evidence.
Scenario 3:
An auditor is engaged to audit a construction company where management refuses to acknowledge its responsibility for preparing financial statements.
Question:
What is the appropriate action for the auditor?
A) Accept the engagement with disclaimers in the report.
B) Withdraw from the engagement.
C) Perform the audit but limit the scope.
D) Ignore management's refusal and proceed with the audit.
Answer: B) Withdraw from the
engagement.
Explanation: ISA 200 requires management to acknowledge responsibility
for the financial statements. Without this, the engagement cannot proceed.
Scenario 4:
While auditing a startup, the auditor notices that the financial reporting framework does not align with industry standards.
Question:
What should the auditor do first?
A) Modify the audit procedures to fit the framework.
B) Accept the framework as it is.
C) Discuss the acceptability of the framework with management.
D) Withdraw from the audit.
Answer: C) Discuss the
acceptability of the framework with management.
Explanation: ISA 200 requires auditors to ensure the financial reporting
framework is appropriate for the entity and intended users.
Scenario 5:
An auditor is auditing a small enterprise with limited internal controls. Management has provided complete access to financial records.
Question:
What inherent limitation should the auditor consider?
A) Timeliness of financial reporting
B) Complexity of accounting estimates
C) Lack of absolute assurance due to weak internal controls
D) The financial reporting framework
Answer: C) Lack of absolute
assurance due to weak internal controls
Explanation: Weak internal controls increase the risk of undetected
material misstatements, which the auditor must address.
Scenario 6:
A company’s financial statements use a new inventory valuation method. The auditor disagrees with its compliance with the applicable financial reporting framework.
Question:
How should the auditor proceed?
A) Issue an unmodified opinion.
B) Modify the opinion to reflect non-compliance.
C) Ignore the issue as immaterial.
D) Issue a disclaimer of opinion.
Answer: B) Modify the opinion to
reflect non-compliance.
Explanation: If the financial statements do not comply with the
applicable framework, the auditor must modify their opinion to address this.
Scenario 7:
An audit client is in a highly regulated industry where financial statements must meet strict compliance standards.
Question:
What ethical principle is most critical in this audit?
A) Professional behavior
B) Independence
C) Confidentiality
D) Integrity
Answer: A) Professional behavior
Explanation: In highly regulated industries, auditors must ensure their
behavior aligns with laws, regulations, and professional standards.
Scenario 8:
During an audit, management refuses to provide the auditor with access to certain board meeting minutes.
Question:
What limitation does this scenario create?
A) Inability to issue an unmodified opinion
B) Failure to obtain sufficient appropriate evidence
C) Risk of material misstatement
D) Failure to maintain independence
Answer: B) Failure to obtain
sufficient appropriate evidence
Explanation: ISA 200 requires sufficient evidence to form an opinion.
Restricted access impacts the auditor's ability to gather such evidence.
Scenario 9:
An auditor is conducting an audit for a company that lacks clear documentation of its internal controls.
Question:
What should the auditor emphasize during the audit?
A) Increasing sample sizes for substantive testing
B) Modifying the audit opinion
C) Using less detailed audit procedures
D) Reducing reliance on professional skepticism
Answer: A) Increasing sample sizes
for substantive testing
Explanation: When internal controls are weak, auditors compensate by
performing more substantive procedures.
Scenario 10:
During an audit, the auditor identifies potential fraud but lacks conclusive evidence.
Question:
What should the auditor do?
A) Ignore the suspicion as no evidence is conclusive.
B) Immediately report the suspicion to regulators.
C) Perform additional procedures to address the suspicion.
D) Modify the audit opinion without further investigation.
Answer: C) Perform additional
procedures to address the suspicion.
Explanation: Professional skepticism requires the auditor to investigate
further when there are indicators of fraud.
Scenario 11:
An auditor is assessing management’s use of significant estimates for warranty provisions in financial statements.
Question:
What is the auditor’s responsibility regarding such estimates?
A) Accept them without evaluation.
B) Ensure they comply with the applicable financial reporting framework.
C) Recalculate the estimates to match prior year figures.
D) Assume the estimates are free from bias.
Answer: B) Ensure they comply with
the applicable financial reporting framework.
Explanation: The auditor must assess whether estimates are reasonable
and comply with the financial reporting framework.
Scenario 12:
The auditor identifies that the entity’s financial records are incomplete and lacks evidence for several transactions.
Question:
What is the appropriate action for the auditor?
A) Proceed with the audit as planned.
B) Issue a disclaimer of opinion immediately.
C) Perform additional procedures to obtain sufficient appropriate evidence.
D) Reduce the scope of the audit.
Answer: C) Perform additional
procedures to obtain sufficient appropriate evidence.
Explanation: ISA 200 requires auditors to gather sufficient appropriate
evidence before forming an opinion.
Scenario 13:
A client has several related-party transactions, but they are not disclosed in the financial statements.
Question:
What should the auditor do?
A) Ignore the issue as it does not affect profitability.
B) Insist on proper disclosure or modify the audit opinion.
C) Perform fewer audit procedures.
D) Assume the transactions are immaterial.
Answer: B) Insist on proper
disclosure or modify the audit opinion.
Explanation: Related-party transactions must be disclosed as per the
financial reporting framework. Non-disclosure may result in a modified opinion.
Scenario 14:
An auditor discovers that the company’s management frequently overrides controls during the financial reporting process.
Question:
How should the auditor respond?
A) Ignore the issue if no fraud is identified.
B) Increase audit procedures focusing on management overrides.
C) Assume the controls are still effective.
D) Reduce sample sizes for testing.
Answer: B) Increase audit
procedures focusing on management overrides.
Explanation: Management override of controls is a significant risk that
requires focused audit procedures.
Scenario 15:
The auditor is engaged to audit a client with operations in multiple countries. The financial reporting frameworks differ across jurisdictions.
Question:
What should the auditor prioritize?
A) Apply the framework of the auditor’s home country.
B) Ensure compliance with the applicable framework for each jurisdiction.
C) Ignore differences in frameworks.
D) Use the simplest framework available.
Answer: B) Ensure compliance with
the applicable framework for each jurisdiction.
Explanation: ISA 200 emphasizes ensuring financial statements comply
with the relevant framework for each jurisdiction.
Scenario 16:
Management of a client has provided limited documentation for high-value cash transactions.
Question:
What should the auditor do?
A) Accept management's explanation for the transactions.
B) Perform alternative procedures to gather sufficient appropriate evidence.
C) Omit these transactions from the audit.
D) Issue an adverse opinion immediately.
Answer: B) Perform alternative
procedures to gather sufficient appropriate evidence.
Explanation: When direct evidence is unavailable, the auditor must
perform alternative procedures to obtain sufficient evidence.
Scenario 17:
An auditor is conducting an engagement for a public company, and management requests the report be expedited, reducing audit procedures.
Question:
What should the auditor do?
A) Comply with management’s request to maintain the client relationship.
B) Discuss the risks of reduced procedures and decline to issue the report
without completing the audit.
C) Issue a modified opinion.
D) Complete the audit without assessing risks.
Answer: B) Discuss the risks of
reduced procedures and decline to issue the report without completing the
audit.
Explanation: Auditors must not compromise the quality of the audit to
meet client-imposed deadlines.
Scenario 18:
A new audit engagement involves a complex financial instrument unfamiliar to the auditor.
Question:
What action should the auditor take?
A) Ignore the complexity and proceed.
B) Seek assistance from an expert with relevant knowledge.
C) Rely entirely on management’s explanation.
D) Exclude the instrument from the scope of the audit.
Answer: B) Seek assistance from an
expert with relevant knowledge.
Explanation: ISA 200 allows auditors to use specialists to address areas
requiring specific expertise.
Scenario 19:
During the audit, the auditor suspects collusion among employees in the accounting department.
Question:
What should the auditor do?
A) Inform the management immediately.
B) Perform additional procedures to confirm the suspicion.
C) Assume the suspicion is incorrect unless proven.
D) Ignore the issue as it involves internal matters.
Answer: B) Perform additional
procedures to confirm the suspicion.
Explanation: Professional skepticism requires the auditor to investigate
further when fraud indicators are present.
Scenario 20:
A company applies a financial reporting framework inconsistent with its industry.
Question:
What is the auditor’s responsibility in this situation?
A) Report non-compliance in the audit opinion.
B) Accept the framework as chosen by management.
C) Ensure the framework’s suitability before proceeding with the audit.
D) Ignore the framework and focus on evidence.
Answer: C) Ensure the framework’s
suitability before proceeding with the audit.
Explanation: The auditor must evaluate whether the financial reporting
framework is appropriate for the entity.
Scenario 21:
The auditor identifies material inconsistencies between the financial statements and the board’s report.
Question:
What should the auditor do?
A) Ignore the inconsistencies if immaterial to profit.
B) Communicate the issue to management and request corrections.
C) Revise the audit opinion without informing management.
D) Exclude the board’s report from the audit.
Answer: B) Communicate the issue to
management and request corrections.
Explanation: ISA 200 requires auditors to address inconsistencies and
ensure the financial statements and other information align.
Scenario 22:
A company’s accounting policies deviate from the applicable financial reporting framework. Management believes the deviation improves financial clarity.
Question:
What is the auditor’s responsibility?
A) Accept management’s explanation without modification.
B) Insist on compliance with the applicable framework.
C) Issue an unmodified opinion based on management’s justification.
D) Highlight the deviation in the audit report.
Answer: B) Insist on compliance
with the applicable framework.
Explanation: Compliance with the applicable financial reporting
framework is mandatory under ISA 200.
Scenario 23:
The client has a history of misstating financial statements but has addressed past errors in the current reporting period.
Question:
What should the auditor emphasize during the audit?
A) Increase the scope of the audit.
B) Focus on materiality only.
C) Evaluate changes in management’s behavior and internal controls.
D) Assume past issues are fully resolved.
Answer: C) Evaluate changes in
management’s behavior and internal controls.
Explanation: The auditor should assess whether prior issues have been
resolved and whether internal controls are now effective.
Scenario 24:
An auditor is engaged by a nonprofit organization where financial transparency is critical for donor confidence.
Question:
What is the primary focus of the audit?
A) Maximize profitability.
B) Ensure financial statements comply with ethical standards and transparency
requirements.
C) Minimize audit procedures.
D) Ignore transparency and focus on profitability.
Answer: B) Ensure financial
statements comply with ethical standards and transparency requirements.
Explanation: Transparency is crucial for nonprofit organizations to
maintain donor trust.
Scenario 25:
The auditor discovers a significant discrepancy in inventory valuation during year-end procedures.
Question:
What is the next step?
A) Ignore the discrepancy as it is a one-time issue.
B) Investigate further to determine whether the discrepancy is an error or
fraud.
C) Assume management has accounted for it elsewhere.
D) Reduce the scope of the audit.
Answer: B) Investigate further to
determine whether the discrepancy is an error or fraud.
Explanation: Auditors must investigate discrepancies thoroughly to
determine their nature and impact.
Scenario 26:
Management introduces new revenue recognition policies that significantly increase reported profits.
Question:
What should the auditor do?
A) Assume the policies are accurate if approved by the board.
B) Assess whether the new policies comply with the financial reporting
framework.
C) Ignore the impact on profits.
D) Focus only on the effect on taxes.
Answer: B) Assess whether the new
policies comply with the financial reporting framework.
Explanation: The auditor must ensure new policies align with the
applicable framework and do not misstate financial performance.
Scenario 27:
An auditor finds that material transactions are recorded without adequate supporting documentation.
Question:
What should the auditor do?
A) Exclude these transactions from the audit.
B) Perform additional procedures to gather sufficient appropriate evidence.
C) Assume management’s explanation is sufficient.
D) Issue a disclaimer of opinion immediately.
Answer: B) Perform additional
procedures to gather sufficient appropriate evidence.
Explanation: ISA 200 requires auditors to obtain sufficient evidence to
support their opinion.
Scenario 28:
The company’s CFO is also responsible for preparing and approving the financial statements.
Question:
What ethical issue should the auditor consider?
A) Management’s independence
B) Auditor’s professional skepticism
C) Material misstatements
D) Management’s conflict of interest
Answer: D) Management’s conflict of
interest
Explanation: Dual roles can create a conflict of interest, increasing
the risk of bias in financial reporting.
Scenario 29:
A client wants the auditor to rely solely on its internal audit team for evidence.
Question:
What should the auditor do?
A) Fully rely on internal audit work.
B) Assess the competence and independence of the internal audit team before
relying on their work.
C) Ignore the internal audit entirely.
D) Issue an unmodified opinion without additional testing.
Answer: B) Assess the competence
and independence of the internal audit team before relying on their work.
Explanation: Auditors may use internal audit work if the team is
competent and independent.
Scenario 30:
The audit team identifies potential fraud indicators involving senior management.
Question:
What should the audit team do?
A) Discuss the indicators with senior management immediately.
B) Report the indicators to the board or audit committee.
C) Ignore the indicators as they are not conclusive evidence.
D) Issue an adverse opinion immediately.
Answer: B) Report the indicators to
the board or audit committee.
Explanation: Fraud involving senior management must be reported to those
charged with governance.
Scenario 31:
A new audit engagement involves a client with significant transactions in foreign currencies.
Question:
What should the auditor focus on?
A) Currency exchange regulations only
B) Assessing the accuracy of foreign currency translations
C) Ignoring foreign currency differences
D) Auditing domestic transactions exclusively
Answer: B) Assessing the accuracy
of foreign currency translations
Explanation: Auditors must verify that foreign currency transactions are
recorded correctly in compliance with the framework.
Scenario 32:
Management asks the auditor to delay issuing the audit report to align with the release of positive market news.
Question:
What should the auditor do?
A) Agree to the delay to maintain client relations.
B) Ensure the audit is completed on time and refuse to delay the report.
C) Issue a disclaimer of opinion.
D) Accept management’s request without question.
Answer: B) Ensure the audit is
completed on time and refuse to delay the report.
Explanation: The auditor must remain independent and ensure timely
reporting, as undue delays may affect the reliability of financial information.
Scenario 33:
During the audit of a logistics company, the auditor identifies inconsistent application of accounting policies across subsidiaries.
Question:
What should the auditor do?
A) Accept the inconsistencies if immaterial.
B) Assess the impact of inconsistencies and require management to align
policies.
C) Ignore the issue as it does not affect the parent company.
D) Modify the audit opinion without further investigation.
Answer: B) Assess the impact of
inconsistencies and require management to align policies.
Explanation: ISA 200 requires consistent application of accounting
policies across entities within a group to ensure accurate financial reporting.
Scenario 34:
The auditor encounters resistance from management in accessing information related to material transactions.
Question:
How should the auditor respond?
A) Issue a disclaimer of opinion immediately.
B) Perform alternative procedures to gather evidence.
C) Ignore the lack of access and proceed with the audit.
D) Reduce the audit scope to avoid confrontation.
Answer: B) Perform alternative
procedures to gather evidence.
Explanation: The auditor must attempt to gather sufficient appropriate
evidence through alternative means when access is restricted.
Scenario 35:
A retail company with multiple branches lacks centralized financial records, making it difficult for the auditor to verify transactions.
Question:
What is the auditor’s responsibility?
A) Refuse to perform the audit.
B) Adapt audit procedures to address the decentralized records.
C) Ignore the decentralized system if immaterial.
D) Assume records are accurate based on management’s explanation.
Answer: B) Adapt audit procedures
to address the decentralized records.
Explanation: The auditor should modify their approach to ensure
sufficient evidence is obtained, considering the decentralized nature of
records.
Scenario 36:
An auditor identifies that certain board members have significant personal interests in the company’s contracts.
Question:
What should the auditor focus on?
A) Ensuring related-party transactions are properly disclosed.
B) Ignoring the issue if profits are unaffected.
C) Replacing the audit team to avoid conflicts.
D) Focusing on unrelated transactions only.
Answer: A) Ensuring related-party
transactions are properly disclosed.
Explanation: ISA 200 emphasizes transparency in related-party
disclosures to ensure compliance with the applicable framework.
Scenario 37:
The audit client uses a new accounting software that the audit team is unfamiliar with.
Question:
How should the audit team address this?
A) Assume the software is accurate and proceed with the audit.
B) Request training or assistance to understand the software.
C) Exclude the system from the audit scope.
D) Issue a modified opinion due to lack of familiarity.
Answer: B) Request training or
assistance to understand the software.
Explanation: ISA 200 requires auditors to obtain sufficient knowledge to
evaluate the system’s impact on financial reporting.
Scenario 38:
A small business client has limited segregation of duties due to its size.
Question:
What should the auditor do?
A) Ignore the issue since it is common in small businesses.
B) Focus on substantive testing to compensate for weak controls.
C) Assume management is acting in good faith.
D) Issue a disclaimer of opinion.
Answer: B) Focus on substantive
testing to compensate for weak controls.
Explanation: When controls are limited, the auditor compensates by
performing more substantive procedures to ensure sufficient evidence.
Scenario 39:
During the audit, the auditor observes that management frequently revises financial forecasts without adequate documentation.
Question:
What should the auditor focus on?
A) Assessing the reasonableness of the revisions and obtaining supporting
evidence.
B) Ignoring the forecasts as they are not part of the financial statements.
C) Accepting the revisions as management’s prerogative.
D) Limiting the audit to historical data.
Answer: A) Assessing the
reasonableness of the revisions and obtaining supporting evidence.
Explanation: Auditors must critically evaluate forecasts and ensure they
are supported by appropriate evidence.
Scenario 40:
An auditor is engaged by a rapidly growing tech company with a history of aggressive revenue recognition practices.
Question:
What is the auditor’s primary responsibility?
A) Evaluate revenue recognition policies for compliance with the applicable
framework.
B) Accept revenue figures as provided by management.
C) Focus only on other areas of the financial statements.
D) Ignore historical practices if the current year appears accurate.
Answer: A) Evaluate revenue
recognition policies for compliance with the applicable framework.
Explanation: Auditors must ensure revenue recognition practices comply
with the applicable financial reporting framework to prevent material
misstatements.
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