Institute of Chartered Accountants in England and Wales (ICAEW) ACA Certificate Level: Accounting and Assurance Flashcards

24 sample cards from the Certificate Level: Accounting and Assurance deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. List three types of error that a trial balance will NOT reveal.

   Error of omission (transaction completely left out), error of commission (correct amount/side but wrong account of same type), error of principle (wrong type of account, e.g. capital vs revenue), error of original entry, compensating errors, and error of complete reversal.

2. Which errors require the use of a suspense account when correcting them?

   Only errors that cause the trial balance to disagree — i.e. one-sided errors or where debits do not equal credits (e.g. a single entry, transposition affecting one side, posting to the wrong side). Errors where debits still equal credits are corrected by journal without a suspense account.

3. In a sole trader's accounts, what does the capital account at the year end comprise?

   $$\text{Closing capital} = \text{Opening capital} + \text{Capital introduced} + \text{Profit} - \text{Drawings}$$ Drawings (cash or goods taken for personal use) reduce capital and are never an expense.

4. How are drawings of goods (rather than cash) by a sole trader recorded?

   Debit Drawings; Credit Purchases (or inventory) at cost. If the business is VAT-registered, output VAT may also be due on the goods taken.

5. Name the appropriations of profit shared between partners in a partnership.

   Profit is first appropriated by interest on capital, partners' salaries, and interest charged on drawings (added back), and the residual profit is then shared in the agreed profit-sharing ratio (PSR).

6. Distinguish a partner's capital account from a current account.

   The capital account records fixed long-term investment (capital introduced/withdrawn and sometimes goodwill adjustments). The current account records the ongoing share of profits, salaries, interest on capital, less drawings and interest on drawings.

7. In the absence of a partnership agreement, what does the Partnership Act 1890 require?

   Profits and losses are shared equally, no interest is allowed on capital, no partner receives a salary, no interest is charged on drawings, and partners receive 5% interest on any loans advanced to the firm beyond their capital.

8. Name the primary financial statements a company prepares under IAS 1.

   A statement of profit or loss and other comprehensive income, a statement of financial position, a statement of changes in equity, a statement of cash flows, and accompanying notes (including accounting policies).

9. How is the dividend on ordinary shares recorded in company financial statements?

   Dividends are an appropriation of profit, not an expense. Declared/paid dividends: Debit Retained earnings (in the statement of changes in equity); Credit Bank (or dividends payable). Only dividends declared before year end are recognised as a liability.

10. Explain the difference between share capital, share premium and retained earnings.

    Share capital is the nominal (par) value of shares issued. Share premium is the excess received over nominal value on issue. Retained earnings are accumulated profits not distributed as dividends. All are components of equity.

11. What is the incomplete records technique using the accounting equation to find profit?

    $$\text{Profit} = \text{Closing net assets} - \text{Opening net assets} + \text{Drawings} - \text{Capital introduced}$$ Used when no proper double-entry records exist; net assets = assets − liabilities.

12. Define gross profit margin and mark-up, and state how they relate.

    Margin expresses gross profit as a percentage of sales: $\text{Margin} = \frac{\text{Gross profit}}{\text{Sales}}$. Mark-up expresses gross profit as a percentage of cost: $\text{Mark-up} = \frac{\text{Gross profit}}{\text{Cost of sales}}$. A mark-up of $\frac{1}{4}$ (25%) equals a margin of $\frac{1}{5}$ (20%).

13. How are credit sales for the period derived in incomplete records using a receivables control account?

    $$\text{Credit sales} = \text{Closing receivables} + \text{Cash received from customers} + \text{Irrecoverable debts/discounts} - \text{Opening receivables}$$ Reconstruct the total receivables (control) account to find the missing sales figure.

14. Define an assurance engagement and state its objective.

    An assurance engagement is one in which a practitioner obtains sufficient appropriate evidence to express a conclusion designed to enhance the degree of confidence of intended users (other than the responsible party) about the outcome of evaluating subject matter against criteria.

15. Name the five elements of an assurance engagement.

    (1) A three-party relationship (practitioner, responsible party, intended users); (2) appropriate subject matter; (3) suitable criteria; (4) sufficient appropriate evidence; (5) a written assurance report/conclusion.

16. Distinguish reasonable assurance from limited assurance.

    Reasonable assurance gives a high (but not absolute) level of assurance, expressed positively (e.g. 'the statements give a true and fair view'). Limited assurance gives a moderate level, expressed negatively (e.g. 'nothing has come to our attention to suggest the statements are misstated').

17. Why can assurance never be absolute? Give two reasons.

    Because of inherent limitations such as the use of sampling/testing rather than examining everything, the use of judgement and estimates, the fact that evidence is persuasive rather than conclusive, the inherent limitations of internal control, and the possibility of fraud, collusion or management override.

18. What are the five components of internal control in an assurance context?

    (1) The control environment; (2) the entity's risk assessment process; (3) the information system and communication; (4) control activities; (5) monitoring of controls.

19. Give four examples of control activities used in an internal control system.

    Authorisation and approval, segregation of duties, physical controls over assets, arithmetical and accounting controls (reconciliations), performance reviews, and information processing/IT access controls.

20. What two qualities must audit/assurance evidence have, and what does each mean?

    Sufficiency (the quantity of evidence — enough to support the conclusion) and appropriateness (the quality — its relevance and reliability). Both are needed to form a sound conclusion.

21. Rank these evidence sources by reliability and explain the principle: external confirmation, auditor-generated evidence, internal documents.

    Generally most to least reliable: evidence generated by the auditor (e.g. recalculation) and independent external sources/confirmations, then evidence from effective internal controls, then internal documentary evidence, with oral evidence least reliable. Reliability rises with independence from the entity and with written/original form.

22. List four common assurance evidence-gathering procedures.

    Inspection (of records/assets), observation, external confirmation, recalculation, reperformance, analytical procedures, and inquiry. (Mnemonic: AEIOU — Analytical procedures, Enquiry/inspection, Observation, recalculation/reperformance, Uncover via confirmation.)

23. State the five fundamental principles of the IESBA/ICAEW Code of Ethics.

    Integrity, Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour.

24. Name the five categories of threat to compliance with the ethical principles.

    Self-interest, self-review, advocacy, familiarity, and intimidation threats. Identified threats are addressed by safeguards or, if not reducible to an acceptable level, by declining/withdrawing from the engagement.

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Certificate Level: Accounting and Assurance flashcards FAQ