ACCA Advanced Audit and Assurance (AAA) Practice Exam

What does ISA 501 specifically address in terms of audit procedures?

1. Evaluating the effectiveness of internal controls

2. Attending physical inventory counts

3. Reviewing cash management policies

4. Assessing the risk of material misstatement

The correct answer is: Attending physical inventory counts

ISA 501 specifically addresses the auditor's responsibilities regarding the attendance at physical inventory counts. This standard emphasizes the importance of the auditor's participation in inventory counts to gain sufficient audit evidence about the existence and condition of inventory at year-end. When auditors attend physical inventory counts, they can directly observe the procedures in place and ascertain that the inventory is both physically present and accurately counted, which is crucial for determining the accuracy of the financial statements. Attendance at inventory counts is particularly significant because inventory is often a material item on the balance sheet and its correct valuation impacts profit and asset reporting. By attending these counts, the auditor is able to verify not only the quantity of inventory but also the condition or quality, which can affect valuation. Other options relate to important audit procedures but do not specifically align with the focus of ISA 501. For example, while evaluating the effectiveness of internal controls is crucial in various standards, it is not the primary concern of ISA 501. Similarly, reviewing cash management policies and assessing the risk of material misstatement are related to broader aspects of the audit but do not directly pertain to the specific procedures outlined in ISA 501. Thus, the emphasis on attending physical inventory counts makes this the correct answer in the context of ISA 501.