ACCA Advanced Audit and Assurance (AAA) Practice Exam

When testing account balances, what method is commonly employed?

1. Analyzing past financial data

2. Physical verification of asset existence

3. Classification of transaction types

4. Evaluating management strategies

The correct answer is: Physical verification of asset existence

The method of physically verifying asset existence is a critical approach when testing account balances. This procedure ensures that the assets reported in the financial statements actually exist at the balance sheet date. By conducting physical verifications, such as counting inventory, checking the condition of fixed assets, or confirming the existence of cash in bank accounts, auditors can gather substantive evidence regarding the accuracy and validity of the reported amounts. Physical verification helps to detect discrepancies caused by issues such as theft, obsolescence, or errors in recording transactions. This form of audit evidence is particularly persuasive and reliable because it provides firsthand confirmation of the asset's existence, reducing the risk of misstatement due to fraud or error. In contrast, analyzing past financial data, classifying transaction types, and evaluating management strategies are important procedures in the auditing process but do not directly confirm the existence of the account balances or assets. These methods may provide valuable context and understanding but rely on interpretations of historical trends or management assertions, which do not substitute for the direct assurance provided by physical verification.