ABA Audit & Attestation Services 3 — Questions and Answers
Question 1: Which component of the internal control framework addresses the entity's values, ethics, and operating style?
- Risk assessment
- Control environment (Correct answer)
- Monitoring activities
- Information and communication
Correct answer: Control environment
The control environment sets the tone of the organization and is the foundation for all other components of internal control.
Question 2: A review engagement provides what level of assurance compared to an audit?
- The same level of assurance
- Higher assurance than an audit
- Limited (negative) assurance rather than reasonable (positive) assurance (Correct answer)
- No assurance whatsoever
Correct answer: Limited (negative) assurance rather than reasonable (positive) assurance
A review provides limited assurance expressed as negative assurance ('nothing came to our attention'), while an audit provides reasonable positive assurance.
Question 3: Which audit procedure involves independently verifying account balances by contacting third parties directly?
- Inspection
- Observation
- Confirmation (Correct answer)
- Recalculation
Correct answer: Confirmation
Confirmation is the process of obtaining a direct written response from a third party, such as confirming accounts receivable balances with customers.
Question 4: What is the primary purpose of a management representation letter in an audit?
- To replace all other audit evidence
- To document management's acknowledgment of its responsibility for the financial statements (Correct answer)
- To provide legal immunity to the auditor
- To serve as the audit report
Correct answer: To document management's acknowledgment of its responsibility for the financial statements
A management representation letter documents that management acknowledges its responsibility for the financial statements and provides written representations to the auditor.
Question 5: Under GAAS, an auditor is required to communicate 'significant deficiencies' in internal control to:
- Only the external regulatory bodies
- Those charged with governance in writing (Correct answer)
- The general public through the audit report
- The IRS immediately
Correct answer: Those charged with governance in writing
GAAS requires auditors to communicate significant deficiencies and material weaknesses to those charged with governance in writing.
Question 6: Inherent risk is best defined as the susceptibility of an assertion to:
- Material misstatement assuming no related internal controls (Correct answer)
- Material misstatement after considering internal controls
- Detection by the auditor's substantive procedures
- Fraud by senior management only
Correct answer: Material misstatement assuming no related internal controls
Inherent risk is the susceptibility of an assertion to material misstatement before considering any related internal controls.
Question 7: Which of the following is an example of a substantive analytical procedure?
- Observing the physical inventory count
- Comparing current-year interest expense to the average loan balance multiplied by the interest rate (Correct answer)
- Confirming accounts receivable with customers
- Inspecting documents supporting a large transaction
Correct answer: Comparing current-year interest expense to the average loan balance multiplied by the interest rate
Substantive analytical procedures use expected relationships (like interest expense vs. loan balance × rate) to assess whether recorded amounts are reasonable.
ABA Audit & Attestation Services 3
Which component of the internal control framework addresses the entity's values, ethics, and operating style?