Auditing and Assurance Training Financial Statement Auditing 2 — Questions and Answers
Question 1: Which financial statement assertion is being tested when an auditor verifies that all fixed assets on the books actually exist through physical inspection?
- Completeness
- Existence (Correct answer)
- Rights and obligations
- Valuation
Correct answer: Existence
Physical inspection directly tests existence — confirming that assets recorded on the balance sheet are real and present.
Question 2: The auditor's responsibility for detecting material misstatements arising from fraud is:
- Limited to clerical errors only
- The same as for errors — both require the same level of skepticism and procedures (Correct answer)
- Not required unless management requests it
- Secondary to detecting errors caused by system failures
Correct answer: The same as for errors — both require the same level of skepticism and procedures
AU-C Section 240 holds auditors responsible for assessing the risk of material misstatement due to fraud with the same rigor as risk of error throughout the audit.
Question 3: What is the auditor's primary concern when testing the cut-off assertion for sales revenue?
- Whether customers paid their balances promptly
- Whether revenue is recorded in the correct accounting period (Correct answer)
- Whether the sales price reflects fair market value
- Whether all customers have signed contracts
Correct answer: Whether revenue is recorded in the correct accounting period
Cut-off testing ensures that revenue transactions near period-end are recorded in the period when the performance obligation was satisfied, not an adjacent period.
Question 4: Which procedure is most appropriate for testing the 'rights and obligations' assertion for long-term debt?
- Physical observation of the debt certificate
- Reviewing loan agreements to confirm the entity is legally obligated to repay the lender (Correct answer)
- Recalculating interest expense
- Confirming year-end balances with the bank
Correct answer: Reviewing loan agreements to confirm the entity is legally obligated to repay the lender
Reviewing loan agreements confirms that the liability recorded represents an actual obligation the entity owes, directly testing the rights and obligations assertion.
Question 5: An adverse audit opinion is appropriate when financial statement misstatements are:
- Material but isolated to one account
- Both material and pervasive — affecting the overall reliability of the statements (Correct answer)
- Only related to disclosures, not account balances
- Limited to a scope restriction imposed by management
Correct answer: Both material and pervasive — affecting the overall reliability of the statements
An adverse opinion is reserved for situations where misstatements are so material and pervasive that they undermine the fair presentation of the financial statements as a whole.
Question 6: Lease accounting under ASC 842 requires auditors to evaluate whether management correctly classified leases as finance or operating. The key distinction is:
- Whether the lessee is a public company
- Whether the lease transfers ownership or substantially all economic benefits to the lessee (Correct answer)
- Whether the lessor is a bank
- Whether the asset is real property or equipment
Correct answer: Whether the lease transfers ownership or substantially all economic benefits to the lessee
ASC 842 classifies leases based on economic substance — if a lease effectively transfers control or substantially all economic benefits of the asset, it is a finance lease.
Auditing and Assurance Training Financial Statement Auditing 2
Which financial statement assertion is being tested when an auditor verifies that all fixed assets on the books actually exist through physical inspection?