Auditing and Assurance Training Financial Statement Auditing 1 — Questions and Answers
Question 1: Under GAAS, the objective of a financial statement audit is to express an opinion on whether the statements are presented fairly in all material respects in accordance with:
- The auditor's own judgment
- The applicable financial reporting framework (e.g., US GAAP) (Correct answer)
- International Financial Reporting Standards only
- The client's internal accounting policies
Correct answer: The applicable financial reporting framework (e.g., US GAAP)
The auditor's opinion is measured against the applicable financial reporting framework — typically US GAAP for US entities — not the auditor's personal preferences.
Question 2: In a standard unmodified audit opinion for a public company under PCAOB standards, the opinion paragraph states that the financial statements present fairly in conformity with:
- International Auditing Standards
- US GAAP (Correct answer)
- IFRS as adopted by the IASB
- The FASB Conceptual Framework
Correct answer: US GAAP
US public companies follow US GAAP, and the PCAOB audit opinion confirms that financial statements are presented in conformity with US Generally Accepted Accounting Principles.
Question 3: What type of audit opinion is issued when the financial statements contain a material but not pervasive misstatement?
- Adverse opinion
- Disclaimer of opinion
- Qualified opinion (Correct answer)
- Unmodified opinion
Correct answer: Qualified opinion
A qualified opinion ('except for') is issued when a misstatement or scope limitation is material but confined — it affects specific amounts rather than the statements as a whole.
Question 4: Revenue recognition under ASC 606 requires an auditor to evaluate whether management correctly applied the five-step model. What is Step 1?
- Determine the transaction price
- Identify the contract with a customer (Correct answer)
- Recognize revenue when a performance obligation is satisfied
- Allocate the transaction price
Correct answer: Identify the contract with a customer
The first step of ASC 606 is identifying whether a valid contract exists between the entity and a customer, which establishes the foundation for the remaining steps.
Question 5: When auditing the allowance for doubtful accounts, the assertion of greatest concern is typically:
- Existence
- Completeness
- Valuation (Correct answer)
- Rights and obligations
Correct answer: Valuation
The allowance for doubtful accounts is an estimate, so the auditor focuses on whether management's estimate is reasonable and properly calculated — a valuation concern.
Question 6: A comparative financial statement audit requires the auditor to consider whether the prior year figures presented are:
- Identical to those originally reported
- Consistent with current year classifications and properly restated if necessary (Correct answer)
- Audited only by the predecessor auditor
- Excluded from the current year opinion
Correct answer: Consistent with current year classifications and properly restated if necessary
When comparative statements are presented, the auditor must ensure prior year numbers are consistent with current year presentation and reflect any required restatements.
Auditing and Assurance Training Financial Statement Auditing 1
Under GAAS, the objective of a financial statement audit is to express an opinion on whether the statements are presented fairly in all material respects in accordance with: