Auditing and Assurance Training Fundamentals 3 — Questions and Answers
Question 1: In the audit risk model (AR = IR × CR × DR), if inherent risk and control risk are both high, how should the auditor respond?
- Increase the acceptable level of detection risk
- Decrease detection risk by performing more extensive substantive procedures (Correct answer)
- Rely more heavily on the client's internal controls
- Issue a qualified opinion without further testing
Correct answer: Decrease detection risk by performing more extensive substantive procedures
When inherent and control risks are high, auditors must lower detection risk by expanding the nature, timing, and extent of substantive procedures.
Question 2: Which of the following is the best example of a preventive control?
- Monthly bank reconciliations
- Annual physical inventory counts
- Separation of duties between cash receipts and recordkeeping (Correct answer)
- Exception reports flagging unusual transactions
Correct answer: Separation of duties between cash receipts and recordkeeping
Separation of duties is a preventive control because it reduces the opportunity for errors or fraud to occur in the first place.
Question 3: A CPA firm discovers an error in a prior-year audit report after it was issued. Under professional standards, the firm should:
- Take no action unless the client requests a correction
- Notify the client, regulatory authorities, and users who relied on the report (Correct answer)
- Issue a new audit report without disclosing the prior error
- Only notify the audit committee of the client
Correct answer: Notify the client, regulatory authorities, and users who relied on the report
When a previously issued audit report is found to be incorrect, the auditor must notify the client and all known users who relied on the report.
Question 4: What is the purpose of performing a 'walkthrough' during an audit of internal controls?
- To physically inspect the client's facilities and equipment
- To trace a transaction from initiation through recording to verify controls operate as designed (Correct answer)
- To walk through the client's financial statements line by line
- To observe employees performing their assigned duties over a full workday
Correct answer: To trace a transaction from initiation through recording to verify controls operate as designed
A walkthrough involves tracing one or a few transactions through the entire process to confirm that documented controls actually exist and function as described.
Question 5: Which of the following financial statement assertions does confirmations of accounts receivable most directly address?
- Completeness and cutoff
- Valuation and allocation
- Existence and rights (Correct answer)
- Presentation and disclosure
Correct answer: Existence and rights
Accounts receivable confirmations provide evidence that the balances exist and that the client has the right to collect them from third parties.
Question 6: Which situation would most likely cause an auditor to issue a disclaimer of opinion?
- A material departure from GAAP in the financial statements
- A pervasive scope limitation that prevents gathering sufficient evidence (Correct answer)
- A material but non-pervasive uncertainty about a contingent liability
- A disagreement with management over an accounting estimate
Correct answer: A pervasive scope limitation that prevents gathering sufficient evidence
A disclaimer of opinion is issued when the auditor is unable to form an opinion due to a pervasive scope limitation restricting access to necessary evidence.
Question 7: Under the AICPA Code of Professional Conduct, which threat to independence arises when an auditor also performs bookkeeping services for a non-public audit client?
- Advocacy threat
- Familiarity threat
- Self-review threat (Correct answer)
- Intimidation threat
Correct answer: Self-review threat
Preparing the financial records and then auditing them creates a self-review threat because the auditor would be evaluating their own work.
Auditing and Assurance Training Fundamentals 3
In the audit risk model (AR = IR × CR × DR), if inherent risk and control risk are both high, how should the auditor respond?