Auditing and Assurance Training Fundamentals 4 — Questions and Answers
Question 1: An auditor is required to communicate 'critical audit matters' (CAMs) in the audit report of a public company. What qualifies as a CAM?
- Any matter discussed with the audit committee during the engagement
- Matters communicated to the audit committee that involved especially challenging or complex auditor judgment (Correct answer)
- All accounting estimates made by management during the period
- Every internal control deficiency identified during the audit
Correct answer: Matters communicated to the audit committee that involved especially challenging or complex auditor judgment
CAMs under PCAOB AS 3101 are matters communicated to the audit committee that involved especially challenging, subjective, or complex auditor judgment.
Question 2: Which sampling approach gives every item in the population an equal and known probability of selection?
- Haphazard sampling
- Judgmental sampling
- Block sampling
- Statistical (random) sampling (Correct answer)
Correct answer: Statistical (random) sampling
Statistical sampling uses randomization to give each population item a known chance of selection, allowing the auditor to project results with measurable confidence.
Question 3: When auditing estimates such as the allowance for doubtful accounts, which auditing approach involves the auditor independently developing their own estimate to compare with management's?
- Reviewing subsequent events
- Testing the effectiveness of controls over estimation
- Developing an independent expectation (Correct answer)
- Inspecting historical collection data
Correct answer: Developing an independent expectation
Developing an independent expectation involves the auditor using their own data and assumptions to create an estimate and comparing it to management's recorded amount.
Question 4: What is the key distinction between a 'significant deficiency' and a 'material weakness' in internal controls?
- A material weakness involves fraud while a significant deficiency involves error
- A material weakness has a reasonable possibility of causing a material misstatement; a significant deficiency is less severe (Correct answer)
- A significant deficiency must be reported to the SEC while a material weakness is only reported internally
- There is no meaningful distinction; the terms are interchangeable
Correct answer: A material weakness has a reasonable possibility of causing a material misstatement; a significant deficiency is less severe
A material weakness has a reasonable possibility of resulting in a material misstatement, whereas a significant deficiency is less severe but still warrants attention by management.
Question 5: During fieldwork, the auditor discovers that a key control was not operating effectively for three months of the fiscal year. This is most likely evidence of:
- A fraud risk factor requiring a change in audit opinion
- A control deficiency that may affect the reliability of related account balances (Correct answer)
- A material misstatement in the financial statements
- An engagement quality review finding
Correct answer: A control deficiency that may affect the reliability of related account balances
An ineffective control for part of the year is a control deficiency that requires the auditor to expand substantive testing for the period the control failed.
Question 6: The concept of 'professional skepticism' in auditing requires the auditor to:
- Assume that management is dishonest until proven otherwise
- Accept management representations without corroborating evidence
- Maintain a questioning mind and critically assess audit evidence (Correct answer)
- Challenge every management estimate regardless of support
Correct answer: Maintain a questioning mind and critically assess audit evidence
Professional skepticism requires auditors to maintain a questioning mindset and rigorously evaluate evidence, neither assuming honesty nor dishonesty.
Question 7: Which of the following best represents a 'review' engagement under SSARS (Statements on Standards for Accounting and Review Services)?
- Providing the highest level of assurance on financial statements
- Performing procedures to express an opinion on financial statements
- Performing inquiries and analytics to provide limited assurance that no material modifications are needed (Correct answer)
- Compiling financial statements without providing any level of assurance
Correct answer: Performing inquiries and analytics to provide limited assurance that no material modifications are needed
A review under SSARS provides limited (negative) assurance based primarily on inquiries and analytical procedures, less than the reasonable assurance of an audit.
Auditing and Assurance Training Fundamentals 4
An auditor is required to communicate 'critical audit matters' (CAMs) in the audit report of a public company.
What qualifies as a CAM?