Auditing and Assurance Training Trivia 3 — Questions and Answers
Question 1: What is the Sarbanes-Oxley Act Section 404 primarily concerned with?
- Auditor independence requirements
- Management's assessment of internal control over financial reporting (Correct answer)
- Whistleblower protections for employees
- Criminal penalties for securities fraud
Correct answer: Management's assessment of internal control over financial reporting
SOX Section 404 requires management to assess and report on the effectiveness of internal control over financial reporting, with the auditor also attesting to that assessment for accelerated filers.
Question 2: Which concept requires auditors to remain mentally independent and avoid relationships that could impair their objectivity?
- Due professional care
- Independence in fact and appearance (Correct answer)
- Professional skepticism
- Competence
Correct answer: Independence in fact and appearance
Independence in fact (mental attitude) and in appearance (as perceived by others) are both required so that users can rely on the auditor's report.
Question 3: What does 'going concern' refer to in auditing?
- An audit firm's ability to continue operations
- Whether an entity can continue operating for at least one year beyond the balance sheet date (Correct answer)
- The auditor's right to examine ongoing transactions
- Management's concern about audit costs
Correct answer: Whether an entity can continue operating for at least one year beyond the balance sheet date
Auditors evaluate whether substantial doubt exists about an entity's ability to continue as a going concern for approximately 12 months after the financial statement date.
Question 4: Which risk model component represents the likelihood that an internal control will fail to prevent or detect a material misstatement?
- Inherent risk
- Detection risk
- Control risk (Correct answer)
- Business risk
Correct answer: Control risk
Control risk is the risk that a material misstatement will not be prevented, or detected and corrected, by the entity's internal controls on a timely basis.
Question 5: An external auditor discovers that a client's CEO has been embezzling funds. Under AU-C Section 240, what is the auditor's primary obligation?
- Immediately report the fraud to law enforcement
- Communicate findings to appropriate levels of management and those charged with governance (Correct answer)
- Issue an adverse opinion without further investigation
- Resign from the engagement immediately
Correct answer: Communicate findings to appropriate levels of management and those charged with governance
AU-C 240 requires the auditor to communicate suspected or actual fraud to the appropriate level of management (typically those charged with governance, such as the audit committee).
Question 6: What is 'lapping' in the context of fraud and auditing?
- Overstating inventory by counting items twice
- Concealing a cash shortage by applying later receipts to earlier accounts receivable (Correct answer)
- Recording fictitious sales to inflate revenue
- Altering bank reconciliation figures to hide discrepancies
Correct answer: Concealing a cash shortage by applying later receipts to earlier accounts receivable
Lapping is a fraud scheme where an employee steals cash from one customer's payment and covers it by applying the next customer's payment to the first account.
Question 7: Which analytical procedure compares current-year financial data with prior-year figures to identify unusual fluctuations?
- Ratio analysis
- Trend analysis
- Regression analysis
- Horizontal analysis (Correct answer)
Correct answer: Horizontal analysis
Horizontal analysis (also called comparative analysis) compares financial statement line items across two or more periods to spot significant changes requiring explanation.
Auditing and Assurance Training Trivia 3
What is the Sarbanes-Oxley Act Section 404 primarily concerned with?