Auditing and Assurance Training Trivia 5 — Questions and Answers
Question 1: What does 'audit risk' represent?
- The risk that an auditor will be sued by a client
- The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated (Correct answer)
- The risk of the client going bankrupt during the audit
- The risk that audit fees will exceed the budgeted amount
Correct answer: The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated
Audit risk is the risk that the auditor issues a clean opinion on financial statements that are materially misstated, and it is the product of inherent risk, control risk, and detection risk.
Question 2: Which financial statement assertion is most directly tested when an auditor observes the client's physical inventory count?
- Rights and obligations
- Existence (Correct answer)
- Completeness
- Valuation
Correct answer: Existence
Observation of the inventory count primarily tests the existence assertion — verifying that the inventory recorded in the books actually exists at that location.
Question 3: A 'significant deficiency' in internal controls is best described as:
- A deficiency less severe than a material weakness but important enough to merit attention by those charged with governance (Correct answer)
- A deficiency so severe that it will result in a material misstatement
- Any control weakness identified during the audit
- A deficiency that must be disclosed in the auditor's public report
Correct answer: A deficiency less severe than a material weakness but important enough to merit attention by those charged with governance
A significant deficiency is less severe than a material weakness but still warrants communication to the audit committee or those charged with governance.
Question 4: Which professional standard governs the auditor's responsibilities relating to other information included in documents containing audited financial statements?
- AU-C Section 720 (Correct answer)
- AU-C Section 570
- AU-C Section 265
- AU-C Section 315
Correct answer: AU-C Section 720
AU-C Section 720 addresses the auditor's responsibilities for other information (such as an annual report narrative) included alongside audited financial statements.
Question 5: What is 'kiting' in the context of bank fraud?
- Inflating accounts receivable balances by recording fictitious sales
- Exploiting the float between deposits and withdrawals at different banks to conceal a cash shortage (Correct answer)
- Creating fictitious vendors and authorizing payments to them
- Overstating inventory by recording purchases that never occurred
Correct answer: Exploiting the float between deposits and withdrawals at different banks to conceal a cash shortage
Kiting manipulates bank float by depositing a check from Bank A into Bank B before the Bank A check clears, artificially inflating cash balances.
Question 6: Under the ethical standards of the AICPA, which threat to independence arises when an auditor reviews their own prior work?
- Advocacy threat
- Familiarity threat
- Self-review threat (Correct answer)
- Undue influence threat
Correct answer: Self-review threat
A self-review threat occurs when the auditor audits work they previously performed (such as providing bookkeeping services and then auditing those books).
Question 7: In a review engagement (as opposed to an audit), what level of assurance does the CPA provide?
- Absolute assurance
- Reasonable assurance
- Limited (negative) assurance (Correct answer)
- No assurance
Correct answer: Limited (negative) assurance
A review provides limited assurance, expressed in negative form ('nothing came to our attention'), which is lower than the reasonable assurance of an audit.
Auditing and Assurance Training Trivia 5
What does 'audit risk' represent?