B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 3 — Questions and Answers
Question 1: Which type of audit opinion should be issued when the financial statements contain a material misstatement that is pervasive to the statements as a whole?
- Qualified opinion
- Adverse opinion (Correct answer)
- Disclaimer of opinion
- Unmodified opinion
Correct answer: Adverse opinion
An adverse opinion is issued when misstatements are both material and pervasive, meaning the statements do not present fairly in conformity with GAAP.
Question 2: Analytical procedures performed during the planning phase of an audit are primarily used to:
- Detect fraud in financial statement line items
- Identify areas that may represent specific risks relevant to the audit (Correct answer)
- Provide substantive evidence for account balances
- Determine the appropriate audit opinion to issue
Correct answer: Identify areas that may represent specific risks relevant to the audit
During planning, analytical procedures help identify unusual fluctuations, relationships, or events that warrant additional audit attention.
Question 3: Which assertion is MOST directly tested when an auditor traces shipping documents to recorded sales?
- Valuation
- Completeness (Correct answer)
- Cutoff
- Classification
Correct answer: Completeness
Tracing shipping documents to recorded sales tests completeness — ensuring that all shipments have been recorded as sales revenue.
Question 4: The 'expectation gap' in auditing refers to the difference between:
- Planned and actual audit hours
- What the public believes auditors do and what auditors actually do (Correct answer)
- Materiality thresholds and actual detected errors
- GAAS requirements and PCAOB standards
Correct answer: What the public believes auditors do and what auditors actually do
The expectation gap exists because the public often believes auditors guarantee accuracy or detect all fraud, which exceeds auditors' actual responsibilities.
Question 5: When assessing the risk of material misstatement due to fraud, auditors are required to presume that risk exists in which area?
- Inventory valuation
- Revenue recognition (Correct answer)
- Accounts payable completeness
- Fixed asset additions
Correct answer: Revenue recognition
AU-C 240 requires auditors to presume there is a fraud risk related to revenue recognition in virtually every audit engagement.
Question 6: A client refuses to allow the auditor to confirm accounts receivable. The auditor should:
- Issue a disclaimer of opinion immediately
- Perform alternative procedures to obtain sufficient evidence (Correct answer)
- Accept management's representations as sufficient
- Withdraw from the engagement without issuing a report
Correct answer: Perform alternative procedures to obtain sufficient evidence
When confirmations are not permitted, auditors must apply alternative procedures (e.g., examining subsequent cash receipts) to gather adequate evidence.
Question 7: The primary difference between a review and an audit of financial statements is:
- A review requires more extensive sampling than an audit
- An audit provides a higher level of assurance than a review (Correct answer)
- A review involves testing internal controls; an audit does not
- An audit provides only negative assurance; a review provides positive assurance
Correct answer: An audit provides a higher level of assurance than a review
An audit provides reasonable (positive) assurance, while a review provides only limited assurance based on inquiry and analytical procedures.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 3
Which type of audit opinion should be issued when the financial statements contain a material misstatement that is pervasive to the statements as a whole?