B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 5 — Questions and Answers
Question 1: Which of the following most accurately describes 'tolerable misstatement' in audit sampling?
- The maximum error rate allowed in internal controls
- The portion of overall materiality allocated to a specific account balance or class of transactions (Correct answer)
- The auditor's estimate of actual errors in the population
- The threshold above which all items must be individually tested
Correct answer: The portion of overall materiality allocated to a specific account balance or class of transactions
Tolerable misstatement is the application of performance materiality to a specific sampling procedure, representing the maximum error the auditor is willing to accept.
Question 2: Under the AICPA Code of Professional Conduct, which of the following would impair an auditor's independence?
- Owning a mutual fund that holds shares in the audit client
- Having a checking account at a bank that is an audit client with a balance within FDIC limits
- Serving on the client's audit committee as a non-voting advisor
- Having a direct financial interest in the audit client (Correct answer)
Correct answer: Having a direct financial interest in the audit client
A direct financial interest in an audit client impairs independence regardless of the amount, as it creates a financial stake in the client's reported results.
Question 3: The auditor's responsibility for evaluating going concern under US GAAS requires consideration of conditions and events for a period of:
- Six months from the balance sheet date
- One year from the balance sheet date (Correct answer)
- Two years from the balance sheet date
- The full operating cycle of the entity
Correct answer: One year from the balance sheet date
AU-C 570 requires the auditor to evaluate whether conditions raise substantial doubt about the entity's ability to continue as a going concern for one year after the balance sheet date.
Question 4: Which type of control is BEST designed to detect errors after they have already occurred?
- Preventive controls
- Detective controls (Correct answer)
- Corrective controls
- Directive controls
Correct answer: Detective controls
Detective controls are designed to identify errors or irregularities that have already occurred, such as bank reconciliations or supervisory reviews.
Question 5: When an auditor issues an unmodified opinion but includes an emphasis-of-matter paragraph, the primary purpose is to:
- Indicate that the audit was limited in scope
- Draw users' attention to a matter disclosed in the financial statements (Correct answer)
- Signal that the auditor disagrees with a significant accounting policy
- Reduce the auditor's liability for a specific disclosure
Correct answer: Draw users' attention to a matter disclosed in the financial statements
An emphasis-of-matter paragraph highlights important information already disclosed in the financial statements without modifying the opinion.
Question 6: In a statistical sampling plan, increasing the confidence level while holding other factors constant will:
- Decrease the required sample size
- Increase the required sample size (Correct answer)
- Have no effect on sample size
- Decrease the tolerable deviation rate
Correct answer: Increase the required sample size
A higher confidence level requires more evidence to support the auditor's conclusion, which translates directly into a larger required sample size.
Question 7: Which of the following best describes the purpose of the 'communication with those charged with governance' requirement in auditing?
- To provide management with a detailed list of all audit adjustments required
- To inform the audit committee of significant findings, including issues with management's integrity (Correct answer)
- To deliver the final audited financial statements to the board
- To request authorization for audit fee increases during the engagement
Correct answer: To inform the audit committee of significant findings, including issues with management's integrity
AU-C 260 requires auditors to communicate significant audit findings, including fraud risks and control deficiencies, to those charged with governance such as the audit committee.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 5
Which of the following most accurately describes 'tolerable misstatement' in audit sampling?