Bcom Bachelor of Commerce Auditing 2 — Questions and Answers
Question 1: What is the 'audit risk model'?
- Audit Risk = Inherent Risk × Control Risk × Detection Risk (Correct answer)
- Audit Risk = Inherent Risk + Control Risk
- Audit Risk = Detection Risk ÷ Control Risk
- Audit Risk = Fraud Risk × Control Risk
Correct answer: Audit Risk = Inherent Risk × Control Risk × Detection Risk
The audit risk model states that overall audit risk is the product of inherent risk (susceptibility to misstatement), control risk (controls failing to catch it), and detection risk (auditor failing to detect it).
Question 2: Which section of the Sarbanes-Oxley Act requires management to assess internal controls over financial reporting?
- Section 404 (Correct answer)
- Section 302
- Section 201
- Section 906
Correct answer: Section 404
SOX Section 404 requires management to assess and report on the effectiveness of internal controls over financial reporting, with the auditor attesting to that assessment.
Question 3: What is an 'audit program'?
- A detailed plan listing the specific audit procedures to be performed (Correct answer)
- Software used to analyze financial data
- The engagement letter signed by the client
- A schedule of audit fees
Correct answer: A detailed plan listing the specific audit procedures to be performed
An audit program documents the specific procedures, timing, and extent of testing an auditor will perform to gather sufficient evidence.
Question 4: What is 'independence' in auditing?
- The auditor's freedom from conflicts of interest that could compromise objectivity (Correct answer)
- The auditor's ability to work without supervision
- The separation of the audit team from non-audit staff
- The requirement that auditors work alone
Correct answer: The auditor's freedom from conflicts of interest that could compromise objectivity
Independence requires that auditors are free from financial, personal, or other relationships that could impair their objectivity or create the appearance of bias.
Question 5: What is 'sampling risk' in auditing?
- The risk that the auditor's conclusion from a sample differs from the conclusion if the entire population were tested (Correct answer)
- The risk of selecting an unrepresentative sample size
- The risk that evidence is insufficient
- The risk of testing the wrong accounts
Correct answer: The risk that the auditor's conclusion from a sample differs from the conclusion if the entire population were tested
Sampling risk arises because auditors test only a portion of transactions; the sample may not perfectly reflect the full population's characteristics.
Question 6: A 'going concern' opinion is issued when:
- There is substantial doubt about a company's ability to continue operations for 12 months (Correct answer)
- The company has reported a net loss for the year
- Management changes are planned
- The company is undergoing a merger
Correct answer: There is substantial doubt about a company's ability to continue operations for 12 months
Auditors add a going concern explanatory paragraph when conditions—such as significant recurring losses or liquidity problems—raise doubt about the entity's survival.
Bcom Bachelor of Commerce Auditing 2
What is the 'audit risk model'?