Auditing & Assurance Services Flashcards
7 cards from real CA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Auditing & Assurance Services flashcards as text
Which of the following best describes 'audit risk'?
Answer: The risk that the auditor expresses an inappropriate opinion on materially misstated financial statements
Audit risk is the risk that an auditor issues an incorrect opinion (typically unmodified) on financial statements that are materially misstated.
A company's inventory balance is $5 million and the auditor sets materiality at $250,000. Using 5% of a balance as a rule of thumb, what does this suggest about the inventory audit?
Answer: The threshold is met, so inventory warrants focused audit attention
When an account balance represents a significant portion of total assets relative to materiality, it warrants substantive testing to detect potential misstatements.
Which sampling method gives every item in the population an equal chance of selection?
Answer: Random number selection
Random number selection (using random number tables or generators) gives each item an equal and independent probability of being chosen.
What is the primary difference between a 'review' and an 'audit' engagement?
Answer: An audit provides reasonable assurance while a review provides limited (negative) assurance
An audit provides reasonable (positive) assurance through extensive evidence-gathering, while a review provides limited (negative) assurance primarily through inquiries and analytical procedures.
Under ISA 580, why are written representations from management considered necessary audit evidence?
Answer: They confirm matters that cannot be evidenced through other means and acknowledge management's responsibility
Written representations support other evidence by confirming matters that are known only to management and acknowledging management's responsibility for the financial statements.
An auditor is assessing the risk of material misstatement for revenue. Which condition represents a fraud risk factor under the fraud triangle?
Answer: Management compensation is heavily tied to meeting earnings targets
Incentive/pressure is a fraud triangle element; heavy compensation tied to earnings targets creates incentive to manipulate revenue recognition.
Which of the following represents a 'test of controls' rather than a 'substantive test'?
Answer: Inspecting 30 purchase orders to verify proper approval signatures
Inspecting purchase orders for approval signatures tests whether the control (authorization of purchases) is operating effectively.