CA Auditing & Assurance Services 2 — Questions and Answers
Question 1: Which type of audit opinion is issued when the auditor concludes that financial statements are presented fairly but with a matter the auditor wishes to draw attention to without modifying the opinion?
- Qualified opinion
- Adverse opinion
- Unmodified opinion with emphasis-of-matter paragraph (Correct answer)
- Disclaimer of opinion
Correct answer: Unmodified opinion with emphasis-of-matter paragraph
An unmodified opinion with an emphasis-of-matter paragraph is used when the auditor wants to highlight a matter without modifying the overall opinion.
Question 2: Under PCAOB standards, what is the auditor's responsibility regarding a company's internal control over financial reporting for public companies?
- Express an opinion only if management requests it
- Express an opinion on internal controls as part of the integrated audit (Correct answer)
- Only report material weaknesses discovered during the audit
- Evaluate controls solely for planning purposes
Correct answer: Express an opinion on internal controls as part of the integrated audit
PCAOB AS 2201 requires auditors of public companies to perform an integrated audit expressing an opinion on both financial statements and ICFR.
Question 3: What distinguishes a 'significant deficiency' from a 'material weakness' in internal controls?
- Significant deficiencies affect external reporting while material weaknesses affect internal reporting
- A material weakness has a reasonable possibility of material misstatement; a significant deficiency is less severe but warrants attention (Correct answer)
- They are the same concept with different names under different standards
- Significant deficiencies must be reported to the SEC while material weaknesses are reported only to management
Correct answer: A material weakness has a reasonable possibility of material misstatement; a significant deficiency is less severe but warrants attention
A material weakness indicates a reasonable possibility of material misstatement in financial statements, while a significant deficiency is less severe but still important enough to communicate to those charged with governance.
Question 4: Which analytical procedure would be most useful for detecting an overstatement of accounts receivable?
- Comparing current year sales to prior year sales
- Calculating the days sales outstanding ratio and comparing to prior periods (Correct answer)
- Reviewing the aging schedule for unusual entries
- Recalculating depreciation expense
Correct answer: Calculating the days sales outstanding ratio and comparing to prior periods
Days sales outstanding (DSO) measures how long it takes to collect receivables; an unusual increase could signal overstated or fictitious receivables.
Question 5: An auditor discovers that the client's CFO has both authorization authority and custody of cash. This represents which type of internal control deficiency?
- Lack of physical safeguards
- Inadequate segregation of duties (Correct answer)
- Insufficient documentation
- Ineffective independent reconciliation
Correct answer: Inadequate segregation of duties
Combining authorization and custody functions in one person violates segregation of duties, creating an opportunity for misappropriation without detection.
Question 6: Under SAS No. 99 (AU-C 240), which of the following best describes the auditor's responsibility for detecting fraud?
- Absolute assurance that all fraud will be detected
- Reasonable assurance that material misstatements due to fraud are detected (Correct answer)
- No responsibility since fraud prevention belongs to management
- Responsibility only for fraudulent financial reporting, not misappropriation of assets
Correct answer: Reasonable assurance that material misstatements due to fraud are detected
Auditors are required to obtain reasonable assurance that material misstatements—whether from error or fraud—are detected, but not absolute assurance.
Question 7: What is the primary purpose of a 'letter of inquiry' sent to a client's legal counsel during an audit?
- To obtain information about pending litigation, claims, and assessments (Correct answer)
- To verify the existence of client assets held by the attorney
- To confirm attorney fee arrangements for proper expense accrual
- To request copies of incorporation documents and board resolutions
Correct answer: To obtain information about pending litigation, claims, and assessments
A legal letter (letter of inquiry) asks the client's attorneys to corroborate management's assertions about pending or threatened litigation and unasserted claims.
CA Auditing & Assurance Services 2
Which type of audit opinion is issued when the auditor concludes that financial statements are presented fairly but with a matter the auditor wishes to draw attention to without modifying the opinion?