CA Auditing & Assurance Services 3

Question 1

Which of the following best describes 'audit risk'?

Accepted Answer

The risk that the auditor expresses an inappropriate opinion on materially misstated financial statements

Answer

Audit risk is the risk that an auditor issues an incorrect opinion (typically unmodified) on financial statements that are materially misstated.

Question 2

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?

Accepted Answer

The threshold is met, so inventory warrants focused audit attention

Answer

When an account balance represents a significant portion of total assets relative to materiality, it warrants substantive testing to detect potential misstatements.

Question 3

Which sampling method gives every item in the population an equal chance of selection?

Accepted Answer

Random number selection

Answer

Random number selection (using random number tables or generators) gives each item an equal and independent probability of being chosen.

Question 4

What is the primary difference between a 'review' and an 'audit' engagement?

Accepted Answer

An audit provides reasonable assurance while a review provides limited (negative) assurance

Answer

An audit provides reasonable (positive) assurance through extensive evidence-gathering, while a review provides limited (negative) assurance primarily through inquiries and analytical procedures.

Question 5

Under ISA 580, why are written representations from management considered necessary audit evidence?

Accepted Answer

They confirm matters that cannot be evidenced through other means and acknowledge management's responsibility

Answer

Written representations support other evidence by confirming matters that are known only to management and acknowledging management's responsibility for the financial statements.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Auditing & Assurance Services 3