CA Auditing & Assurance Services 4 — Questions and Answers
Question 1: Which of the following best describes 'detection risk' in the audit risk model?
- The risk that a material misstatement exists in an account before considering controls
- The risk that internal controls fail to prevent or detect a misstatement
- The risk that the auditor's procedures fail to detect a misstatement that exists (Correct answer)
- The risk that the client will attempt to deceive the auditor
Correct answer: The risk that the auditor's procedures fail to detect a misstatement that exists
Detection risk is the risk that the auditor's substantive procedures will not detect a material misstatement that exists in an account balance or transaction class.
Question 2: An auditor encounters a situation where the client restricts access to a significant class of transactions. What is the most likely audit report outcome?
- Adverse opinion
- Unmodified opinion
- Qualified opinion or disclaimer of opinion due to scope limitation (Correct answer)
- Emphasis-of-matter paragraph with unmodified opinion
Correct answer: Qualified opinion or disclaimer of opinion due to scope limitation
A scope limitation prevents the auditor from obtaining sufficient appropriate evidence, leading to either a qualified 'except for' opinion or a disclaimer if the limitation is pervasive.
Question 3: What is 'professional skepticism' as applied in auditing?
- Assuming that management is dishonest in all circumstances
- A questioning mind and critical assessment of audit evidence without assuming honesty or dishonesty (Correct answer)
- Accepting all evidence at face value since clients are presumed honest
- Refusing to rely on any internal controls
Correct answer: A questioning mind and critical assessment of audit evidence without assuming honesty or dishonesty
Professional skepticism requires auditors to maintain a questioning mind and critically evaluate evidence without being presumptuous about client honesty or dishonesty.
Question 4: Which engagement requires the practitioner to obtain an understanding of the subject matter and suitable criteria before performing procedures?
- Compilation engagement
- Agreed-upon procedures engagement
- Attestation engagement
- Both B and C (Correct answer)
Correct answer: Both B and C
Both agreed-upon procedures and attestation engagements require the practitioner to understand the subject matter and applicable criteria, though they differ in scope and level of assurance.
Question 5: Under AICPA standards, which of the following threats to auditor independence can be mitigated by a 'self-review safeguard'?
- Advocacy threat
- Familiarity threat
- Preparation of financial statements followed by auditing them (Correct answer)
- Financial interest in the audit client
Correct answer: Preparation of financial statements followed by auditing them
When auditors prepare financial statements and then audit them, the self-review threat arises; firm policies separating these services can serve as a safeguard.
Question 6: What is the auditor's primary objective when performing a 'cutoff' test on sales transactions?
- To verify that all sales were properly authorized
- To ensure that transactions are recorded in the correct accounting period (Correct answer)
- To confirm that accounts receivable balances are collectible
- To detect fictitious sales recorded during the year
Correct answer: To ensure that transactions are recorded in the correct accounting period
Cutoff tests verify that sales and related receivables are recorded in the correct period—transactions just before and after year-end are examined to detect improper timing.
Question 7: Which of the following most accurately defines 'sufficient appropriate audit evidence'?
- All available evidence must be gathered regardless of cost
- Enough relevant and reliable evidence to support the auditor's conclusions at an acceptable risk level (Correct answer)
- Evidence provided only by third parties external to the client
- Documentary evidence supported by at least two corroborating sources
Correct answer: Enough relevant and reliable evidence to support the auditor's conclusions at an acceptable risk level
Sufficiency relates to quantity and appropriateness relates to quality (relevance and reliability); together they define the standard for audit evidence under professional standards.
CA Auditing & Assurance Services 4
Which of the following best describes 'detection risk' in the audit risk model?