CA Auditing & Assurance Services 5 — Questions and Answers
Question 1: Which of the following best describes the concept of 'performance materiality'?
- The threshold above which all misstatements must be corrected
- An amount set below overall materiality to reduce the risk that aggregate uncorrected misstatements exceed materiality (Correct answer)
- Materiality applied only to income statement accounts
- The level used only when auditing public companies under PCAOB
Correct answer: An amount set below overall materiality to reduce the risk that aggregate uncorrected misstatements exceed materiality
Performance materiality is set lower than overall materiality to provide a buffer so that the accumulation of individually immaterial misstatements does not exceed overall materiality.
Question 2: What is the purpose of the 'engagement quality control review' (EQCR) in an audit?
- To replace the audit partner's review of working papers
- To provide an objective evaluation of significant judgments made by the engagement team before the report is issued (Correct answer)
- To review the client's quality control procedures
- To satisfy regulatory requirements for small non-public companies only
Correct answer: To provide an objective evaluation of significant judgments made by the engagement team before the report is issued
An EQCR is performed by a qualified reviewer not part of the engagement team to provide an independent check on significant judgments, enhancing audit quality.
Question 3: Under AU-C 560, what is the auditor's responsibility regarding 'subsequent events' discovered after the audit report date but before the financial statements are issued?
- No action is required since the report has already been signed
- The auditor must perform additional procedures and, if necessary, require financial statement adjustment or disclosure (Correct answer)
- The auditor may only disclose the event without requiring adjustment
- The auditor must withdraw from the engagement
Correct answer: The auditor must perform additional procedures and, if necessary, require financial statement adjustment or disclosure
Events discovered between the audit report date and issuance of financial statements require the auditor to assess whether the financial statements need revision and to perform additional procedures.
Question 4: Which assertion is most relevant when the auditor is testing whether all liabilities that should be recorded are included in the financial statements?
- Existence
- Valuation
- Completeness (Correct answer)
- Rights and obligations
Correct answer: Completeness
The completeness assertion addresses whether all transactions and balances that should be recorded are included, making it critical for liability testing.
Question 5: A public accounting firm audits a client and also provides internal audit outsourcing services to that same client. Which independence threat does this create?
- Advocacy threat
- Self-interest threat
- Self-review threat (Correct answer)
- Intimidation threat
Correct answer: Self-review threat
Providing internal audit services and then relying on internal audit work during the external audit creates a self-review threat because the external auditors may evaluate their own work.
Question 6: Which of the following is an example of a 'substantive analytical procedure' used to test the reasonableness of payroll expense?
- Reperforming payroll calculations for a sample of employees
- Confirming wage rates with the HR department
- Multiplying average headcount by average salary and comparing to recorded payroll (Correct answer)
- Inspecting time cards for authorization signatures
Correct answer: Multiplying average headcount by average salary and comparing to recorded payroll
Developing an independent expectation of payroll by multiplying headcount by average salary and comparing it to the recorded amount is a substantive analytical procedure.
Question 7: What is the key distinction between 'positive confirmation' and 'negative confirmation' of accounts receivable?
- Positive confirmations are sent by mail; negative confirmations are sent electronically
- Positive confirmations request a response whether or not the balance is correct; negative confirmations request a response only if the balance is incorrect (Correct answer)
- Positive confirmations are used only for small balances; negative for large balances
- Negative confirmations require follow-up while positive confirmations do not
Correct answer: Positive confirmations request a response whether or not the balance is correct; negative confirmations request a response only if the balance is incorrect
Positive confirmations require a reply in all cases providing stronger evidence, while negative confirmations assume agreement if no response is received, providing weaker evidence.
CA Auditing & Assurance Services 5
Which of the following best describes the concept of 'performance materiality'?