CA Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Under the AICPA standards, what is the primary purpose of an engagement quality review?
- To replace the engagement partner's review
- To provide an objective evaluation of significant judgments made by the engagement team (Correct answer)
- To satisfy regulatory filing requirements
- To document audit procedures performed
Correct answer: To provide an objective evaluation of significant judgments made by the engagement team
An engagement quality review provides an objective evaluation of the significant judgments and conclusions reached by the engagement team before the report is issued.
Question 2: Which type of audit opinion is issued when financial statements are fairly presented except for a specific material matter?
- Adverse opinion
- Disclaimer of opinion
- Qualified opinion (Correct answer)
- Unmodified opinion
Correct answer: Qualified opinion
A qualified opinion uses 'except for' language to indicate the financial statements are fairly presented except for the specified matter.
Question 3: The risk that an auditor's procedures will not detect a material misstatement that exists is called:
- Inherent risk
- Control risk
- Detection risk (Correct answer)
- Sampling risk
Correct answer: Detection risk
Detection risk is the risk that audit procedures will fail to detect a material misstatement that actually exists in the financial statements.
Question 4: When assessing going concern, which condition would most likely raise substantial doubt about an entity's ability to continue as a going concern?
- A decrease in the gross profit margin of 2%
- Recurring operating losses and negative cash flows from operations (Correct answer)
- Management turnover in two senior positions
- A qualified audit opinion from the prior year
Correct answer: Recurring operating losses and negative cash flows from operations
Recurring operating losses combined with negative operating cash flows are classic indicators of going concern doubt as they suggest the business cannot sustain itself.
Question 5: In a test of controls, the auditor finds that 3 out of 60 sampled items deviate from the prescribed control. The tolerable deviation rate is 5%. The auditor should:
- Conclude the control is effective since 3/60 = 5%
- Increase reliance on the control as deviations are low
- Assess whether the actual deviation rate exceeds the tolerable rate (Correct answer)
- Automatically issue a qualified opinion
Correct answer: Assess whether the actual deviation rate exceeds the tolerable rate
The auditor must evaluate the sample deviation rate (5%) against the tolerable rate and consider whether the control can be relied upon.
Question 6: Which assertion is most directly tested by confirming accounts receivable with customers?
- Completeness
- Valuation
- Existence (Correct answer)
- Classification
Correct answer: Existence
Confirming receivables with customers primarily tests existence — verifying that the recorded receivables actually exist at the balance sheet date.
Question 7: Under ISA 600, when auditing group financial statements, the group auditor's responsibilities include:
- Auditing all components directly, without using component auditors
- Issuing a separate opinion on each component
- Understanding the work of component auditors and evaluating its sufficiency (Correct answer)
- Eliminating reliance on component auditors for significant components
Correct answer: Understanding the work of component auditors and evaluating its sufficiency
ISA 600 requires the group auditor to understand, evaluate, and take responsibility for the work performed by component auditors on significant components.
CA Auditing Principles & Procedures 3
Under the AICPA standards, what is the primary purpose of an engagement quality review?