CA Auditing Standards 2 — Questions and Answers
Question 1: Under AS 2201, what is the auditor's primary objective when auditing internal control over financial reporting?
- To express an opinion on the effectiveness of ICFR (Correct answer)
- To detect all fraud within the organization
- To test every individual transaction processed
- To evaluate management's compensation policies
Correct answer: To express an opinion on the effectiveness of ICFR
AS 2201 requires the auditor to express an opinion on whether ICFR is effective based on identified control criteria.
Question 2: Which risk assessment procedure involves the auditor physically examining assets, documents, or records?
- Inquiry
- Observation
- Inspection (Correct answer)
- Analytical procedures
Correct answer: Inspection
Inspection involves physically examining records, documents, or tangible assets to gather audit evidence.
Question 3: The concept of 'professional skepticism' in auditing requires the auditor to:
- Assume management is dishonest in all cases
- Maintain a questioning mind and critically assess evidence (Correct answer)
- Reject all representations made by management
- Limit reliance on any internal controls
Correct answer: Maintain a questioning mind and critically assess evidence
Professional skepticism means maintaining a questioning mind and critically evaluating evidence without assuming either honesty or dishonesty.
Question 4: Which of the following best describes 'audit risk'?
- The risk that the auditor will lose the client engagement
- The risk that the financial statements contain a material misstatement that the auditor fails to detect (Correct answer)
- The risk that employees will commit fraud
- The risk that audit fees will not be collected
Correct answer: The risk that the financial statements contain a material misstatement that the auditor fails to detect
Audit risk is the risk that the auditor issues an unmodified opinion on materially misstated financial statements.
Question 5: When an auditor identifies a significant deficiency in internal controls, the auditor is required to:
- Resign from the engagement immediately
- Communicate the deficiency in writing to management and those charged with governance (Correct answer)
- Issue a qualified opinion on the financial statements
- Report the deficiency directly to the SEC
Correct answer: Communicate the deficiency in writing to management and those charged with governance
AU-C Section 265 requires written communication of significant deficiencies to management and those charged with governance.
Question 6: Which sampling method gives every item in the population an equal and independent chance of selection?
- Systematic sampling
- Haphazard sampling
- Judgmental sampling
- Random sampling (Correct answer)
Correct answer: Random sampling
Random sampling ensures each population item has an equal probability of selection, supporting statistical inference.
Question 7: The 'going concern' assumption is threatened when:
- The company reports a minor decrease in gross margin
- There is substantial doubt about the entity's ability to continue operations for the next 12 months (Correct answer)
- The auditor disagrees with an accounting policy
- The client changes its fiscal year end
Correct answer: There is substantial doubt about the entity's ability to continue operations for the next 12 months
AU-C 570 requires evaluation of whether substantial doubt exists about the entity's ability to continue as a going concern for 12 months after the financial statement date.
CA Auditing Standards 2
Under AS 2201, what is the auditor's primary objective when auditing internal control over financial reporting?