CA Auditing Standards 3 — Questions and Answers
Question 1: Which type of audit opinion is issued when the financial statements are presented fairly in all material respects?
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
- Unmodified opinion (Correct answer)
Correct answer: Unmodified opinion
An unmodified (clean) opinion means the auditor concluded the financial statements are fairly presented in accordance with the applicable framework.
Question 2: A CPA firm's independence is impaired when a partner has a:
- Remote financial interest in an audit client
- Direct material financial interest in an audit client (Correct answer)
- Spouse employed in a non-key position at a non-audit client
- Prior year audit experience with the same client
Correct answer: Direct material financial interest in an audit client
A direct material financial interest in an audit client impairs independence under both AICPA and SEC independence rules.
Question 3: Under the AICPA's risk-based audit approach, which component of the audit risk model represents the effectiveness of controls in preventing or detecting misstatements?
- Inherent risk
- Control risk (Correct answer)
- Detection risk
- Sampling risk
Correct answer: Control risk
Control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by internal controls.
Question 4: Which document outlines the nature, timing, and extent of planned audit procedures and serves as a guide for the audit team?
- Engagement letter
- Management representation letter
- Audit program (Correct answer)
- Working trial balance
Correct answer: Audit program
The audit program specifies the procedures to be performed, their timing, and the extent of testing planned for each audit area.
Question 5: Which of the following is an example of a substantive analytical procedure?
- Reperforming a bank reconciliation
- Comparing current-year interest expense to prior-year balances relative to outstanding debt (Correct answer)
- Observing the client's physical inventory count
- Confirming accounts receivable with customers
Correct answer: Comparing current-year interest expense to prior-year balances relative to outstanding debt
Substantive analytical procedures use plausible relationships (e.g., interest expense relative to debt) to develop expectations and identify potential misstatements.
Question 6: Which PCAOB standard governs the auditor's responsibilities regarding related party transactions?
- AS 2410 (Correct answer)
- AS 2201
- AS 1105
- AS 2301
Correct answer: AS 2410
AS 2410 establishes requirements for auditing related party transactions and relationships, including identifying undisclosed relationships.
Question 7: When an auditor issues a disclaimer of opinion, it means the auditor:
- Found the financial statements to be materially misstated
- Was unable to obtain sufficient appropriate audit evidence to form an opinion (Correct answer)
- Disagrees with management on an accounting principle
- Determined the entity is not a going concern
Correct answer: Was unable to obtain sufficient appropriate audit evidence to form an opinion
A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate evidence, such as in a severe scope limitation.
CA Auditing Standards 3
Which type of audit opinion is issued when the financial statements are presented fairly in all material respects?