CA Auditing Standards 4 — Questions and Answers
Question 1: Under GAAS, which party is responsible for the preparation and fair presentation of the financial statements?
- The external auditor
- The audit committee
- Management (Correct answer)
- The board of directors collectively with the auditor
Correct answer: Management
Management is responsible for preparing financial statements in accordance with the applicable financial reporting framework.
Question 2: Which of the following is NOT a component of the COSO Internal Control — Integrated Framework?
- Control environment
- Risk assessment
- Audit sampling (Correct answer)
- Monitoring activities
Correct answer: Audit sampling
The five COSO components are control environment, risk assessment, control activities, information and communication, and monitoring activities — audit sampling is not one of them.
Question 3: An auditor who discovers an illegal act by the client that is not material to the financial statements should:
- Withdraw from the engagement immediately
- Issue an adverse opinion
- Communicate the matter to the appropriate level of management (Correct answer)
- Report it directly to law enforcement
Correct answer: Communicate the matter to the appropriate level of management
AU-C 250 requires the auditor to inform the appropriate level of management about an illegal act, even if immaterial.
Question 4: Which assertion is the auditor testing when verifying that all sales transactions occurring during the period have been recorded?
- Existence
- Valuation
- Completeness (Correct answer)
- Rights and obligations
Correct answer: Completeness
Completeness addresses whether all transactions and events that should have been recorded actually have been recorded.
Question 5: The 'expectation gap' in auditing refers to:
- The difference between the auditor's planned and actual hours
- The difference between what users expect from an audit and what auditors actually do (Correct answer)
- A variance between budgeted and actual audit fees
- Discrepancies in expected vs. actual account balances
Correct answer: The difference between what users expect from an audit and what auditors actually do
The expectation gap is the difference between users' beliefs about an audit's scope and assurance level and the actual scope and responsibilities under auditing standards.
Question 6: Under AU-C 240, which of the following fraud risk factors relates to 'incentives/pressures'?
- Weak internal controls over financial reporting
- Aggressive accounting policy choices by management
- Significant pressure to meet analyst earnings forecasts (Correct answer)
- Rapid employee turnover in the accounting department
Correct answer: Significant pressure to meet analyst earnings forecasts
Pressure to meet earnings forecasts represents an incentive/pressure fraud risk factor in the fraud triangle.
Question 7: Which procedure provides the highest level of assurance about the existence of accounts receivable?
- Reviewing the aged accounts receivable trial balance
- Performing analytical procedures on revenue trends
- Sending positive confirmations to customers (Correct answer)
- Inspecting the sales journal for large entries
Correct answer: Sending positive confirmations to customers
Positive confirmations require the recipient to respond regardless of agreement, providing strong third-party evidence of existence.
CA Auditing Standards 4
Under GAAS, which party is responsible for the preparation and fair presentation of the financial statements?