CA Auditing Standards 5 — Questions and Answers
Question 1: Which standard requires the auditor to obtain written representations from management at the conclusion of the audit?
- AU-C 580 (Correct answer)
- AU-C 265
- AU-C 330
- AU-C 450
Correct answer: AU-C 580
AU-C 580 requires the auditor to obtain a management representation letter confirming certain matters disclosed or not disclosed in the financial statements.
Question 2: When the auditor concludes that a material weakness exists in ICFR for a public company, which type of opinion must be issued on internal control?
- Qualified opinion
- Unmodified opinion with emphasis paragraph
- Adverse opinion (Correct answer)
- Disclaimer of opinion
Correct answer: Adverse opinion
Under AS 2201, a material weakness requires the auditor to issue an adverse opinion on the effectiveness of ICFR.
Question 3: Which of the following best describes 'tolerable misstatement' in audit sampling?
- The amount of misstatement the auditor expects to find in the population
- The maximum monetary misstatement in an account that would still allow an unmodified opinion (Correct answer)
- The threshold above which misstatements are reported to management
- The variance allowed between book value and confirmed balances
Correct answer: The maximum monetary misstatement in an account that would still allow an unmodified opinion
Tolerable misstatement is the maximum error the auditor is willing to accept in an account balance while still concluding the balance is fairly stated.
Question 4: An auditor is required to perform 'dual-purpose tests' when:
- Auditing both domestic and international operations
- A single test simultaneously provides evidence for both control testing and substantive purposes (Correct answer)
- Testing both assets and liabilities in the same procedure
- Auditing for two different clients with overlapping operations
Correct answer: A single test simultaneously provides evidence for both control testing and substantive purposes
Dual-purpose tests are procedures designed to test the operating effectiveness of a control and provide substantive evidence about a financial statement assertion at the same time.
Question 5: Which of the following situations would most likely require the auditor to add an emphasis-of-matter paragraph to an otherwise unmodified report?
- Minor reclassification of prior period balances
- Adoption of a new accounting principle that has a material effect on the financial statements (Correct answer)
- Discovery of an immaterial error corrected in the current period
- Use of an accounting estimate that the auditor agrees with
Correct answer: Adoption of a new accounting principle that has a material effect on the financial statements
A material change in accounting principle requires an emphasis-of-matter paragraph to draw users' attention to the change, even when the auditor concurs.
Question 6: Under the Sarbanes-Oxley Act, who is responsible for appointing, compensating, and overseeing the external auditor of a public company?
- The CEO and CFO jointly
- The full board of directors
- The audit committee (Correct answer)
- The SEC's Division of Corporation Finance
Correct answer: The audit committee
SOX Section 301 requires the audit committee — composed of independent directors — to be directly responsible for the appointment, compensation, and oversight of the external auditor.
Question 7: Which type of evidence is generally considered most reliable under auditing standards?
- Evidence obtained directly from the client's accounting records
- Evidence obtained from third parties externally and independently of the client (Correct answer)
- Evidence prepared internally by the client's staff
- Verbal explanations provided by management during inquiries
Correct answer: Evidence obtained from third parties externally and independently of the client
Evidence obtained from independent external sources is generally more reliable than evidence generated internally by the client.
CA Auditing Standards 5
Which standard requires the auditor to obtain written representations from management at the conclusion of the audit?