Auditing Principles & Procedures Flashcards
7 cards from real CAT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Auditing Principles & Procedures flashcards as text
Which of the following best defines 'audit risk'?
Answer: The risk that the auditor expresses an inappropriate opinion when financial statements are materially misstated
Audit risk is the risk that the auditor gives a clean opinion on financial statements that are in fact materially misstated.
In the audit risk model (AR = IR × CR × DR), if inherent risk and control risk are both high, what must the auditor do to achieve an acceptable level of audit risk?
Answer: Decrease detection risk by performing more extensive substantive procedures
Detection risk must be set lower (meaning the auditor must gather more persuasive evidence) to offset the high inherent and control risks and keep overall audit risk at an acceptable level.
Which of the following is an example of an external confirmation that provides strong audit evidence?
Answer: A direct written response from a customer confirming their account balance
External confirmations obtained directly from third parties are considered highly reliable evidence because they are independent of the client.
The term 'substantive procedures' refers to audit procedures designed to:
Answer: Detect material misstatements in account balances and disclosures
Substantive procedures provide direct evidence about whether account balances, transactions, and disclosures are free from material misstatement.
Which of the following best describes 'tolerable misstatement' in audit sampling?
Answer: The maximum dollar error the auditor will accept in a population before concluding it is materially misstated
Tolerable misstatement is the application of performance materiality to a specific sampling procedure—it is the maximum error in a population the auditor can accept and still conclude the balance is not materially misstated.
When an auditor performs a test of controls and finds the control is not operating effectively, what is the most likely consequence?
Answer: The auditor increases the extent of substantive procedures in the affected area
If controls are ineffective, the auditor cannot rely on them and must compensate by performing more extensive or persuasive substantive procedures.
Which of the following is NOT a component of COSO's Internal Control — Integrated Framework?
Answer: Audit Opinion Formation
The five COSO components are Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring Activities; forming an audit opinion is not a COSO component.