CAT Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which sampling method gives every item in the population an equal chance of being selected and is considered the most theoretically sound?
- Systematic sampling
- Haphazard sampling
- Cluster sampling
- Simple random sampling (Correct answer)
Correct answer: Simple random sampling
Simple random sampling ensures each item has an equal probability of selection, making it the most statistically rigorous approach and free from auditor bias.
Question 2: The 'lower assessed level of control risk' approach means the auditor:
- Performs fewer substantive procedures because controls are deemed effective (Correct answer)
- Performs more substantive procedures to compensate for weak controls
- Skips tests of controls entirely
- Issues a qualified opinion automatically
Correct answer: Performs fewer substantive procedures because controls are deemed effective
When control risk is assessed lower (i.e., controls are considered effective), the auditor can reduce the extent of substantive procedures, relying more heavily on the controls.
Question 3: Which assertion is directly addressed when an auditor verifies that all recorded sales transactions actually occurred?
- Completeness
- Occurrence (Correct answer)
- Accuracy
- Classification
Correct answer: Occurrence
The occurrence assertion relates to whether recorded transactions and events actually took place and pertain to the entity.
Question 4: An auditor uses analytical procedures during the planning phase primarily to:
- Substantiate specific account balances
- Identify unusual fluctuations that may indicate risk areas (Correct answer)
- Provide evidence for the audit opinion
- Test the accuracy of management's estimates
Correct answer: Identify unusual fluctuations that may indicate risk areas
During planning, analytical procedures help the auditor understand the entity and identify areas of potential misstatement risk that should receive more audit attention.
Question 5: What is the primary purpose of an engagement letter in an audit?
- To confirm the auditor's independence
- To document the terms and responsibilities of the audit engagement (Correct answer)
- To communicate internal control deficiencies to management
- To summarize the audit findings for shareholders
Correct answer: To document the terms and responsibilities of the audit engagement
The engagement letter establishes the agreed terms between the auditor and client, including the scope, objectives, responsibilities, and fees, reducing the risk of misunderstandings.
Question 6: Which of the following is an example of a detective control?
- Requiring dual authorization for large purchases
- Conducting monthly bank reconciliations (Correct answer)
- Locking the petty cash box
- Encrypting data during transmission
Correct answer: Conducting monthly bank reconciliations
Bank reconciliations are detective controls because they identify errors or irregularities that have already occurred rather than preventing them.
Question 7: When evaluating going concern, which condition would most likely trigger the auditor to include a going concern paragraph?
- A minor decline in gross profit margin
- Recurring operating losses and inability to meet debt obligations (Correct answer)
- A change in accounting estimate
- A moderate increase in accounts receivable turnover
Correct answer: Recurring operating losses and inability to meet debt obligations
Recurring losses combined with inability to service debt are classic indicators of substantial doubt about an entity's ability to continue as a going concern.
CAT Auditing Principles & Procedures 3
Which sampling method gives every item in the population an equal chance of being selected and is considered the most theoretically sound?