CBS Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which sampling method gives every item in the population an equal chance of selection?
- Systematic sampling
- Judgmental sampling
- Random sampling (Correct answer)
- Stratified sampling
Correct answer: Random sampling
Random (simple random) sampling ensures every item has an equal probability of being selected, reducing selection bias.
Question 2: An auditor discovers that a budget officer approved their own reimbursement requests without secondary review. This is an example of a failure in:
- Segregation of duties (Correct answer)
- Audit trail documentation
- Budget variance thresholds
- Encumbrance accounting
Correct answer: Segregation of duties
Segregation of duties requires that no single person control all phases of a transaction; self-approval violates this key internal control.
Question 3: In governmental auditing, 'materiality' for compliance purposes is generally set at a level that is:
- Higher than financial statement materiality
- The same as financial statement materiality
- Lower than financial statement materiality (Correct answer)
- Not applicable to compliance audits
Correct answer: Lower than financial statement materiality
Compliance materiality is typically set lower than financial statement materiality because even small noncompliance can be significant in a governmental context.
Question 4: Which document formally communicates the auditor's findings, conclusions, and recommendations at the end of a budget audit?
- Engagement letter
- Management representation letter
- Audit report (Correct answer)
- Risk assessment memo
Correct answer: Audit report
The audit report is the formal output that communicates findings, conclusions, and any recommendations to stakeholders.
Question 5: Analytical procedures used during the planning phase of a budget audit are intended to:
- Replace substantive testing entirely
- Identify areas of potential risk or unusual fluctuations (Correct answer)
- Confirm all account balances independently
- Determine the auditor's fee structure
Correct answer: Identify areas of potential risk or unusual fluctuations
During planning, analytical procedures help identify unusual relationships or fluctuations that may indicate higher-risk areas requiring more audit attention.
Question 6: A 'finding' in a government budget audit report must typically include all of the following EXCEPT:
- Criteria (the standard)
- Condition (what was found)
- Auditor's personal opinion on management competence (Correct answer)
- Recommendation for corrective action
Correct answer: Auditor's personal opinion on management competence
Audit findings include criteria, condition, cause, effect, and recommendation—but must not include personal opinions about management's competence.
Question 7: The primary purpose of an engagement letter in a budget audit is to:
- Confirm the auditor's independence
- Establish the terms, scope, and responsibilities of the audit (Correct answer)
- Document the auditor's risk assessment
- Provide preliminary audit findings to management
Correct answer: Establish the terms, scope, and responsibilities of the audit
An engagement letter defines the scope, objectives, responsibilities of both parties, and fees, forming a contract for the audit engagement.
CBS Auditing Principles & Procedures 3
Which sampling method gives every item in the population an equal chance of selection?