CCA CCA Audit & Assurance 2 — Questions and Answers
Question 1: What is the difference between a Type I and Type II subsequent event?
- Type I provides evidence of conditions existing at year-end and requires adjustment; Type II reveals conditions arising after year-end and requires disclosure only (Correct answer)
- Type I requires disclosure only; Type II requires adjustment to financial statements
- Type I occurs before the auditor's report; Type II occurs after the report is issued
- Type I is a material error; Type II is an immaterial error
Correct answer: Type I provides evidence of conditions existing at year-end and requires adjustment; Type II reveals conditions arising after year-end and requires disclosure only
Type I subsequent events reflect conditions existing at the balance sheet date and require adjustment to the financial statements; Type II events arise after year-end and require disclosure but not adjustment.
Question 2: What is the purpose of an engagement letter in an audit?
- To summarize audit findings for shareholders
- To formally define the scope, responsibilities, and terms of the audit engagement (Correct answer)
- To list all internal control deficiencies found
- To certify management's representations are accurate
Correct answer: To formally define the scope, responsibilities, and terms of the audit engagement
An engagement letter documents the agreed terms between auditor and client, including audit scope, management and auditor responsibilities, and the basis for fees.
Question 3: Which assertion addresses whether transactions are recorded in the correct accounting period?
- Completeness
- Valuation
- Cutoff (Correct answer)
- Rights and obligations
Correct answer: Cutoff
The cutoff assertion ensures that transactions and events are recorded in the proper accounting period, preventing premature or delayed revenue and expense recognition.
Question 4: What is a significant deficiency in internal controls?
- A deficiency severe enough to prevent detection of material misstatement by internal controls
- A less severe deficiency than a material weakness, yet important enough to warrant attention by those charged with governance (Correct answer)
- Any control deviation found during audit testing
- A deficiency in the client's IT systems only
Correct answer: A less severe deficiency than a material weakness, yet important enough to warrant attention by those charged with governance
A significant deficiency is less severe than a material weakness but still important enough to be communicated to those charged with governance (e.g., the audit committee).
Question 5: What is the auditor's responsibility regarding fraud under US GAAS?
- To provide absolute assurance that all fraud is detected
- To plan and perform the audit to obtain reasonable assurance about whether financial statements are materially misstated due to fraud or error (Correct answer)
- To investigate and report all fraud to law enforcement
- To prevent fraud by implementing stronger internal controls
Correct answer: To plan and perform the audit to obtain reasonable assurance about whether financial statements are materially misstated due to fraud or error
Under AU-C 240, auditors must maintain professional skepticism and design procedures to detect material misstatements from fraud, but are not guarantors of fraud detection.
Question 6: What is the purpose of analytical procedures in an audit?
- To physically verify the existence of inventory
- To identify unusual fluctuations or relationships that may indicate misstatements requiring further investigation (Correct answer)
- To confirm accounts receivable balances directly with customers
- To reperform management's calculations in the financial statements
Correct answer: To identify unusual fluctuations or relationships that may indicate misstatements requiring further investigation
Analytical procedures evaluate financial data by comparing relationships and trends, highlighting anomalies that may signal errors, fraud, or areas requiring more audit attention.
CCA CCA Audit & Assurance 2
What is the difference between a Type I and Type II subsequent event?