CFC Audit Coordination & Preparation 5 — Questions and Answers
Question 1: Which audit standard governs the auditor's use of the work of an internal audit function for external audit purposes?
- AS 2201
- AS 2605 (Using the Work of Internal Auditors) (Correct answer)
- AU-C Section 600
- PCAOB Release 2003-06
Correct answer: AS 2605 (Using the Work of Internal Auditors)
AS 2605 provides guidance on how external auditors can use internal audit work, requiring assessment of internal audit competence and objectivity.
Question 2: A financial controller notices that the external auditor's sample size for accounts payable testing seems unusually small. The MOST appropriate response is to:
- Approve the sample size to expedite the audit
- Inquire whether the sample size is sufficient given the assessed risk and account balance (Correct answer)
- Increase the population size to make sampling more difficult
- Replace the auditor's sample with one selected by management
Correct answer: Inquire whether the sample size is sufficient given the assessed risk and account balance
Controllers can professionally question audit methodology when it appears inconsistent with the risk profile, ensuring audit quality without compromising auditor independence.
Question 3: What is the PURPOSE of an audit readiness assessment conducted several months before year-end?
- To replace the external audit entirely
- To identify and remediate control gaps before auditors arrive, reducing audit risk and time (Correct answer)
- To determine the external auditor's fee structure
- To prepare the management discussion and analysis section only
Correct answer: To identify and remediate control gaps before auditors arrive, reducing audit risk and time
An audit readiness assessment proactively identifies weaknesses in controls, documentation, and processes so they can be corrected before external audit fieldwork begins.
Question 4: When auditors perform a walkthrough of a business process, what are they PRIMARILY evaluating?
- Whether employees are following the documented process and controls as described (Correct answer)
- The profitability of the business process
- Whether the process can be outsourced
- The number of employees involved in each step
Correct answer: Whether employees are following the documented process and controls as described
Walkthroughs confirm that controls operate as described in process documentation by tracing one or more transactions through the entire process from initiation to recording.
Question 5: Which of the following BEST describes the concept of tolerable misstatement in the context of audit planning?
- The maximum misstatement that can exist without affecting the auditor's opinion (Correct answer)
- The auditor's threshold below which all errors are completely ignored
- An amount equal to overall materiality
- The total of all uncorrected misstatements in the financial statements
Correct answer: The maximum misstatement that can exist without affecting the auditor's opinion
Tolerable misstatement is an amount set below overall materiality that allows the auditor to conclude that misstatements in an account or class will not exceed overall materiality in aggregate.
Question 6: A controller is coordinating the audit of a subsidiary recently acquired mid-year. Which additional audit consideration is MOST critical?
- Whether the subsidiary uses the same email system
- Allocation of purchase price, opening balance sheet accuracy, and pre-acquisition period exclusion from consolidated results (Correct answer)
- The number of employees transferred from the subsidiary
- Whether the subsidiary's CEO has an audit background
Correct answer: Allocation of purchase price, opening balance sheet accuracy, and pre-acquisition period exclusion from consolidated results
Acquisitions require purchase price allocation, audit of the opening balance sheet, and ensuring pre-acquisition results are properly excluded from consolidated post-acquisition earnings.
Question 7: Under COSO's Internal Control framework, which component addresses the organization's commitment to integrity and ethical values as a foundation for all other controls?
- Risk Assessment
- Control Environment (Correct answer)
- Monitoring Activities
- Information and Communication
Correct answer: Control Environment
The Control Environment is the foundation of COSO's framework and encompasses the tone at the top, governance, ethics, and organizational structure that shape how controls operate.
CFC Audit Coordination & Preparation 5
Which audit standard governs the auditor's use of the work of an internal audit function for external audit purposes?