CIA Auditing Principles & Procedures 2 — Questions and Answers
Question 1: Which type of audit evidence is generally considered the most reliable?
- Oral statements from management
- Externally generated documents obtained directly by the auditor (Correct answer)
- Internally prepared schedules provided by the client
- Prior-year audit working papers
Correct answer: Externally generated documents obtained directly by the auditor
Evidence obtained directly from external sources is most reliable because it is independent of client influence.
Question 2: What is the primary purpose of audit working papers?
- To satisfy regulatory filing requirements
- To support the audit opinion and document work performed (Correct answer)
- To provide management with a copy of audit findings
- To replace the need for client-prepared schedules
Correct answer: To support the audit opinion and document work performed
Working papers document the evidence gathered and procedures performed to support the auditor's conclusions.
Question 3: In insurance auditing, a 'walkthrough' procedure is used primarily to:
- Test a large sample of transactions for errors
- Verify that internal controls operate as described (Correct answer)
- Review the physical condition of insured property
- Confirm policyholder information with third parties
Correct answer: Verify that internal controls operate as described
A walkthrough traces one or a few transactions through the system to confirm controls function as described in documentation.
Question 4: When an auditor identifies a discrepancy in reserve calculations, the most appropriate first step is to:
- Issue an immediate adverse opinion
- Notify law enforcement authorities
- Obtain an explanation from management and gather corroborating evidence (Correct answer)
- Withdraw from the engagement
Correct answer: Obtain an explanation from management and gather corroborating evidence
Auditors must investigate discrepancies by seeking management explanations and additional evidence before drawing conclusions.
Question 5: Which audit procedure is best suited for verifying the existence of an insurance company's investment portfolio?
- Recalculation of premium income
- Confirmation with custodians or brokers holding the securities (Correct answer)
- Analytical procedures comparing prior-year balances
- Inquiry of the chief financial officer
Correct answer: Confirmation with custodians or brokers holding the securities
Direct confirmation with the custodian or broker independently verifies that the investments physically exist.
Question 6: The term 'audit trail' in insurance company auditing refers to:
- The route auditors physically travel during property inspections
- A documented sequence linking transactions to source records (Correct answer)
- The list of audit findings submitted to regulators
- A statistical sampling path through policyholder files
Correct answer: A documented sequence linking transactions to source records
An audit trail is a chronological record of source documents and system entries that allows transactions to be traced end-to-end.
Question 7: Analytical procedures in insurance auditing involve:
- Physically inspecting insured assets for damage
- Evaluating financial data by studying plausible relationships (Correct answer)
- Contacting policyholders to verify coverage details
- Recounting cash in the company's vault
Correct answer: Evaluating financial data by studying plausible relationships
Analytical procedures assess reasonableness by comparing financial data against expectations derived from trends, ratios, and industry benchmarks.
CIA Auditing Principles & Procedures 2
Which type of audit evidence is generally considered the most reliable?