CPA CFE Audit and Assurance 2 — Questions and Answers
Question 1: What is the difference between substantive procedures and tests of controls in an audit?
- There is no difference; they are the same type of procedure
- Substantive procedures test the amounts and disclosures in financial statements; tests of controls evaluate the operating effectiveness of internal controls (Correct answer)
- Tests of controls are performed only at year-end; substantive procedures are performed at interim
- Substantive procedures are optional; tests of controls are mandatory
Correct answer: Substantive procedures test the amounts and disclosures in financial statements; tests of controls evaluate the operating effectiveness of internal controls
Tests of controls evaluate whether internal controls are operating effectively to prevent or detect misstatements. Substantive procedures (analytical procedures and tests of details) directly test financial statement amounts and disclosures for misstatements.
Question 2: Under CAS 240, what is the auditor's responsibility regarding fraud in an audit of financial statements?
- To detect all fraud regardless of materiality
- To obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error, maintaining professional skepticism throughout (Correct answer)
- To prevent all future fraud from occurring
- To report all suspected fraud directly to law enforcement
Correct answer: To obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error, maintaining professional skepticism throughout
CAS 240 requires auditors to maintain professional skepticism and obtain reasonable assurance about material misstatements due to fraud. The auditor should consider fraud risk factors, respond to assessed risks of material misstatement due to fraud, and communicate findings appropriately.
Question 3: What is the purpose of an audit engagement letter?
- To serve as the final audit report
- To document the agreed terms of the engagement, including the objective, scope, responsibilities, and limitations of the audit (Correct answer)
- To provide the auditor's preliminary opinion on the financial statements
- To list all audit procedures the auditor will perform
Correct answer: To document the agreed terms of the engagement, including the objective, scope, responsibilities, and limitations of the audit
The engagement letter establishes the terms of the audit engagement before work begins. It defines the audit objective, scope, management and auditor responsibilities, the applicable financial reporting framework, and the expected form of the report.
Question 4: Under CAS, what is the meaning of 'sufficient appropriate audit evidence'?
- All evidence available to the auditor
- Evidence that is adequate in quantity (sufficient) and quality (appropriate: relevant and reliable) to support the auditor's conclusions (Correct answer)
- Only documentary evidence obtained from external parties
- Evidence based solely on management representations
Correct answer: Evidence that is adequate in quantity (sufficient) and quality (appropriate: relevant and reliable) to support the auditor's conclusions
Sufficient relates to the quantity of evidence (affected by risk of misstatement and quality of evidence). Appropriate relates to the quality — relevance (pertains to the assertion being tested) and reliability (nature and source of evidence and circumstances of obtaining it).
Question 5: Which of the following is an example of an analytical procedure used as a substantive test?
- Confirming accounts receivable balances with customers
- Comparing the current year's gross margin percentage to prior years and industry data to identify unusual fluctuations (Correct answer)
- Physically counting inventory on hand
- Inspecting board minutes for approval of major transactions
Correct answer: Comparing the current year's gross margin percentage to prior years and industry data to identify unusual fluctuations
Substantive analytical procedures involve evaluating financial information through analysis of plausible relationships among financial and non-financial data. Comparing ratios, trends, and relationships to expectations helps identify potential misstatements.
Question 6: What is the auditor's responsibility when a subsequent event occurs between the date of the financial statements and the date of the auditor's report?
- The auditor has no responsibility for events after the financial statement date
- The auditor must perform procedures to identify events requiring adjustment or disclosure in the financial statements (Correct answer)
- The auditor should automatically reissue the financial statements
- The auditor should only consider events occurring after the report date
Correct answer: The auditor must perform procedures to identify events requiring adjustment or disclosure in the financial statements
Under CAS 560, the auditor must perform procedures covering the period between the financial statement date and the auditor's report date to identify subsequent events that may require adjustment or disclosure. The nature of response depends on whether the event is adjusting or non-adjusting.
CPA CFE Audit and Assurance 2
What is the difference between substantive procedures and tests of controls in an audit?