CPA CFE Audit and Assurance 3 — Questions and Answers
Question 1: Under the independence requirements of Canadian auditing standards and the CPA Code of Professional Conduct, which of the following would impair auditor independence?
- Providing tax compliance services to the audit client with appropriate safeguards
- An audit partner holding direct financial interest in the audit client (Correct answer)
- Performing the audit for the same client for two consecutive years
- Having a relative who works in a non-financial role at the audit client
Correct answer: An audit partner holding direct financial interest in the audit client
Direct financial interests (owning shares) in an audit client by the audit partner or members of the engagement team create a self-interest threat that cannot be reduced to an acceptable level. This is a clear prohibition under independence rules.
Question 2: What is the purpose of audit documentation (working papers)?
- To provide a record for billing purposes only
- To provide a record of the audit procedures performed, evidence obtained, and conclusions reached as the basis for the auditor's report (Correct answer)
- To replace the need for an audit report
- To satisfy income tax filing requirements
Correct answer: To provide a record of the audit procedures performed, evidence obtained, and conclusions reached as the basis for the auditor's report
Audit documentation serves as the principal record of procedures performed, evidence obtained, and conclusions reached. It supports the auditor's report, assists in planning and supervising the engagement, enables quality control reviews, and provides a record if the work is challenged.
Question 3: When assessing the risk of material misstatement, the auditor should consider which of the following?
- Only quantitative factors related to account balances
- Both inherent risk and control risk at the assertion level for classes of transactions, account balances, and disclosures (Correct answer)
- Only the risk of fraud, not error
- The auditor's own detection risk exclusively
Correct answer: Both inherent risk and control risk at the assertion level for classes of transactions, account balances, and disclosures
CAS 315 requires the auditor to assess the risk of material misstatement at both the financial statement level and the assertion level. This combined assessment of inherent risk and control risk drives the nature, timing, and extent of further audit procedures.
Question 4: What is the auditor's responsibility regarding going concern under CAS 570?
- To predict whether the entity will fail in the future
- To evaluate management's assessment of the entity's ability to continue as a going concern and conclude whether a material uncertainty exists (Correct answer)
- To guarantee the entity will continue operating for at least 12 months
- To advise management on how to avoid bankruptcy
Correct answer: To evaluate management's assessment of the entity's ability to continue as a going concern and conclude whether a material uncertainty exists
CAS 570 requires the auditor to evaluate management's going concern assessment, determine if events or conditions cast significant doubt, evaluate the adequacy of disclosures, and consider the impact on the audit report. The auditor assesses but does not predict future outcomes.
Question 5: In sampling, what is the difference between statistical and non-statistical sampling?
- Statistical sampling is always more accurate
- Statistical sampling uses random selection and probability theory to evaluate results; non-statistical sampling relies on the auditor's professional judgment for selection and evaluation (Correct answer)
- Non-statistical sampling is prohibited under CAS
- Statistical sampling tests every item in the population
Correct answer: Statistical sampling uses random selection and probability theory to evaluate results; non-statistical sampling relies on the auditor's professional judgment for selection and evaluation
Statistical sampling uses random selection methods and probability theory to evaluate sample results, allowing the auditor to quantify sampling risk. Non-statistical sampling uses auditor judgment for sample selection and evaluation. Both are acceptable under CAS when properly applied.
Question 6: What is an emphasis of matter paragraph in an audit report?
- A paragraph that modifies the auditor's opinion
- A paragraph that draws attention to a matter appropriately presented in the financial statements that is of such importance that it is fundamental to users' understanding, without modifying the opinion (Correct answer)
- A paragraph that replaces the opinion paragraph
- A paragraph used only when the auditor disagrees with management
Correct answer: A paragraph that draws attention to a matter appropriately presented in the financial statements that is of such importance that it is fundamental to users' understanding, without modifying the opinion
An emphasis of matter paragraph (CAS 706) is included after the opinion paragraph to highlight a matter that, while appropriately presented and disclosed in the financial statements, is so important that users need it drawn to their attention. It does not modify the opinion.
CPA CFE Audit and Assurance 3
Under the independence requirements of Canadian auditing standards and the CPA Code of Professional Conduct, which of the following would impair auditor independence?