CPA CFE Audit and Assurance 4 — Questions and Answers
Question 1: Under CAS 550, what are the auditor's responsibilities regarding related party transactions?
- The auditor has no specific responsibilities for related parties
- To identify related party relationships and transactions, evaluate whether they have been properly accounted for and disclosed, and assess the risk of material misstatement (Correct answer)
- To approve all related party transactions
- To negotiate the terms of related party agreements
Correct answer: To identify related party relationships and transactions, evaluate whether they have been properly accounted for and disclosed, and assess the risk of material misstatement
CAS 550 requires auditors to perform procedures to identify related parties and related party transactions, assess the risks of material misstatement associated with them, and evaluate whether they have been properly accounted for and adequately disclosed in accordance with the applicable framework.
Question 2: What is the purpose of performing audit procedures on accounting estimates?
- To replace management's estimates with the auditor's own calculations
- To evaluate whether accounting estimates are reasonable and properly disclosed, as they are inherently subject to estimation uncertainty and management bias (Correct answer)
- To ensure all estimates are eliminated from the financial statements
- To verify that estimates match the prior year's amounts exactly
Correct answer: To evaluate whether accounting estimates are reasonable and properly disclosed, as they are inherently subject to estimation uncertainty and management bias
CAS 540 requires auditors to evaluate accounting estimates because they involve significant judgment and are susceptible to management bias. The auditor assesses reasonableness, evaluates the assumptions and methods used, and considers whether disclosures about estimation uncertainty are adequate.
Question 3: What is the auditor's responsibility when using the work of an expert?
- The auditor can rely entirely on the expert without further evaluation
- The auditor must evaluate the competence, capabilities, and objectivity of the expert, and assess whether the expert's work is adequate for audit purposes (Correct answer)
- The expert's opinion automatically becomes the auditor's opinion
- The auditor must independently replicate all of the expert's work
Correct answer: The auditor must evaluate the competence, capabilities, and objectivity of the expert, and assess whether the expert's work is adequate for audit purposes
Under CAS 620, when using an auditor's expert, the auditor must evaluate the expert's competence, capabilities, and objectivity; obtain an understanding of the expert's field; agree on terms; and evaluate whether the expert's work is adequate. The auditor remains responsible for the opinion.
Question 4: In the context of internal control, what is the concept of segregation of duties?
- Having one person perform all steps of a transaction for efficiency
- Dividing responsibilities among different individuals so that no single person controls all aspects of a transaction, reducing the risk of errors or fraud (Correct answer)
- Outsourcing all accounting functions to a third party
- Rotating employees between departments every month
Correct answer: Dividing responsibilities among different individuals so that no single person controls all aspects of a transaction, reducing the risk of errors or fraud
Segregation of duties is a key internal control principle that separates authorization, custody, and recording functions among different individuals. This creates checks and balances, making it more difficult for errors or fraud to occur without detection.
Question 5: Under CAS 330, what is the auditor's response to assessed risks of material misstatement at the financial statement level?
- Performing only substantive procedures on material account balances
- Designing and implementing overall responses such as assigning more experienced staff, increasing supervision, incorporating additional unpredictability, and making general changes to the nature, timing, or extent of procedures (Correct answer)
- Issuing a disclaimer of opinion immediately
- Reducing the scope of the audit to minimize costs
Correct answer: Designing and implementing overall responses such as assigning more experienced staff, increasing supervision, incorporating additional unpredictability, and making general changes to the nature, timing, or extent of procedures
Financial statement level risks (such as management override, pervasive control weaknesses) require overall responses that affect the audit as a whole. These include emphasis on professional skepticism, assigning experienced staff, increased supervision, and incorporating unpredictability.
Question 6: What is the difference between a review engagement and an audit engagement?
- A review provides the same level of assurance as an audit
- A review provides limited (moderate) assurance through inquiry and analytical procedures, while an audit provides reasonable (high) assurance through extensive testing (Correct answer)
- A review requires more work than an audit
- A review can only be performed for private companies
Correct answer: A review provides limited (moderate) assurance through inquiry and analytical procedures, while an audit provides reasonable (high) assurance through extensive testing
A review engagement (under CSRE 2400) provides limited assurance that the financial statements are not materially misstated, primarily through inquiry and analytical procedures. An audit provides reasonable assurance through a wider range of procedures including tests of controls and substantive testing.
CPA CFE Audit and Assurance 4
Under CAS 550, what are the auditor's responsibilities regarding related party transactions?