CPA CFE Audit and Assurance 1 — Questions and Answers
Question 1: Under Canadian Auditing Standards (CAS), what is the primary objective of a financial statement audit?
- To detect all instances of fraud within the organization
- To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to express an opinion thereon (Correct answer)
- To guarantee the accuracy of every transaction recorded
- To evaluate management's effectiveness in running the business
Correct answer: To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to express an opinion thereon
CAS 200 states that the objective of an audit is to obtain reasonable assurance (a high but not absolute level) about whether the financial statements are free from material misstatement, whether due to fraud or error, and to report on the financial statements in accordance with the auditor's findings.
Question 2: What is audit risk, and what are its three components?
- The risk of business failure; market risk, credit risk, and operational risk
- The risk that the auditor may unknowingly fail to modify the opinion on materially misstated financial statements; inherent risk, control risk, and detection risk (Correct answer)
- The risk of losing the audit client; pricing risk, timing risk, and staffing risk
- The risk of regulatory sanctions; compliance risk, legal risk, and reputational risk
Correct answer: The risk that the auditor may unknowingly fail to modify the opinion on materially misstated financial statements; inherent risk, control risk, and detection risk
Audit risk is the risk that the auditor expresses an inappropriate opinion on materially misstated financial statements. It comprises: inherent risk (susceptibility to misstatement), control risk (failure of internal controls to prevent/detect), and detection risk (auditor's procedures fail to detect).
Question 3: Under CAS, when is the auditor required to communicate key audit matters (KAMs) in the audit report?
- For all audit engagements regardless of entity type
- For audits of listed entities, and when law or regulation requires it or the auditor decides to communicate them (Correct answer)
- Only when the auditor issues a qualified opinion
- Only when fraud is detected during the audit
Correct answer: For audits of listed entities, and when law or regulation requires it or the auditor decides to communicate them
CAS 701 requires communication of key audit matters for audits of listed entities. KAMs are matters that, in the auditor's professional judgment, were of most significance in the audit. Non-listed entities may also include KAMs when required by law or chosen by the auditor.
Question 4: What is the purpose of obtaining a management representation letter during an audit?
- To replace other audit evidence and reduce the work performed
- To obtain written confirmation from management regarding their responsibilities and specific assertions relevant to the financial statements (Correct answer)
- To serve as the engagement letter for the audit
- To document the fee arrangement between the auditor and client
Correct answer: To obtain written confirmation from management regarding their responsibilities and specific assertions relevant to the financial statements
Management representations provide written acknowledgment of management's responsibilities and confirm specific assertions (completeness, existence of contingencies, related party transactions, etc.). They complement other audit evidence but do not replace it.
Question 5: Under CAS, what does the concept of materiality in planning an audit relate to?
- The total assets of the company being audited
- The magnitude of misstatements that, individually or in aggregate, could reasonably be expected to influence the economic decisions of users of the financial statements (Correct answer)
- The number of transactions processed during the year
- The auditor's fee for the engagement
Correct answer: The magnitude of misstatements that, individually or in aggregate, could reasonably be expected to influence the economic decisions of users of the financial statements
Materiality is defined in terms of the financial statement users' decision-making. The auditor sets materiality at the planning stage and may revise it during the audit. Performance materiality is set lower than overall materiality to reduce aggregation risk.
Question 6: What type of audit opinion is issued when the auditor concludes that misstatements are material but not pervasive to the financial statements?
- Unmodified (clean) opinion
- Qualified opinion (Correct answer)
- Adverse opinion
- Disclaimer of opinion
Correct answer: Qualified opinion
A qualified opinion is issued when the auditor concludes that misstatements are material but not pervasive to the financial statements, or when the auditor is unable to obtain sufficient appropriate audit evidence but the possible effects are not pervasive. An adverse opinion is for material and pervasive misstatements.
CPA CFE Audit and Assurance 1
Under Canadian Auditing Standards (CAS), what is the primary objective of a financial statement audit?