Audit and Assurance Flashcards

What is the difference between substantive procedures and tests of controls in an audit?

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.

Under CAS 240, what is the auditor's responsibility regarding fraud in an audit of financial statements?

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.

What is the purpose of an audit engagement letter?

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.

Under CAS, what is the meaning of 'sufficient appropriate audit evidence'?

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).

Which of the following is an example of an analytical procedure used as a substantive test?

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.

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?

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.