Audit and Assurance Flashcards

Under Canadian Auditing Standards (CAS), what is the primary objective of a financial statement audit?

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.

What is audit risk, and what are its three components?

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).

Under CAS, when is the auditor required to communicate key audit matters (KAMs) in the audit report?

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.

What is the purpose of obtaining a management representation letter during an audit?

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.

Under CAS, what does the concept of materiality in planning an audit relate to?

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.

What type of audit opinion is issued when the auditor concludes that misstatements are material but not pervasive to the financial statements?

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.