CPA Auditing & Assurance Services 3 — Questions and Answers
Question 1: Which procedure provides the highest level of assurance about the existence of accounts receivable?
- Reviewing the aged receivables listing
- Vouching sales invoices to shipping documents
- Sending positive confirmation requests to customers (Correct answer)
- Performing analytical procedures on revenue trends
Correct answer: Sending positive confirmation requests to customers
Positive confirmations require the recipient to respond whether or not they agree, providing direct external evidence about existence.
Question 2: What is the auditor's responsibility regarding fraud under AU-C 240?
- Guarantee detection of all fraud
- Obtain reasonable assurance that financial statements are free of material misstatement due to fraud or error (Correct answer)
- Investigate all fraud detected by internal audit
- Report all suspected fraud to law enforcement
Correct answer: Obtain reasonable assurance that financial statements are free of material misstatement due to fraud or error
AU-C 240 requires auditors to obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error, not to guarantee detection.
Question 3: Which element of the fraud triangle refers to the perpetrator's ability to rationalize the fraudulent act?
- Pressure
- Opportunity
- Rationalization (Correct answer)
- Capability
Correct answer: Rationalization
Rationalization is the third element of the fraud triangle, where the perpetrator justifies the fraudulent behavior to themselves.
Question 4: An auditor is evaluating going concern issues. Which condition would most likely raise substantial doubt about an entity's ability to continue as a going concern?
- A 10% decline in gross margin over two years
- Recurring operating losses and negative cash flows from operations (Correct answer)
- A change in the useful life estimate of fixed assets
- Adoption of a new accounting pronouncement
Correct answer: Recurring operating losses and negative cash flows from operations
Recurring operating losses combined with negative cash flows from operations are classic indicators that raise substantial doubt about going concern.
Question 5: What type of assurance engagement provides a conclusion in the form 'nothing has come to our attention' (negative assurance)?
- Audit engagement
- Review engagement (Correct answer)
- Agreed-upon procedures engagement
- Compilation engagement
Correct answer: Review engagement
A review engagement results in negative (limited) assurance, expressed as nothing coming to the accountant's attention indicating material modifications are needed.
Question 6: Which internal control activity involves assigning different employees to authorize transactions, record them, and maintain custody of assets?
- Physical controls
- Performance reviews
- Segregation of duties (Correct answer)
- Information processing controls
Correct answer: Segregation of duties
Segregation of duties separates the functions of authorization, recordkeeping, and asset custody to reduce the risk of undetected errors or fraud.
Question 7: Under the COSO framework, which component addresses the entity's values, ethical standards, and the tone set by management?
- Risk assessment
- Control activities
- Control environment (Correct answer)
- Monitoring activities
Correct answer: Control environment
The control environment is the foundation of internal control under COSO, encompassing the entity's ethical values and management's tone at the top.
CPA Auditing & Assurance Services 3
Which procedure provides the highest level of assurance about the existence of accounts receivable?