FAC Auditing Principles & Procedures 2 — Questions and Answers
Question 1: Which type of audit opinion is issued when financial statements contain a material misstatement that is not pervasive?
- Adverse opinion
- Qualified opinion (Correct answer)
- Disclaimer of opinion
- Unmodified opinion
Correct answer: Qualified opinion
A qualified opinion is issued when a misstatement is material but not pervasive, using the phrase 'except for' in the report.
Question 2: What is the primary purpose of an audit engagement letter?
- To confirm the auditor's fee arrangement only
- To establish the terms and objectives of the engagement (Correct answer)
- To document internal control findings
- To summarize the final audit report
Correct answer: To establish the terms and objectives of the engagement
An engagement letter establishes the terms, objectives, scope, and responsibilities of the audit engagement before work begins.
Question 3: Which sampling method gives every item in the population an equal probability of selection?
- Systematic sampling
- Haphazard sampling
- Simple random sampling (Correct answer)
- Stratified sampling
Correct answer: Simple random sampling
Simple random sampling ensures each item has an equal and independent chance of being selected from the population.
Question 4: When an auditor lacks independence, what audit opinion should be issued?
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion (Correct answer)
- Unmodified opinion with an emphasis paragraph
Correct answer: Disclaimer of opinion
Lack of independence requires a disclaimer of opinion because the auditor cannot express any assurance on the financial statements.
Question 5: Which procedure provides the MOST reliable audit evidence?
- Inquiry of management
- Analytical procedures
- Physical inspection by the auditor (Correct answer)
- Review of prior-year workpapers
Correct answer: Physical inspection by the auditor
Physical inspection performed directly by the auditor is highly reliable because it is first-hand evidence obtained independently.
Question 6: What does 'inherent risk' refer to in auditing?
- Risk that internal controls fail to prevent misstatements
- Susceptibility of an assertion to misstatement absent controls (Correct answer)
- Risk the auditor fails to detect a misstatement
- Risk arising from the audit firm's procedures
Correct answer: Susceptibility of an assertion to misstatement absent controls
Inherent risk is the susceptibility of a financial statement assertion to material misstatement before considering any related controls.
Question 7: Which party is responsible for designing and maintaining internal controls over financial reporting?
- External auditors
- Audit committee
- Management (Correct answer)
- Board of directors only
Correct answer: Management
Management is responsible for designing, implementing, and maintaining effective internal controls over financial reporting.
FAC Auditing Principles & Procedures 2
Which type of audit opinion is issued when financial statements contain a material misstatement that is not pervasive?