FAC Auditing Principles & Procedures 3 — Questions and Answers
Question 1: What is the concept of 'audit materiality' primarily used to determine?
- The number of audit staff needed
- The threshold above which misstatements could influence user decisions (Correct answer)
- The length of the audit report
- The auditor's fee structure
Correct answer: The threshold above which misstatements could influence user decisions
Materiality is the threshold above which uncorrected misstatements could reasonably influence the economic decisions of financial statement users.
Question 2: Which element is NOT part of the fraud triangle?
- Opportunity
- Rationalization
- Pressure
- Capability (Correct answer)
Correct answer: Capability
The classic fraud triangle consists of pressure, opportunity, and rationalization; capability is part of the extended fraud diamond, not the triangle.
Question 3: What is 'lapping' as a type of fraud in accounting?
- Overstating inventory balances across periods
- Concealing a cash shortage by delaying recording of receipts (Correct answer)
- Manipulating depreciation schedules
- Inflating revenue through fictitious sales
Correct answer: Concealing a cash shortage by delaying recording of receipts
Lapping is a scheme where stolen cash receipts are concealed by applying later receipts to the earlier account, creating a perpetual lag.
Question 4: Which audit procedure is MOST effective in detecting unrecorded liabilities?
- Reviewing the accounts payable subledger
- Examining cash disbursements after period end (Correct answer)
- Confirming accounts receivable balances
- Recalculating depreciation expense
Correct answer: Examining cash disbursements after period end
Examining subsequent cash disbursements after period-end helps identify payments for goods and services not recorded as liabilities at year-end.
Question 5: What is the purpose of a 'cutoff test' in an audit?
- To verify the physical existence of assets
- To confirm that transactions are recorded in the correct period (Correct answer)
- To assess the completeness of the general ledger
- To evaluate the adequacy of the allowance for doubtful accounts
Correct answer: To confirm that transactions are recorded in the correct period
Cutoff tests verify that transactions occurring near the period-end are recorded in the proper accounting period.
Question 6: Which AICPA standard requires auditors to communicate significant deficiencies to those charged with governance?
- AU-C 315
- AU-C 265 (Correct answer)
- AU-C 330
- AU-C 240
Correct answer: AU-C 265
AU-C 265 requires auditors to communicate significant deficiencies and material weaknesses in internal control to those charged with governance in writing.
Question 7: What distinguishes a 'material weakness' from a 'significant deficiency' in internal control?
- Material weaknesses involve only financial controls; significant deficiencies involve operational controls
- A material weakness creates a reasonable possibility of a material misstatement not being prevented or detected (Correct answer)
- Significant deficiencies must be reported to the SEC; material weaknesses need not be
- Material weaknesses apply only to public companies
Correct answer: A material weakness creates a reasonable possibility of a material misstatement not being prevented or detected
A material weakness is a deficiency where there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.
FAC Auditing Principles & Procedures 3
What is the concept of 'audit materiality' primarily used to determine?