FAC Finance and Accounting Auditing & Risk Review 3 — Questions and Answers
Question 1: An auditor discovers that a client's CFO has override access to approve journal entries without secondary review. This represents a deficiency in which control principle?
- Control environment
- Segregation of duties (Correct answer)
- Physical access controls
- Monitoring activities
Correct answer: Segregation of duties
Segregation of duties requires that no single individual can initiate, approve, and record a transaction; CFO override without secondary review violates this principle.
Question 2: The concept of 'materiality' in auditing is BEST described as:
- The total dollar value of all transactions in a period
- The threshold above which misstatements could influence economic decisions of users (Correct answer)
- The maximum allowable error rate in an audit sample
- The minimum amount that must be disclosed in financial statement footnotes
Correct answer: The threshold above which misstatements could influence economic decisions of users
Materiality is the magnitude of an omission or misstatement that could influence the economic decisions of reasonable users relying on the financial statements.
Question 3: Which risk response strategy involves a company choosing NOT to engage in a particular business activity because the risk exceeds its tolerance?
- Risk reduction
- Risk sharing
- Risk acceptance
- Risk avoidance (Correct answer)
Correct answer: Risk avoidance
Risk avoidance means deciding not to pursue an activity or exiting a business line because the risk level exceeds what the organization is willing to accept.
Question 4: In forensic accounting investigations, which type of fraud scheme involves an employee creating fictitious vendors and submitting false invoices for payment?
- Skimming
- Billing fraud (Correct answer)
- Payroll fraud
- Expense reimbursement fraud
Correct answer: Billing fraud
Billing fraud (also called vendor fraud) involves creating fictitious vendors or inflating legitimate vendor invoices to misappropriate company funds.
Question 5: Which audit procedure provides the HIGHEST level of assurance about a client's accounts receivable balance?
- Reviewing the aged accounts receivable schedule
- Confirming balances directly with customers (Correct answer)
- Tracing subsequent cash receipts to the ledger
- Recalculating the allowance for doubtful accounts
Correct answer: Confirming balances directly with customers
External confirmation directly from customers provides strong third-party evidence about the existence and accuracy of accounts receivable balances.
Question 6: A company's risk appetite is BEST defined as:
- The maximum loss a company can absorb before becoming insolvent
- The amount of risk an organization is willing to accept in pursuit of its objectives (Correct answer)
- The residual risk remaining after controls are applied
- The probability that a risk event will occur in a given year
Correct answer: The amount of risk an organization is willing to accept in pursuit of its objectives
Risk appetite represents the broad level of risk an organization is willing to accept in pursuit of value, guiding decisions about risk responses and control investments.
Question 7: Under PCAOB standards, an integrated audit requires the external auditor to express an opinion on:
- Financial statements only
- Internal controls over financial reporting only
- Both financial statements and internal controls over financial reporting (Correct answer)
- Management's assessment of internal controls only
Correct answer: Both financial statements and internal controls over financial reporting
An integrated audit under PCAOB AS 2201 requires the auditor to issue opinions on both the financial statements and the effectiveness of ICFR.
FAC Finance and Accounting Auditing & Risk Review 3
An auditor discovers that a client's CFO has override access to approve journal entries without secondary review.
This represents a deficiency in which control principle?