IFA IFA Auditing & Assurance 2 — Questions and Answers
Question 1: Audit sampling is used because:
- It is required by US GAAP
- Testing every transaction is often impractical or cost-prohibitive (Correct answer)
- Auditors are only required to test 10% of transactions
- Management prefers limited testing
Correct answer: Testing every transaction is often impractical or cost-prohibitive
Audit sampling allows auditors to draw conclusions about a population by testing only a portion of items when 100% testing is impractical.
Question 2: What is a 'going concern' opinion?
- An opinion that the company is profitable
- A conclusion by auditors that the entity may not continue in operation for the foreseeable future (Correct answer)
- A statement that all debts are paid
- An assertion that the company will grow next year
Correct answer: A conclusion by auditors that the entity may not continue in operation for the foreseeable future
A going concern qualification is issued when auditors have substantial doubt about an entity's ability to continue operating for the next 12 months.
Question 3: Which document outlines the terms and objectives agreed between the auditor and client before the audit begins?
- Audit report
- Management letter
- Engagement letter (Correct answer)
- Board resolution
Correct answer: Engagement letter
An engagement letter sets out the terms of the audit engagement, including scope, responsibilities, fees, and reporting timelines, agreed before work commences.
Question 4: What is substantive testing in an audit?
- Testing internal controls only
- Procedures to detect material misstatements in account balances and transactions (Correct answer)
- Reviewing management's strategic plans
- Interviewing employees about company culture
Correct answer: Procedures to detect material misstatements in account balances and transactions
Substantive testing involves audit procedures designed to detect material misstatements at the assertion level in account balances, transactions, and disclosures.
Question 5: What does 'audit trail' refer to?
- The physical path auditors walk in the client's office
- A chronological record of transactions that can be traced from source to financial statements (Correct answer)
- The list of all audit clients a firm has
- The sequence of audit team meetings
Correct answer: A chronological record of transactions that can be traced from source to financial statements
An audit trail is a chronological record of all transaction steps, allowing tracing from source documents through to the final financial statements.
Question 6: Which IFA ethical principle requires auditors to avoid conflicts of interest and remain objective?
- Confidentiality
- Professional competence
- Independence and objectivity (Correct answer)
- Due care
Correct answer: Independence and objectivity
Auditors must maintain independence and objectivity, avoiding situations where personal interests or relationships could compromise their professional judgment.
IFA IFA Auditing & Assurance 2
Audit sampling is used because: