QFC Auditing Principles & Procedures 2 — Questions and Answers
Question 1: Which audit procedure is most effective for verifying the completeness assertion for accounts payable?
- Reviewing subsequent cash disbursements after the balance sheet date (Correct answer)
- Confirming balances directly with suppliers
- Recalculating accrued interest on outstanding invoices
- Inspecting vendor contracts for payment terms
Correct answer: Reviewing subsequent cash disbursements after the balance sheet date
Reviewing subsequent cash disbursements identifies payments made after year-end that relate to unrecorded liabilities, directly testing completeness of accounts payable.
Question 2: In a quantitative finance audit, what does 'model risk' primarily refer to?
- Risk that the pricing model produces inaccurate valuations due to faulty assumptions or implementation (Correct answer)
- Risk that market data feeds are delayed or corrupted
- Risk that auditors lack the quantitative expertise to review models
- Risk that regulatory changes will render existing models non-compliant
Correct answer: Risk that the pricing model produces inaccurate valuations due to faulty assumptions or implementation
Model risk is the risk of loss resulting from inaccurate model outputs due to incorrect assumptions, data inputs, or implementation errors.
Question 3: An auditor discovers that a financial institution uses a Black-Scholes model to price exotic options. The most appropriate audit response is to:
- Engage a valuation specialist to assess model suitability for exotic instruments (Correct answer)
- Accept the model if it is widely used in the industry
- Test only the input data without evaluating model appropriateness
- Require the institution to switch to a binomial model
Correct answer: Engage a valuation specialist to assess model suitability for exotic instruments
Black-Scholes may not be appropriate for exotic options; engaging a specialist ensures the model's suitability and assumptions are independently validated.
Question 4: Which of the following best describes the concept of 'dual purpose testing' in auditing?
- A single test that simultaneously provides evidence for both controls testing and substantive testing (Correct answer)
- Testing performed by both internal and external auditors on the same population
- Applying two different analytical procedures to the same account balance
- Conducting tests in two separate audit phases for comparative purposes
Correct answer: A single test that simultaneously provides evidence for both controls testing and substantive testing
Dual purpose testing allows auditors to evaluate control effectiveness and gather substantive evidence in one efficient procedure.
Question 5: When auditing a derivatives portfolio, which assertion is most directly tested by reviewing master netting agreements?
- Presentation and disclosure (Correct answer)
- Existence
- Completeness
- Valuation
Correct answer: Presentation and disclosure
Master netting agreements affect how derivative assets and liabilities are presented (gross vs. net) on the balance sheet, directly impacting presentation and disclosure.
Question 6: What is the primary purpose of performing a 'walk-through' in an internal controls audit?
- To confirm the auditor's understanding of the control flow by tracing a transaction from initiation to recording (Correct answer)
- To observe employees performing their daily duties without prior notice
- To physically inspect all assets recorded in the financial statements
- To recalculate all journal entries posted during the audit period
Correct answer: To confirm the auditor's understanding of the control flow by tracing a transaction from initiation to recording
A walk-through traces one or more transactions through the entire system to verify that the auditor's documented understanding of controls matches actual practice.
Question 7: Under ISA 620, when using the work of an auditor's expert, the auditor must:
- Evaluate the competence, capabilities, and objectivity of the expert and assess the adequacy of their work (Correct answer)
- Assume full responsibility for all conclusions reached by the expert
- Obtain written consent from the client before engaging any external expert
- Disclose the expert's identity and fee in the audit report
Correct answer: Evaluate the competence, capabilities, and objectivity of the expert and assess the adequacy of their work
ISA 620 requires auditors to assess whether the expert has the necessary competence, capability, and objectivity, and to evaluate whether their work is adequate for audit purposes.
QFC Auditing Principles & Procedures 2
Which audit procedure is most effective for verifying the completeness assertion for accounts payable?