QFC Auditing Principles & Procedures 2

Question 1

Which audit procedure is most effective for verifying the completeness assertion for accounts payable?

Accepted Answer

Reviewing subsequent cash disbursements after the balance sheet date

Answer

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?

Accepted Answer

Risk that the pricing model produces inaccurate valuations due to faulty assumptions or implementation

Answer

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:

Accepted Answer

Engage a valuation specialist to assess model suitability for exotic instruments

Answer

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?

Accepted Answer

A single test that simultaneously provides evidence for both controls testing and substantive testing

Answer

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?

Accepted Answer

Presentation and disclosure

Answer

Master netting agreements affect how derivative assets and liabilities are presented (gross vs. net) on the balance sheet, directly impacting presentation and disclosure.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Auditing Principles & Procedures 2