QFC Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which sampling method is most appropriate when an auditor wants to ensure that all items in a population have an equal probability of selection?
- Simple random sampling (Correct answer)
- Systematic sampling with a random start
- Stratified sampling
- Haphazard sampling
Correct answer: Simple random sampling
Simple random sampling gives every item in the population an equal and independent chance of being selected, satisfying the equal probability requirement.
Question 2: In the context of auditing fair value measurements, Level 3 inputs under ASC 820 are best characterized as:
- Unobservable inputs based on the entity's own assumptions about market participant assumptions (Correct answer)
- Quoted prices in active markets for identical assets or liabilities
- Observable market data other than Level 1 quoted prices
- Regulatory-approved benchmark rates published by central banks
Correct answer: Unobservable inputs based on the entity's own assumptions about market participant assumptions
Level 3 inputs are unobservable and reflect the reporting entity's own assumptions, requiring the most auditor scrutiny due to high subjectivity.
Question 3: An auditor's primary concern when evaluating the segregation of duties in a trading operation is:
- Ensuring that trade execution, confirmation, and settlement functions are performed by different individuals (Correct answer)
- Verifying that all traders hold appropriate professional certifications
- Confirming that risk limits are documented in writing
- Testing that all trades are executed at market prices
Correct answer: Ensuring that trade execution, confirmation, and settlement functions are performed by different individuals
Proper segregation prevents any single individual from controlling a complete transaction cycle, reducing the risk of fraud or undetected error in trading operations.
Question 4: What is 'tolerable misstatement' in the context of audit sampling?
- The maximum monetary misstatement in an account balance that the auditor is willing to accept without qualifying the opinion (Correct answer)
- The percentage of errors found in a sample that triggers full population testing
- The amount by which actual misstatements may exceed performance materiality
- The auditor's estimate of actual misstatements in the population
Correct answer: The maximum monetary misstatement in an account balance that the auditor is willing to accept without qualifying the opinion
Tolerable misstatement is the application of performance materiality to a sampling procedure, representing the threshold below which the auditor accepts the account balance as fairly stated.
Question 5: Which of the following would most likely indicate a breakdown in a financial institution's credit risk controls during an audit?
- Loan approvals consistently exceeding established credit limits without documented exceptions (Correct answer)
- Minor differences between the loan subsidiary ledger and the general ledger
- Loans classified as performing with interest payments received within 30 days of due date
- Credit committee minutes reflecting detailed discussion of marginal loan applications
Correct answer: Loan approvals consistently exceeding established credit limits without documented exceptions
Systematic overrides of credit limits without proper documentation indicate that key preventive controls are ineffective, which is a significant red flag.
Question 6: In auditing a Value-at-Risk (VaR) model, which procedure provides the most direct evidence about model accuracy?
- Back-testing the VaR model by comparing predicted losses to actual trading losses over a historical period (Correct answer)
- Reviewing the qualifications of the quantitative analysts who built the model
- Inspecting regulatory approval documentation for the internal model
- Recalculating VaR using a different confidence interval
Correct answer: Back-testing the VaR model by comparing predicted losses to actual trading losses over a historical period
Back-testing directly compares model predictions to actual outcomes, providing objective evidence of whether the VaR model accurately estimates potential losses.
Question 7: The audit procedure of 'recalculation' provides evidence primarily related to which financial statement assertion?
- Accuracy (Correct answer)
- Existence
- Completeness
- Rights and obligations
Correct answer: Accuracy
Recalculation verifies the mathematical accuracy of recorded amounts, directly addressing the accuracy assertion for financial statement balances and transactions.
QFC Auditing Principles & Procedures 3
Which sampling method is most appropriate when an auditor wants to ensure that all items in a population have an equal probability of selection?