QFC Auditing Principles & Procedures 5

Question 1

Which of the following would constitute a 'material weakness' in internal control over financial reporting under PCAOB standards?

Accepted Answer

A deficiency that results in a reasonable possibility of a material misstatement not being prevented or detected on a timely basis

Answer

A material weakness requires both a reasonable possibility that a misstatement could occur and that it would be material to the financial statements.

Question 2

In auditing hedge accounting designations under ASC 815, the auditor's primary focus should be:

Accepted Answer

Verifying that formal hedge documentation was prepared at inception and that effectiveness testing supports the designation

Answer

ASC 815 requires contemporaneous hedge documentation and ongoing effectiveness testing as prerequisites for hedge accounting treatment, making these the core audit focus.

Question 3

What does 'audit risk' equal under the Audit Risk Model?

Accepted Answer

Inherent risk multiplied by control risk multiplied by detection risk

Answer

The Audit Risk Model (AR = IR × CR × DR) expresses audit risk as the product of the three components, showing how each interacts to produce the overall risk of an undetected material misstatement.

Question 4

When an auditor concludes that a significant deficiency exists in internal controls, the required communication is to:

Accepted Answer

Management and the audit committee in writing

Answer

Significant deficiencies must be communicated in writing to both management and those charged with governance (the audit committee) before the audit report is issued.

Question 5

A quantitative analyst uses a Monte Carlo simulation to value a complex structured product. The most important audit procedure for evaluating this valuation is:

Accepted Answer

Assessing the reasonableness of the key assumptions, distribution choices, and the number of simulation paths used

Answer

The reliability of a Monte Carlo simulation depends critically on its assumptions and methodology; auditors must challenge whether these are reasonable and supported by market evidence.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Auditing Principles & Procedures 5