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SOCPA Auditing practice questions

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Question 1Auditing and Assurance

Which of the following best describes the primary purpose of an audit of financial statements?

  1. To prepare the financial statements on behalf of management
  2. To guarantee that the entity will remain a going concern for the next twelve months
  3. To provide an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Correct answer.
  4. To detect every instance of fraud and error in the entity's records

Explanation

An audit is an independent examination that culminates in an opinion on whether the financial statements are free from material misstatement under the applicable framework. It provides reasonable, not absolute, assurance and does not guarantee future viability or detect all fraud. Management, not the auditor, prepares the financial statements.

Question 2Auditing and Assurance

The concept of 'reasonable assurance' in an audit means that the auditor:

  1. Obtains absolute certainty that the financial statements contain no misstatements
  2. Provides only limited assurance, similar to a review engagement
  3. Obtains a high but not absolute level of assurance, because of inherent limitations such as sampling and estimation Correct answer.
  4. Guarantees that the entity complies with all applicable laws and regulations

Explanation

Reasonable assurance is a high level of assurance but is not absolute because of inherent limitations including the use of sampling, judgment, and the nature of evidence. It is higher than the limited assurance obtained in a review. It does not extend to absolute certainty or a guarantee of legal compliance.

Question 3Auditing and Assurance

According to auditing standards, who is responsible for the preparation of the financial statements?

  1. Management, with oversight from those charged with governance Correct answer.
  2. The internal audit function
  3. The engagement partner of the audit firm
  4. The external auditor who signs the opinion

Explanation

Management is responsible for preparing the financial statements, and those charged with governance oversee that process. The auditor's responsibility is to form and express an opinion on those statements. Internal audit and the engagement partner do not bear this responsibility.

Question 4Auditing and Assurance

Professional scepticism requires the auditor to:

  1. Reject all documentary evidence that is internally generated
  2. Assume that management is dishonest until proven otherwise
  3. Maintain a questioning mind and be alert to conditions indicating possible misstatement due to error or fraud Correct answer.
  4. Accept management's representations without further evidence

Explanation

Professional scepticism is an attitude of questioning and alertness to possible misstatement, including fraud. It does not require assuming dishonesty or rejecting evidence outright. Management representations are corroborated rather than accepted blindly.

Question 5Auditing and Assurance

Audit risk is generally modelled as the combination of which components?

  1. Sampling risk, non-sampling risk and business risk
  2. Inherent risk, business risk and engagement risk
  3. Control risk, fraud risk and going-concern risk
  4. Inherent risk, control risk and detection risk Correct answer.

Explanation

Audit risk comprises inherent risk, control risk and detection risk, where the first two together form the risk of material misstatement. Detection risk is the risk that procedures fail to detect a misstatement. The other listed combinations do not reflect the standard model.

Question 6Auditing and Assurance

Which of the following is an example of a substantive audit procedure?

  1. Observing the segregation of duties in the cash receipts process
  2. Inquiring about management's fraud risk assessment process
  3. Inspecting evidence that monthly bank reconciliations are reviewed
  4. Confirming a sample of accounts receivable balances directly with customers Correct answer.

Explanation

Substantive procedures are designed to detect material misstatements at the assertion level and include tests of details and substantive analytical procedures. External confirmation of receivable balances is a test of details. Observing segregation of duties and testing reconciliations review are tests of controls.

Question 7Auditing and Assurance

Which of the following is the most reliable form of audit evidence?

  1. Oral representations made by the financial controller
  2. A draft budget prepared by management for the coming year
  3. Documentary evidence obtained directly by the auditor from an independent external source Correct answer.
  4. An internally prepared schedule with no supporting documentation

Explanation

The reliability of evidence increases when it is obtained from independent external sources and when it is obtained directly by the auditor. Internal documents with weak controls and oral representations are less reliable. A draft budget is prospective and internally generated.

Question 8Auditing and Assurance

An auditor's report that expresses an unmodified opinion is one that states the financial statements:

  1. Have been prepared by the auditor independently of management
  2. Give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable framework Correct answer.
  3. Contain no misstatements of any amount whatsoever
  4. Are free from all risk of fraud

Explanation

An unmodified opinion states that the financial statements give a true and fair view or are fairly presented, in all material respects, under the applicable framework. It is subject to materiality and inherent limitations. It does not certify the absence of any misstatement or of fraud.

Question 9Auditing and Assurance

An auditor sets materiality for the financial statements as a whole at $100,000. During the audit, the auditor identifies an uncorrected misstatement of $60,000. What is the most appropriate conclusion?

  1. The audit opinion must be qualified because any misstatement requires modification
  2. The misstatement must be reported to the regulator immediately because it exceeds half of materiality
  3. The misstatement can be ignored entirely because it is below overall materiality
  4. The misstatement is below overall materiality but should still be accumulated and evaluated against performance materiality and qualitative factors Correct answer.

Explanation

Misstatements below overall materiality are accumulated and evaluated, considering performance materiality and qualitative factors, to assess whether they could aggregate to a material level. They are not automatically ignored nor do they automatically require a modified opinion. Immediate regulatory reporting is not triggered by this threshold alone.

Question 10Auditing and Assurance

When the auditor assesses inherent risk as high, the audit risk model requires the auditor to:

  1. Set detection risk higher to compensate for the elevated inherent risk
  2. Set detection risk lower, which generally requires more extensive or more persuasive substantive procedures Correct answer.
  3. Reduce the amount of substantive testing to keep audit risk constant
  4. Rely entirely on tests of controls regardless of their results

Explanation

Audit risk is held at an acceptably low level, so higher inherent risk requires lower detection risk. Lower detection risk is achieved by performing more extensive or more persuasive substantive procedures. Detection risk cannot be raised to offset inherent risk, and controls cannot be relied on without evidence of effectiveness.

Question 11Auditing and Assurance

Which of the following best describes the purpose of the engagement letter?

  1. To serve as the auditor's formal opinion on the financial statements
  2. To document the agreed terms of the audit engagement, including the responsibilities of management and the auditor Correct answer.
  3. To replace the need for an audit plan
  4. To provide the client with a guarantee that no fraud will be found

Explanation

The engagement letter confirms the terms of the engagement, including the respective responsibilities of management and the auditor and the scope of the work. It is not a guarantee, does not replace planning, and is not the audit opinion. It helps prevent misunderstandings between the parties.

Question 12Auditing and Assurance

The auditor's understanding of the entity's internal control is primarily used to:

  1. Prepare the entity's accounting records for the year
  2. Identify and assess risks of material misstatement and design the nature, timing and extent of further audit procedures Correct answer.
  3. Replace the need for substantive testing in all circumstances
  4. Determine the exact selling price of the entity's products

Explanation

Understanding internal control helps the auditor identify and assess risks of material misstatement and design further audit procedures. It does not involve preparing accounting records or setting prices. Substantive procedures are still required for material classes of transactions, balances and disclosures.

Question 13Auditing and Assurance

An auditor plans to rely on a control over sales invoicing. Which procedure provides the most appropriate evidence that the control operated effectively throughout the period?

  1. Inquiring of the sales manager whether the control is working
  2. Testing a sample of invoices for evidence that the control was performed at the relevant times Correct answer.
  3. Observing the control being performed on a single day
  4. Reading the written policy that describes the control

Explanation

To conclude that a control operated effectively throughout the period, the auditor tests a sample of transactions or control instances across the period. Inquiry alone, reading policy documents, or a single observation does not provide sufficient evidence of operating effectiveness over time.

Question 14Auditing and Assurance

Which of the following is an example of an external confirmation procedure?

  1. Observing the physical inventory count
  2. Reviewing the entity's sales invoices for proper authorization
  3. Sending a request to the entity's bank to verify the year-end balance and loan covenants Correct answer.
  4. Recalculating the depreciation expense for the year

Explanation

An external confirmation is a direct written response from a third party to the auditor, such as a bank confirming balances and covenants. Reviewing invoices, recalculating depreciation, and observing inventory are other procedures, not external confirmations.

Question 15Auditing and Assurance

During the audit of inventory, the auditor attends the physical count primarily to:

  1. Obtain evidence about the existence and condition of inventory Correct answer.
  2. Confirm the collectability of trade receivables
  3. Assess the adequacy of the entity's tax provision
  4. Verify the accuracy of the entity's payroll calculations

Explanation

Attendance at the physical inventory count provides evidence about the existence and condition of inventory and the reliability of management's count procedures. It does not address payroll accuracy, receivable collectability, or tax provisions.

Question 16Auditing and Assurance

An auditor discovers that a client has changed an accounting estimate in a way that management cannot support with reasonable evidence. The effect is material but not pervasive. What type of opinion is most appropriate?

  1. Qualified opinion Correct answer.
  2. Unmodified opinion with an emphasis of matter paragraph
  3. Adverse opinion
  4. Disclaimer of opinion

Explanation

A material but not pervasive misstatement leads to a qualified opinion. An adverse opinion is used when the misstatement is both material and pervasive. A disclaimer applies when the auditor cannot obtain sufficient evidence and the possible effects are material and pervasive. An emphasis of matter does not address a misstatement.

Question 17Auditing and Assurance

An auditor is unable to obtain sufficient appropriate evidence about a subsidiary that represents a significant portion of the group's assets. The possible effects are material and pervasive. What opinion should the auditor express?

  1. Unmodified opinion
  2. Qualified opinion
  3. Disclaimer of opinion Correct answer.
  4. Adverse opinion

Explanation

When the auditor cannot obtain sufficient appropriate evidence and the possible effects are both material and pervasive, a disclaimer of opinion is appropriate. A qualified opinion applies when the possible effects are material but not pervasive. An adverse opinion applies to known material and pervasive misstatements.

Question 18Auditing and Assurance

Which of the following best describes the auditor's responsibility regarding subsequent events occurring between the date of the financial statements and the date of the auditor's report?

  1. The auditor must guarantee that no subsequent events occur
  2. The auditor performs procedures to obtain sufficient appropriate evidence that events requiring adjustment or disclosure have been identified Correct answer.
  3. The auditor must issue a new report for every subsequent event discovered
  4. The auditor has no responsibility for any events after the reporting period end

Explanation

The auditor is required to perform procedures designed to obtain sufficient appropriate evidence that subsequent events requiring adjustment or disclosure have been identified up to the date of the auditor's report. The auditor does not guarantee the absence of events and does not automatically reissue reports.

Question 19Auditing and Assurance

Which of the following situations most clearly creates a self-interest threat to auditor independence?

  1. The audit partner holds a significant direct financial interest in the audit client Correct answer.
  2. The auditor attends a client's industry conference
  3. The auditor reviews work performed by a member of the same engagement team
  4. The auditor uses the client's accounting software to extract data

Explanation

A self-interest threat arises when the auditor has a financial or other interest that could inappropriately influence judgment, such as a direct financial interest in the client. Reviewing team work, using client software, and attending an industry conference do not inherently create a self-interest threat.

Question 20Auditing and Assurance

An auditor's documentation should be sufficient to enable:

  1. The regulator to replace the auditor's judgment with its own
  2. The auditor to avoid performing any further procedures in future years
  3. An experienced auditor with no previous connection to the audit to understand the work performed and the conclusions reached Correct answer.
  4. The client to prepare its tax return without further assistance

Explanation

Audit documentation must be sufficient for an experienced auditor with no prior connection to the engagement to understand the procedures performed, evidence obtained, and conclusions reached. It is not prepared for the client's tax return, does not eliminate future procedures, and does not transfer judgment to a regulator.

Question 21Auditing and Assurance

An auditor identifies a risk of material misstatement due to fraud related to revenue recognition. Which response is most appropriate?

  1. Rely solely on management's written representation that revenue is correctly recorded
  2. Postpone all revenue testing until the following year's audit
  3. Reduce the extent of revenue testing because fraud risk is difficult to detect
  4. Design substantive procedures specifically directed at revenue, such as testing journal entries and analyzing revenue trends Correct answer.

Explanation

When fraud risk is identified in revenue recognition, the auditor designs targeted substantive procedures, such as testing journal entries and performing analytical procedures on revenue trends. Reducing testing, relying only on representations, or postponing work would not appropriately respond to the risk.

Question 22Auditing and Assurance

An auditor uses a statistical sampling approach and concludes that the tolerable deviation rate is exceeded based on the sample results. What is the most appropriate next step?

  1. Reduce the sample size and re-test the same items
  2. Increase the assessed risk of material misstatement or extend testing to determine whether a control deficiency exists Correct answer.
  3. Ignore the result because sampling results are never conclusive
  4. Conclude that the control is effective because the sample was representative

Explanation

If the sample deviation rate exceeds the tolerable rate, the auditor cannot conclude the control is effective and should consider the implications, such as increasing the assessed risk or extending testing. The result cannot be ignored, and simply reducing the sample size is inappropriate.

Question 23Auditing and Assurance

An auditor is evaluating the going concern assumption. Management's assessment covers twelve months from the reporting date, but the auditor becomes aware of a bank loan covenant breach likely to trigger repayment within six months, and management has no realistic refinancing plan. What is the most appropriate action?

  1. Request that management adjust the financial statements or make adequate disclosure, and consider the effect on the audit opinion Correct answer.
  2. Resign from the engagement immediately without further evaluation
  3. Conclude that the going concern basis is appropriate without further work
  4. Issue an unmodified opinion with no additional paragraph because the breach is only probable

Explanation

When a material uncertainty or inappropriate use of the going concern basis is identified, the auditor evaluates management's plans and disclosures and considers the effect on the opinion, including whether a material uncertainty paragraph or a modified opinion is needed. Ignoring the issue or resigning immediately is not the appropriate response.

Question 24Auditing and Assurance

An auditor is assessing the reliability of evidence obtained from an entity's internally generated system report. Which factor most affects the auditor's assessment of its reliability?

  1. The date on which the report was printed
  2. The physical length of the report
  3. The effectiveness of the controls over the system that produced the report Correct answer.
  4. The seniority of the employee who printed the report

Explanation

The reliability of a system-generated report depends largely on the effectiveness of the controls over its production, including completeness and accuracy controls. Length, printing seniority, and print date do not determine reliability. The auditor may test the report's completeness and accuracy.

Question 25Auditing and Assurance

An auditor identifies that a client's management has overridden a key control to record an unsupported journal entry near year-end. Which conclusion is most appropriate?

  1. The unsupported entry should be accepted if it is below the performance materiality threshold
  2. Management override is a significant risk requiring specific procedures such as testing journal entries and reviewing estimates for bias Correct answer.
  3. The auditor should rely on the control that was overridden for the remainder of the audit
  4. Management override is not a fraud risk because it involves only one entry

Explanation

Management override of controls is a recognized significant fraud risk that requires specific procedures, including testing journal entries and reviewing accounting estimates for bias. A single override is not dismissed, and a control known to be overridden cannot be relied upon. Materiality thresholds do not justify accepting unsupported entries without evaluation.

Question 26Auditing and Assurance

Which statement best describes the overall objective of an audit of financial statements?

  1. To detect every instance of employee fraud within the entity
  2. To obtain reasonable assurance about whether the financial statements are free from material misstatement Correct answer.
  3. To prepare the financial statements on behalf of management
  4. To guarantee that the financial statements contain no errors of any kind

Explanation

An audit is designed to obtain reasonable assurance, not absolute assurance, that the financial statements as a whole are free from material misstatement. The auditor expresses an opinion based on that assurance. Absolute guarantees and preparation of statements are outside the audit objective.

Question 27Auditing and Assurance

Professional skepticism in an audit requires the auditor to do which of the following?

  1. Rely primarily on prior-year audit evidence
  2. Maintain a questioning mind and be alert to conditions indicating possible misstatement Correct answer.
  3. Accept management representations as reliable unless proven false
  4. Assume that all client personnel are dishonest

Explanation

Professional skepticism involves a questioning mind and critical assessment of evidence, remaining alert to indicators of possible misstatement or fraud. It is a balanced attitude, not a presumption of dishonesty. Representations and prior-year evidence must still be evaluated critically.

Question 28Auditing and Assurance

Which of the following is an example of an analytical procedure used during the risk assessment phase?

  1. Sending a bank confirmation to the client's lender
  2. Inspecting a signed supplier contract
  3. Comparing the current year's gross margin with budgeted and prior-year figures Correct answer.
  4. Recalculating the depreciation charge for a fixed asset

Explanation

Analytical procedures involve evaluating financial information by analyzing plausible relationships, such as comparing ratios and trends across periods or against budgets. Confirmations, inspection, and recalculation are substantive tests of detail, not analytical procedures.

Question 29Auditing and Assurance

Which of the following best describes the purpose of audit planning?

  1. To enable the auditor to conduct the engagement in an effective and efficient manner Correct answer.
  2. To eliminate the need for further audit procedures
  3. To transfer responsibility for the audit to the client's management
  4. To satisfy a requirement that the audit be completed within one week

Explanation

Planning helps the auditor devote appropriate attention to important areas, identify and resolve problems timely, and organize the engagement so it is performed effectively and efficiently. It does not remove the need for procedures or shift responsibility to management.

Question 30Auditing and Assurance

Which of the following describes the primary purpose of obtaining an understanding of the entity and its environment?

  1. To decide whether to accept the engagement
  2. To determine the exact audit fee to charge
  3. To satisfy the client's internal reporting needs
  4. To identify and assess risks of material misstatement Correct answer.

Explanation

Understanding the entity and its environment, including internal control, provides the basis for identifying and assessing risks of material misstatement. Fee determination and client reporting are not the purpose of this understanding.

Question 31Auditing and Assurance

Which of the following is an example of an internal document that the auditor might inspect as audit evidence?

  1. A supplier's statement received directly from the supplier
  2. A bank statement mailed directly to the auditor
  3. A legal opinion obtained from the client's external lawyer
  4. A purchase order prepared by the client Correct answer.

Explanation

A purchase order generated internally by the client is an internal document. Evidence originating outside the entity and received directly by the auditor, such as a supplier statement or bank statement, is external and generally more reliable.

Question 32Auditing and Assurance

Which of the following best describes the auditor's responsibility when using the work of an internal audit function?

  1. The auditor must ignore all internal audit work by regulation
  2. The auditor must evaluate the internal auditors' competence and objectivity before using their work Correct answer.
  3. The auditor delegates the audit opinion to the internal audit function
  4. The auditor may rely fully on internal audit work without further procedures

Explanation

Before using internal audit work, the auditor evaluates the function's objectivity, technical competence, and the application of a systematic approach, and performs procedures on the work used. The external auditor retains full responsibility for the opinion.

Question 33Auditing and Assurance

Which of the following is a key element of an audit engagement letter?

  1. The objective and scope of the audit Correct answer.
  2. The names of all client employees to be interviewed
  3. The auditor's internal working paper index
  4. The detailed audit program to be performed

Explanation

An engagement letter documents the agreed objective and scope of the audit, the respective responsibilities of the auditor and management, and other terms. The detailed audit program and working paper index are internal to the auditor and not part of the letter.

Question 34Auditing and Assurance

An auditor is designing procedures over the occurrence assertion for sales. Which procedure best addresses whether recorded sales actually occurred?

  1. Comparing the sales ledger balance with the prior year
  2. Tracing shipping documents to sales invoices and the sales journal Correct answer.
  3. Testing the mathematical accuracy of the sales journal
  4. Reviewing the sales journal for unusual large entries

Explanation

The occurrence assertion concerns whether recorded transactions actually took place. Tracing from shipping documents (evidence of dispatch) to recorded sales provides evidence that recorded sales are genuine. Vouching the other direction tests completeness, and the other procedures do not directly test occurrence.

Question 35Auditing and Assurance

An auditor is testing the completeness of accounts payable. Which procedure provides the most relevant evidence?

  1. Vouching recorded payables to supplier invoices
  2. Recalculating the accounts payable ledger total
  3. Confirming recorded payable balances with suppliers
  4. Searching for unrecorded liabilities by reviewing payments after year-end Correct answer.

Explanation

Completeness concerns whether all liabilities that should be recorded have been recorded. Searching for unrecorded liabilities, such as by examining post-year-end payments and unmatched receiving reports, targets omissions. Vouching and confirming recorded balances test existence rather than completeness.

Question 36Auditing and Assurance

An auditor identifies a significant risk of material misstatement. How should the auditor respond?

  1. Design and perform substantive procedures specifically responsive to that risk Correct answer.
  2. Rely solely on the client's oral assurances
  3. Reduce the extent of testing to save time
  4. Perform only analytical procedures at the planning stage

Explanation

For significant risks, the auditor designs and performs substantive procedures that are specifically responsive to the assessed risk, and cannot rely solely on tests of controls. The response must be tailored and sufficiently persuasive.

Question 37Auditing and Assurance

An auditor wants to test the operating effectiveness of a control over credit approval. Which approach is most appropriate?

  1. Analytical review of the allowance for doubtful debts only
  2. Review of the prior-year audit file
  3. Inspection of evidence of approval combined with observation and re-performance Correct answer.
  4. Inquiry of the credit manager only

Explanation

Testing operating effectiveness requires evidence that the control operated as designed throughout the period, obtained through a combination of inspection, observation, and re-performance. Inquiry alone is never sufficient, and prior-year files do not evidence current operation.

Question 38Auditing and Assurance

An auditor is assessing control risk for a significant class of transactions. Which of the following is true about the auditor's documentation of the understanding of internal control?

  1. Documentation of the understanding of internal control is required for every audit Correct answer.
  2. Documentation is only needed if the client requests it
  3. Documentation is optional if the auditor has prior experience with the client
  4. Documentation is required only when controls are found to be ineffective

Explanation

The auditor is required to document the understanding of the entity's internal control obtained during the audit, regardless of whether controls are effective or whether the client requests it. Prior experience does not remove the documentation requirement.

Question 39Auditing and Assurance

An auditor selects a sample of 60 purchase invoices from a population of 3,000 and finds 3 deviations from the control. The auditor's conclusion based on this sample is that the control is:

  1. Assessed using sampling risk and the tolerable deviation rate before concluding Correct answer.
  2. Guaranteed to be effective for the entire population
  3. Effective because the sample size was adequate
  4. Automatically ineffective because any deviation exists

Explanation

When deviations are found, the auditor evaluates the sample results against the tolerable deviation rate, considering sampling risk, and may extend testing or conclude the control is not operating effectively. A single deviation does not automatically make a control ineffective, and results are not guarantees.

Question 40Auditing and Assurance

An auditor is evaluating misstatements identified during the audit. Which of the following is an example of a factual misstatement?

  1. A difference arising from a change in management's judgment
  2. A projected misstatement from a sample
  3. A difference between the recorded amount and the amount supported by the underlying documents Correct answer.
  4. A difference arising from the auditor's estimate of an allowance

Explanation

Factual misstatements are those about which there is no doubt, such as a recorded amount differing from the amount supported by documentation. Differences from auditor estimates or management judgment are judgmental, and sample projections are projected misstatements.

Question 41Auditing and Assurance

An auditor is reviewing a client's legal correspondence for litigation. Which of the following best describes the appropriate treatment of a lawyer's refusal to respond to a letter of inquiry?

  1. The auditor treats the refusal as a scope limitation and considers its effect on the opinion Correct answer.
  2. The auditor reports the refusal to the regulator immediately
  3. The auditor ignores the refusal because it is the lawyer's right
  4. The auditor assumes no litigation exists

Explanation

A refusal by a lawyer to respond to an inquiry is treated as a scope limitation, and the auditor considers whether alternative procedures are available and the possible effect on the audit opinion. The auditor cannot assume there is no litigation or ignore the matter.

Question 42Auditing and Assurance

An auditor is using a computer-assisted audit technique to test all transactions in a population. Which of the following best describes the main advantage of this approach?

  1. It removes the need for professional judgment
  2. It guarantees that no misstatements exist
  3. It allows testing of the entire population rather than a sample Correct answer.
  4. It eliminates the need to understand the client's system

Explanation

Computer-assisted audit techniques can test 100% of a population, reducing sampling risk and enabling analysis of patterns and anomalies. They do not eliminate the need to understand the system, guarantee accuracy, or replace professional judgment.

Question 43Auditing and Assurance

An auditor is assessing whether the going concern basis is appropriate. Which of the following is the auditor's responsibility?

  1. To evaluate management's assessment and consider whether events or conditions raise doubt about the entity's ability to continue Correct answer.
  2. To prepare a cash flow forecast for management
  3. To guarantee the entity will continue operating for the next year
  4. To ignore management's assessment if the prior year was unmodified

Explanation

The auditor evaluates management's assessment of going concern and considers whether events or conditions create significant doubt about the entity's ability to continue. Preparing forecasts is management's role, and the auditor cannot guarantee future viability.

Question 44Auditing and Assurance

An auditor identifies that management has made an accounting estimate that is within a reasonable range but close to the aggressive end. How should the auditor respond?

  1. Conclude the estimate is misstated because it is aggressive
  2. Evaluate the estimate for reasonableness and consider whether it indicates possible bias Correct answer.
  3. Ignore the estimate because it is within a reasonable range
  4. Require management to change the estimate to the midpoint

Explanation

An estimate within a reasonable range is not necessarily misstated, but the auditor considers whether the pattern of estimates indicates possible management bias. The auditor evaluates reasonableness and the cumulative effect of estimates rather than forcing a midpoint or ignoring the matter.

Question 45Auditing and Assurance

An auditor is considering the use of an external specialist to value complex financial instruments. Which of the following is the auditor's responsibility?

  1. To disclose the specialist's name in the auditor's report
  2. To evaluate the specialist's competence, capabilities, and objectivity and the appropriateness of the work Correct answer.
  3. To replace the specialist with the auditor's own valuation
  4. To accept the specialist's findings without evaluation

Explanation

When using the work of an auditor's specialist, the auditor evaluates the specialist's competence, capabilities, and objectivity, and the appropriateness of the work as audit evidence. The auditor does not simply accept the findings or replace the specialist.

Question 46Auditing and Assurance

An auditor is reviewing the audit file of an engagement and finds that the engagement quality control review was completed after the auditor's report was dated. What is the implication?

  1. The review can be omitted for small engagements
  2. This is acceptable because the review is a formality
  3. The report date should be moved forward to accommodate the review
  4. The engagement quality control review should be completed before the report is dated Correct answer.

Explanation

For engagements subject to engagement quality control review, the review must be completed before the auditor's report is dated. Completing it afterwards undermines the purpose of the review, which is to evaluate significant judgments before the report is issued.

Question 47Auditing and Assurance

An auditor is evaluating a client's revenue recognition policy for long-term construction contracts. Which of the following would most likely indicate a risk of material misstatement?

  1. The client uses the same policy consistently across all contracts
  2. The client's contracts are all short-term and completed within one month
  3. The client discloses its revenue policy in the notes
  4. The client recognizes revenue based on costs incurred, and management can influence the estimate of costs to complete Correct answer.

Explanation

Revenue recognition based on progress toward completion relies on estimates of costs to complete, which management can influence, creating a risk of material misstatement. Consistency, disclosure, and short-term contracts reduce rather than increase risk.

Question 48Auditing and Assurance

An auditor is assessing the sufficiency of audit evidence obtained from a test of controls and substantive procedures. Which of the following best describes the relationship between the assessed risk of material misstatement and the evidence required?

  1. Higher assessed risk requires less persuasive evidence
  2. Lower assessed risk requires more persuasive evidence
  3. Higher assessed risk requires more persuasive evidence Correct answer.
  4. The assessed risk has no effect on the evidence required

Explanation

The higher the assessed risk of material misstatement, the more persuasive the audit evidence the auditor needs to obtain. Lower risk generally allows less persuasive evidence, and risk is a key driver of the nature, timing, and extent of procedures.

Question 49Auditing and Assurance

An auditor is evaluating a related party transaction that was not disclosed in the financial statements. Which of the following is the most appropriate response?

  1. Disclose the transaction in the auditor's report in place of management
  2. Communicate the matter to those charged with governance and consider the effect on the financial statements and the auditor's report Correct answer.
  3. Withdraw from the engagement immediately in all cases
  4. Ignore the matter because related party transactions are not material

Explanation

Undisclosed related party transactions are a matter for the auditor to communicate to those charged with governance and to evaluate for material misstatement and the effect on the auditor's report. The auditor does not make the disclosure on management's behalf, and withdrawal is not automatically required.

Question 50Auditing and Assurance

An auditor is reviewing the completeness of the disclosure of contingent liabilities. Which of the following procedures is most likely to identify an omitted contingency?

  1. Reviewing the legal expense account and correspondence with legal counsel Correct answer.
  2. Confirming recorded contingent liabilities with third parties
  3. Recalculating the provision for warranties
  4. Vouching recorded legal expenses to invoices

Explanation

Reviewing legal expense accounts and correspondence with legal counsel helps identify matters that may give rise to undisclosed contingencies. Confirming recorded liabilities and recalculating provisions test recorded amounts, and vouching expenses tests accuracy rather than completeness of disclosure.