Question 1

Which of the following statements is correct concerning the auditor's opinion on internal control effectiveness?

Accepted Answer

The auditor's report on the effectiveness of internal control over financial reporting does not specify whether the control weaknesses were first identified by management or the auditor. This distinction is not part of the report's objective, which focuses on the existence of material weaknesses as of the report date.

Question 2

Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency?

Accepted Answer

The nature of the client's industry may be a relevant factor in determining the control weakness, but it is not a determining factor in whether it is considered a material weakness or a significant deficiency. The materiality of the related balance, the volume of transactions affected, and the subjectivity of the account balance are all factors that can contribute to the determination of whether a control weakness is a material weakness or a significant deficiency.

Question 3

With a substantive audit strategy,what is an auditor likely to do?

Accepted Answer

With a substantive audit strategy, the auditor is likely to limit the testing of internal controls and focus more on testing the accuracy and completeness of the financial data. This approach assumes that the internal controls are not effective, and therefore, the auditor needs to test the assertions directly. This is different from the controls-based audit approach, where the auditor tests the controls to gain assurance on the reliability of the financial data. The choice of limiting the testing of internal controls is based on several factors, including the size and complexity of the organization, the nature of its operations, and the effectiveness of its internal controls. The auditor may still test some internal controls if it is deemed necessary to reduce the substantive audit risk to an acceptable level.

Question 4

Which of the following would not affect an auditor's judgment concerning internal controls?

Accepted Answer

The level of inherent risk is separate from an auditor's judgment concerning internal controls. Inherent risk relates to the susceptibility of an assertion to a material misstatement, whereas internal control relates to the measures in place to prevent or detect such misstatements. A, B, and C would all be factors that could affect an auditor's judgment concerning internal controls.

Question 5

Phases of the Audit Opinion Formulation Process Identify the five phases involved in the audit opinion formulation process.

Accepted Answer

The answer of Phases of the Audit Opinion Formulation Process...

Question 6

Financial Statement Assertions Identify and describe the five management assertions inherent in financial statement.Provide examples.

Accepted Answer

The answer of Financial Statement Assertions Identify and describe the...

Question 7

Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing?

Accepted Answer

Whether the control promotes operational efficiency is not a relevant factor in determining whether to pursue a lower control risk approach prior to substantive testing. The other options are all factors that an auditor considers when making this decision.

Question 8

If the auditor's assessment of the materiality of the account balance is high,what would be the respective effect on (1)the extent of substantive testing and (2)the nature of procedures performed?

Accepted Answer

When the auditor's assessment of materiality of the account balance is high, it implies that significant errors or misstatements in the balance could potentially affect the decisions made by the users of the financial statements. Therefore, the auditor would need to increase the extent of substantive testing in order to obtain reasonable assurance that the account balance is fairly presented. This means that more extensive testing procedures would need to be performed, such as selecting a larger sample size or testing more complex transactions. Additionally, the nature of the procedures performed would also need to be more rigorous, such as performing analytical procedures, external confirmations, and testing for fraud. Therefore, choice D is the correct answer.

Question 9

Which statement is correct?

Accepted Answer

The extent and results of control tests performed by the auditor can provide the auditor with an understanding of the client's internal control system. Based on this understanding, the auditor can assess the risks of material misstatement and tailor the substantive procedures to be performed accordingly. Therefore, D is the correct statement. A, B, and C are incorrect because assertions affected by highly objective estimates may require indirect tests, the materiality of the account does not dictate substantive procedures in all cases, and evidence obtained from risk assessment procedures influences the overall audit approach and the nature, timing, and extent of substantive procedures to be performed.

Question 10

What does the effectiveness of internal controls influence?

Accepted Answer

The effectiveness of internal controls can influence both the control risk (ability of the internal control to prevent or detect material misstatements) and the risk of material misstatement (the risk that material misstatements may occur in the financial statements). The inherent risk (risk associated with the nature of the financial information being audited) is generally unaffected by the effectiveness of internal controls.

Question 11

An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on (1)control effectiveness and for (2)testing controls in the financial statement period? Control Effectiveness Financial Statement

Accepted Answer

For expressing an opinion on control effectiveness, the auditor gathers evidence as of year-end. However, for testing controls in the financial statement period, the auditor needs to gather evidence throughout the year. Therefore, the best choice is B where (1) As of year-end is selected for expressing an opinion on control effectiveness, and (2) Throughout the year is selected for testing controls in the financial statement period.

Question 12

At what level does the auditor assess the risk of material misstatement?

Accepted Answer

The auditor assesses the risk of material misstatement both at the financial statement level and at the assertion level for classes of transactions, account balances, and disclosures.

Question 13

Which of the following is not a component of business risk?

Accepted Answer

Changes in stock market performance are not considered a component of business risk as it is a reflection of external market factors and not directly related to the company's operations, strategy, or financial performance. Business risk includes regulatory risks, economic or competitive changes, and changes in fair market values of assets or liabilities.

Question 14

Which of the following statements is true regarding client acceptance or continuance decisions?

Accepted Answer

The client acceptance/continuance decision is crucial in ensuring audit quality as it helps the audit firm evaluate the risks associated with accepting or continuing a client relationship.

Note: A is incorrect because an audit firm can discontinue providing audit services if there are valid reasons, such as a breach of contract or the client's unwillingness to address significant accounting or auditing issues. B is incorrect because potential audit fees are a consideration in the acceptance or continuance decision. D is incorrect as audit firms may conduct background checks, within ethical and legal boundaries, to assess the integrity of the management of a potential client.

Question 15

What are the AICPA's fundamental principles?

Accepted Answer

The answer of What are the AICPA's fundamental principles?...

Question 16

Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk?

Accepted Answer

The PCAOB has identified controls over significant, unusual transactions; controls over related-party transactions; and controls related to significant management estimates as important controls for auditors to consider in evaluating an organization's response to fraud risk. However, controls related to marketable securities are not specifically mentioned by the PCAOB as a control to consider.

Question 17

The auditing standards What is the structure or format of each auditing standard issued by the AICPA and by the IAASB? What is the purpose of each section?

Accepted Answer

The answer of The auditing standards What is the structure...

Question 18

Which of the following factors affect the substantive procedures performed in an audit?

Accepted Answer

All of the factors listed affect the substantive procedures that are performed in an audit. 
- The subjectivity of the accounting process may require additional substantive procedures to obtain sufficient and appropriate evidence for the auditor's opinion. 
- The size of the account may require additional testing to ensure accuracy and completeness. 
- The effectiveness of relevant controls may impact the nature, timing, and extent of substantive procedures performed by the auditor.

Question 19

Which statement is true concerning materiality?

Accepted Answer

Materiality is a concept used in determining whether a misstatement in the financial statements could reasonably influence the decisions of users. It is a relative concept and depends on the size and nature of the item or error in question. PCAOB does not prescribe materiality guidelines, and materiality is also relevant in assessing internal control effectiveness. Materiality applies to both financial statement presentation and disclosures.

Question 20

With a dual-purpose test,what is an auditor likely to do?

Accepted Answer

A dual-purpose test is when an auditor performs a substantive procedure concurrently with a test of a control. This means that the auditor is testing the effectiveness of a control while also gathering substantive evidence on the financial statement assertion being tested. This approach can save time and resources by combining two procedures into one.

Quiz 5: Professional Auditing Standards and the Audit Opinion Formulation Process