A management representation letter:
Representations from management are supplementary; they do not replace sufficient appropriate evidence.
Auditing MCQs
An audit engagement letter is mainly used to:
The engagement letter sets out the objective, scope, responsibilities and terms of the audit.
Auditor independence consists of:
Both independence of mind and independence in appearance are needed to maintain credibility.
An auditor holding shares in the audited client creates which type of threat?
A financial interest in the client creates a self-interest threat to objectivity.
An external confirmation of accounts receivable balances mainly provides evidence about:
Receivable confirmations mainly support the existence (and rights) assertion for the balance.
Vouching, which starts from the accounting records and traces back to supporting documents, is mainly used to test for:
Selecting recorded items and checking them to documents tests whether recorded items are real, i.e. overstatement.
Tracing from source documents (e.g. goods received notes) to the accounting records mainly tests:
Starting from documents and checking they were recorded tests for omissions, i.e. completeness.
Which of the following is a test of controls?
Tests of controls check the operating effectiveness of controls, such as evidence of approval.
Under the ISAs, analytical procedures are required to be performed at which stages of the audit?
ISA 315 and ISA 520 require analytical procedures in risk assessment and in the overall review; substantive use is optional.
Audit sampling means applying audit procedures to:
Sampling allows conclusions about the whole population from a part of it.
Inherent risk is the susceptibility of an assertion to material misstatement:
Inherent risk exists before taking internal controls into account, for example in complex estimates.
Control risk is the risk that a material misstatement:
Control risk relates to the failure of the entity's internal control system to prevent or detect misstatements.
Detection risk is the risk that:
Detection risk depends on the nature, timing and extent of the auditor's procedures, so the auditor can control it.
Information is considered material if its omission or misstatement could:
Materiality is judged by whether users' economic decisions could be influenced.
Which body issues the International Standards on Auditing (ISAs)?
The IAASB, operating under IFAC, develops and issues ISAs. The IASB issues IFRS.
Which type of audit evidence is generally the most reliable?
Evidence from independent external sources and in original form is more reliable than internal or oral evidence.
A qualified opinion is issued when misstatements are:
A qualified opinion (except for) is used when the effect is material but not pervasive to the financial statements.
An adverse opinion is issued when the effects of misstatements are:
An adverse opinion says the financial statements do not present fairly because misstatements are material and pervasive.
A disclaimer of opinion is given when the auditor:
If the auditor cannot obtain enough evidence and the possible effects are pervasive, no opinion can be expressed.
The purpose of an Emphasis of Matter paragraph in the auditor’s report is to:
An Emphasis of Matter paragraph does not modify the opinion; it highlights a matter already properly disclosed.
The going concern assumption means that the entity:
Financial statements are normally prepared on the assumption that the entity will continue operating for the foreseeable future.
Audit risk is the risk that the auditor:
Audit risk is the risk of expressing an inappropriate opinion on materially misstated financial statements.
What is the main objective of an external audit of financial statements?
The auditor gives an opinion on the financial statements. Preparing them is management's job, and an audit gives reasonable (not absolute) assurance.
Who is primarily responsible for preparing the financial statements?
Management prepares the financial statements and the auditor expresses an opinion on them.
An unmodified (clean) audit opinion means that the financial statements:
An unmodified opinion states that the statements are fairly presented in all material respects; it is not a guarantee of accuracy.