CA Audit & Risk Management 2 — Questions and Answers
Question 1: Which type of audit risk arises from the possibility that internal controls fail to prevent or detect material misstatements?
- Inherent risk
- Control risk (Correct answer)
- Detection risk
- Sampling risk
Correct answer: Control risk
Control risk is the risk that a client's internal controls fail to prevent or detect material misstatements on a timely basis.
Question 2: An auditor issues a qualified opinion when:
- The financial statements are free of material misstatements
- There is a pervasive material misstatement in the financial statements
- A material but non-pervasive misstatement or scope limitation exists (Correct answer)
- Management refuses to provide any financial data
Correct answer: A material but non-pervasive misstatement or scope limitation exists
A qualified opinion ('except for') is issued when misstatements or scope limitations are material but not pervasive enough to warrant an adverse or disclaimer opinion.
Question 3: Enterprise Risk Management (ERM) under the COSO framework includes which of the following components?
- Risk identification, risk pricing, risk transfer, and risk elimination
- Governance & culture, strategy & objective-setting, performance, review & revision, and information & communication (Correct answer)
- Financial reporting, internal audit, external audit, and compliance
- Risk appetite, risk tolerance, risk avoidance, and risk acceptance
Correct answer: Governance & culture, strategy & objective-setting, performance, review & revision, and information & communication
The 2017 COSO ERM framework organizes risk management into five interrelated components: governance & culture, strategy & objective-setting, performance, review & revision, and information, communication & reporting.
Question 4: When an auditor uses stratified sampling, the primary purpose is to:
- Ensure every item in the population has an equal chance of selection
- Divide the population into subgroups to improve audit efficiency and focus on higher-risk items (Correct answer)
- Eliminate the need for professional judgment in selecting sample sizes
- Comply with ISA requirements for random number generation
Correct answer: Divide the population into subgroups to improve audit efficiency and focus on higher-risk items
Stratified sampling divides the population into homogeneous subgroups so the auditor can apply more scrutiny to higher-value or higher-risk strata.
Question 5: Which procedure is classified as a substantive analytical procedure rather than a test of details?
- Confirming accounts receivable balances directly with customers
- Vouching purchase invoices to the general ledger
- Comparing the current year's gross margin percentage to prior years and industry averages (Correct answer)
- Physically counting inventory at the year-end date
Correct answer: Comparing the current year's gross margin percentage to prior years and industry averages
Substantive analytical procedures involve evaluating financial information through plausible relationships among data, such as trend and ratio analysis, rather than examining individual transactions.
Question 6: The concept of 'materiality' in auditing is BEST described as:
- The total value of errors found during the audit
- The threshold above which misstatements could influence the economic decisions of financial statement users (Correct answer)
- The auditor's maximum acceptable level of detection risk
- The percentage of revenue used as a benchmark for planning purposes only
Correct answer: The threshold above which misstatements could influence the economic decisions of financial statement users
Materiality is the magnitude of an omission or misstatement that, individually or in aggregate, could reasonably influence the economic decisions of users relying on the financial statements.
Question 7: A key indicator of a significant deficiency in internal controls (as opposed to a material weakness) is:
- A control deficiency that is less severe than a material weakness yet important enough to merit attention by those charged with governance (Correct answer)
- Any error detected by the external auditor during the annual audit
- A deficiency that results in a restatement of prior-year financial statements
- A control gap that management has already remediated before year-end
Correct answer: A control deficiency that is less severe than a material weakness yet important enough to merit attention by those charged with governance
A significant deficiency is a control deficiency, or combination of deficiencies, that is less severe than a material weakness but still warrants the attention of those charged with governance.
CA Audit & Risk Management 2
Which type of audit risk arises from the possibility that internal controls fail to prevent or detect material misstatements?