Compliance and Auditing Audit Planning and Execution 2 — Questions and Answers
Question 1: Which type of audit evidence is generally considered most reliable?
- Evidence obtained from management representations
- Evidence created internally by the client
- Evidence obtained directly by the auditor from external sources (Correct answer)
- Verbal evidence from employees
Correct answer: Evidence obtained directly by the auditor from external sources
Evidence obtained directly by the auditor from independent external sources (such as confirmations from banks or third parties) is considered the most reliable form of audit evidence.
Question 2: What does 'audit risk' consist of in the audit risk model?
- Inherent risk, control risk, and detection risk (Correct answer)
- Financial risk, operational risk, and compliance risk
- Material risk, sample risk, and reporting risk
- Strategic risk, reputational risk, and legal risk
Correct answer: Inherent risk, control risk, and detection risk
The audit risk model defines audit risk as the product of inherent risk (susceptibility to misstatement), control risk (failure of internal controls), and detection risk (failure of auditors to detect misstatements).
Question 3: What is the role of the audit committee in a publicly traded US company?
- Perform the annual financial audit
- Oversee financial reporting, internal controls, and the external audit (Correct answer)
- Prepare the annual report
- Approve executive compensation
Correct answer: Oversee financial reporting, internal controls, and the external audit
The audit committee of the board of directors oversees financial reporting integrity, internal control systems, and the relationship with external and internal auditors.
Question 4: Which standard governs the conduct of internal auditors in the United States?
- GAAS
- PCAOB Standards
- IIA International Standards for the Professional Practice of Internal Auditing (Correct answer)
- GAAP
Correct answer: IIA International Standards for the Professional Practice of Internal Auditing
The Institute of Internal Auditors (IIA) International Standards for the Professional Practice of Internal Auditing define the requirements for performing and promoting internal audit activities.
Question 5: What is 'audit trail' in the context of compliance auditing?
- The auditor's physical travel path during fieldwork
- A chronological record of system activities that allows reconstruction of events (Correct answer)
- The list of audit clients for the year
- A summary of audit findings
Correct answer: A chronological record of system activities that allows reconstruction of events
An audit trail is a chronological record of system activities, user actions, or transactions that enables reconstruction and examination of events related to operations and security.
Question 6: In auditing, what does 'inherent risk' represent?
- The risk that auditors will fail to detect errors
- The risk of material misstatement assuming no internal controls exist (Correct answer)
- The risk that controls will fail to prevent errors
- The risk of regulatory non-compliance
Correct answer: The risk of material misstatement assuming no internal controls exist
Inherent risk is the susceptibility of an account balance or class of transactions to material misstatement, assuming there are no related internal controls.
Compliance and Auditing Audit Planning and Execution 2
Which type of audit evidence is generally considered most reliable?