Audit and Assurance (AA) Flashcards

According to ISA 200, what level of assurance does a statutory audit provide?

Answer: Reasonable assurance

ISA 200 states that an audit provides reasonable assurance, which is a high but not absolute level of assurance. Absolute assurance is not attainable due to inherent limitations of an audit, including the use of sampling, the inherent limitations of internal controls, and the fact that much audit evidence is persuasive rather than conclusive.

Which of the following is a substantive procedure?

Answer: Confirming a sample of receivable balances directly with customers

Confirming receivable balances directly with customers is a substantive procedure (specifically, external confirmation under ISA 505). It is designed to detect material misstatements in account balances. The other options — observing segregation of duties, reviewing reconciliations performed by the client as a control, and inquiring about IT controls — are tests of controls.

Under ISA 530, which sampling method gives every item in the population an equal chance of selection?

Answer: Random selection

Random selection ensures every sampling unit has an equal probability of being selected, typically using random number generators or tables. Haphazard selection avoids conscious bias but does not guarantee equal probability. Block selection picks contiguous items. Judgemental selection is based on the auditor's criteria and is non-statistical.

An auditor discovers a material misstatement that management refuses to correct. The misstatement is material but not pervasive. What type of audit opinion should be issued?

Answer: Qualified opinion ('except for')

Under ISA 705, when a material misstatement exists but is not pervasive to the financial statements, the auditor issues a qualified ('except for') opinion. An adverse opinion is issued when the misstatement is both material AND pervasive. A disclaimer is issued when the auditor is unable to obtain sufficient appropriate evidence and the possible effects are material and pervasive.

Which of the following threats to auditor independence is created when the audit firm provides tax advisory services to an audit client?

Answer: Self-review threat

Providing tax advisory services to an audit client creates a self-review threat because the audit team may need to evaluate the results of the tax advice or work performed by colleagues in the same firm. If the tax advice affects figures in the financial statements, the audit team would be reviewing their own firm's work.

Under ISA 240, which of the following is a characteristic of fraud rather than error?

Answer: Intentional manipulation of financial statements by those charged with governance

ISA 240 distinguishes fraud from error based on intent. Fraud involves intentional acts of deception, including fraudulent financial reporting (manipulation of statements) and misappropriation of assets. Errors are unintentional mistakes. Both may result in misstatements, but the presence of deliberate intent is the defining characteristic of fraud.