Evidence — CPA AUD practice questions

When a group engagement partner decides to make reference to a component auditor's work in the auditor's report (a 'reference report'), this indicates that:

1. the component auditor's opinion was adverse and must be disclosed
2. the group engagement team performed no procedures over the component
3. the group auditor is dividing responsibility for that component with the component auditor
4. the component's financial statements are immaterial and excluded from the group opinion

Answer: C — the group auditor is dividing responsibility for that component with the component auditor

A) A reference report doesn't imply an adverse component opinion; it can be used even with an unmodified component opinion. B) The group team may still perform some procedures; reference reporting concerns how responsibility is divided and disclosed, not whether any work occurred. C) Correct — under AU-C 600, when the group auditor is not willing to take full responsibility for a component auditor's work, the group auditor may reference the component auditor's report, dividing responsibility for that portion of the financial statements. D) An immaterial, excluded component would not be referenced in the group opinion at all.

Audit evidence is considered SUFFICIENT when the:

1. Evidence is generated internally by the client
2. Quantity of evidence obtained is adequate
3. Auditor completes the standard checklist
4. Client's controller signs the workpapers

Answer: B — Quantity of evidence obtained is adequate

B) Correct — sufficiency refers to the QUANTITY of evidence, while appropriateness refers to relevance and reliability (AU-C 500). A) Internal generation relates to reliability, not sufficiency. C) A checklist is not the standard for sufficiency. D) Client signature is not the standard.

In a group audit performed under AU-C 600, the group engagement partner determines that a component's financial information is individually significant to the group financial statements. Which of the following is the MOST appropriate response?

1. The group engagement team may rely solely on analytical procedures performed at the group level for that component
2. The component should be excluded from group consolidation procedures and separately footnoted
3. The component auditor's report may be referred to in the group auditor's report regardless of significance
4. An audit of the component's financial information, using materiality for the component, should be performed

Answer: D — An audit of the component's financial information, using materiality for the component, should be performed

A) Individually significant components require more than analytical procedures at the group level. B) Excluding a significant component from group procedures is inconsistent with obtaining sufficient appropriate evidence about the group as a whole. C) Reference to a component auditor's report is permitted only under specific conditions related to a divided-responsibility approach, not automatically for any significant component. D) Correct — AU-C 600 requires an audit using component materiality for components that are individually significant.

Under AU-C 610, an external auditor planning to use direct assistance from internal auditors must first evaluate the internal auditors':

1. years of tenure with the company exceeding a fixed minimum of ten years
2. membership in a specific professional certification body
3. willingness to work unpaid overtime during the audit's peak season
4. competence and objectivity, and confirm there is no significant threat to their objectivity

Answer: D — competence and objectivity, and confirm there is no significant threat to their objectivity

A) There's no fixed ten-year tenure threshold in the standard. C) Willingness to work overtime is irrelevant to the evaluative criteria. B) Membership in a particular certification body isn't itself the required evaluative factor. D) Correct — AU-C 610 requires the external auditor to evaluate the competence and objectivity of the internal auditors providing direct assistance and confirm that significant threats to objectivity are not present, before using their work.

A successor auditor is unable to obtain sufficient appropriate evidence concerning opening inventory balances because the predecessor's workpapers are unavailable and no alternative procedures can substitute. The auditor's report on the current period would MOST likely reflect a:

1. qualified opinion or disclaimer of opinion due to a scope limitation on opening balances
2. standard unmodified opinion, since opening balances are the predecessor's responsibility
3. adverse opinion on the entire set of current-period financial statements
4. emphasis-of-matter paragraph added to an otherwise unmodified opinion

Answer: A — qualified opinion or disclaimer of opinion due to a scope limitation on opening balances

B) The successor auditor remains responsible for evaluating opening balances even though the predecessor audited the prior year. C) An adverse opinion reflects pervasive misstatement, not an inability to obtain evidence. D) An emphasis-of-matter paragraph does not resolve an unresolved scope limitation on a material item. A) Correct — an inability to obtain sufficient evidence about material opening balances (e.g., inventory affecting cost of sales) is a scope limitation, generally resulting in a qualified opinion or disclaimer, depending on pervasiveness.

Under PCAOB AS 1206 (issuer audits), a referring auditor who makes reference to another auditor's report on a component MUST:

1. omit any mention of the component from the audit report entirely
2. take sole, undivided responsibility for the referenced component
3. decline to accept the engagement if any component is audited by another firm
4. determine that the other auditor has adequate competence, applicable independence, and is subject to inspection or oversight

Answer: D — determine that the other auditor has adequate competence, applicable independence, and is subject to inspection or oversight

A) Reference reporting requires disclosure of the reference, not its omission. B) Reference reporting is specifically the alternative to assuming sole responsibility for the component. C) Engagements with multiple participating auditors are common and accepted; using another auditor doesn't bar acceptance. D) Correct — AS 1206 requires the referring auditor to make certain determinations about the other auditor, including adequate technical competence, applicable independence, and being subject to inspection (e.g., PCAOB registration where required), before referencing that auditor's work.

How does component materiality relate to overall group materiality under AU-C 600?

1. Component materiality is set lower than group materiality, so that the aggregation risk of undetected or uncorrected misstatements across components exceeding group materiality is reduced to an appropriately low level
2. Component materiality must always equal group materiality to ensure consistency across the group
3. Component materiality is set higher than group materiality to account for the smaller scope of a component audit
4. Component materiality is irrelevant once group materiality has been determined, since only the consolidated total matters

Answer: A — Component materiality is set lower than group materiality, so that the aggregation risk of undetected or uncorrected misstatements across components exceeding group materiality is reduced to an appropriately low level

B) Requiring equality would ignore the aggregation-risk purpose of component materiality. C) Setting component materiality higher would increase, not decrease, the risk that misstatements at multiple components aggregate to a material amount at the group level. D) Component materiality remains relevant precisely because group materiality alone doesn't address the risk of small misstatements at individual components adding up across the group. A) Correct — this reflects the purpose and mechanics of component materiality.

During substantive testing, an auditor accumulates $150,000 of identified (known) misstatements and estimates $250,000 of projected misstatements across all accounts, for a total of $400,000. Overall materiality is $500,000. Which of the following BEST describes the appropriate auditor action?

1. Because $400,000 is below the $500,000 materiality threshold, the auditor may conclude the financial statements are fairly stated with no further consideration required
2. Even though the total is below overall materiality, the auditor should evaluate the aggregate effect together with qualitative factors and the risk of further undetected misstatement, and communicate uncorrected misstatements to those charged with governance
3. The auditor must automatically modify the opinion, since any accumulated misstatement close to materiality requires a qualified opinion regardless of qualitative considerations
4. The auditor should disregard the projected misstatements entirely and consider only the known misstatements, since projections are not sufficiently reliable for evaluation purposes

Answer: B — Even though the total is below overall materiality, the auditor should evaluate the aggregate effect together with qualitative factors and the risk of further undetected misstatement, and communicate uncorrected misstatements to those charged with governance

A) Being below the quantitative threshold does not end the analysis — the auditor must still consider qualitative factors, closeness to materiality, and the risk of additional undetected misstatements. C) An opinion modification is not automatic simply because accumulated misstatements approach materiality; the auditor evaluates aggregate quantitative and qualitative factors first. D) Both known and projected misstatements must be aggregated and evaluated together. B) Correct — this reflects the required evaluation of accumulated misstatements under AU-C 450, including required communication to governance.

Among the following, which is a required GENERAL representation under AU-C 580, distinct from representations about specific account balances?

1. That inventory was counted using statistical sampling techniques
2. That all related-party receivables have been individually confirmed
3. That management has provided the auditor with all relevant information and access agreed upon in the engagement terms
4. That the allowance for doubtful accounts was computed using the same specialist as the prior year

Answer: C — That management has provided the auditor with all relevant information and access agreed upon in the engagement terms

A) Statistical sampling for inventory is a specific-procedure detail, not a required general representation. B) Individual confirmation of every related-party receivable is not a standard general representation topic. D) Consistent use of the same specialist is not among the enumerated general representations. C) Correct — AU-C 580 requires a general representation that management has provided all agreed-upon access, information, and unrestricted access needed for the audit.

The 'auditor's specialist' is a person or organization with expertise in a field OTHER than accounting/auditing whose work is used to:

1. Prepare the client's financial statements
2. Assist the auditor in obtaining evidence
3. Replace the auditor's ultimate responsibility
4. Manage the client's operational strategy

Answer: B — Assist the auditor in obtaining evidence

A) Preparing statements is a management function. B) Correct — under AU-C 620, the auditor's specialist (e.g., valuation, actuarial, legal) assists the auditor; the auditor evaluates competence, capabilities, and objectivity. C) The auditor's responsibility for the opinion is not replaced. D) Operational strategy is a client matter.

Reference report in a group audit?

Group auditor divides responsibility with a component auditor and discloses the reference in the auditor's report.

Appropriateness of audit evidence?

Measure of the QUALITY of evidence - relevance to the assertion plus reliability of the source.

Analytical procedures?

Compare expected vs actual. Use ratios, trends, prior years.

Hierarchy of evidence reliability?

External written > internal documentary > inquiry. External more reliable.