A1 M2 - Audit Engagements (notes)

Question 1

Which of the following is not an example of the application of professional skepticism?

A.Option A.
Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity.

B.Option B.
Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.

C.Option C.
Obtaining corroboration of management’s explanations through consultation with a specialist.

D.Option D.
Using third-party confirmations to provide support for management’s representations.

Answer 1

Choice “A” is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management’s honesty and integrity performed during the previous year would not necessarily be relevant to the current year’s audit.

Choice “B” is incorrect. An auditor might apply professional skepticism by performing additional audit procedures designed to improve the reliability of evidence.

Choice “C” is incorrect. Corroborating management’s explanations is an example of the application of professional skepticism, because the auditor is obtaining additional support rather than simply accepting the explanation as given.

Choice “D” is incorrect. Using third-party confirmations to provide support for management’s representations is an example of the application of professional skepticism, because the auditor is obtaining additional support rather than simply accepting the explanation as given.

Question 2

In order to express an opinion, the auditor obtains a level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. Which of the following is required of the auditor in obtaining this level of assurance?

A.Option A.
Determine the applicable financial reporting framework and prepare an adequate description of the framework for inclusion in the financial statements.

B.Option B.
Obtain absolute assurance that the financial statements are not misstated due to fraud on the part of management.

C.Option C.
Exercise his or her specific legal powers and authority in investigating suspicious activities of the entity’s employees, including management.

D.Option D.
Plan the work and properly supervise any assistants.

Answer 2

Choice “D” is correct. The auditor, in order to express an opinion, must obtain a reasonable level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. In order to obtain reasonable assurance, the auditor must (a) plan the work and properly supervise any assistants; (b) determine and apply appropriate materiality levels; (c) identify and assess risks of material misstatement, whether due to error or fraud; and (d) obtain sufficient appropriate audit evidence.

Choice “A” is incorrect. These are responsibilities of management, not of the auditor. Management is responsible for (a) preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; (b) the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement due to error or fraud; and (c) providing the auditor with access to information and persons within the entity needed to complete the audit.

Choice “B” is incorrect. The auditor obtains reasonable assurance, not absolute assurance. Reasonable assurance is a high level of assurance; the auditor is unable to obtain absolute assurance because of the inherent limitations of an audit.

Choice “C” is incorrect. The auditor does not have specific legal powers, and an audit is not an investigation into a wrongdoing. The purpose of an audit is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Question 3

Which of the following terms identifies a requirement for audit evidence?

A.Option A.
Adequate.

B.Option B.
Reasonable.

C.Option C.
Disconfirming.

D.Option D.
Appropriate.

Answer 3

Choice “D” is correct. The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion.

Choice “A” is incorrect. Auditing standards do not use the word adequate in describing the requirements for audit evidence; the term is sufficient appropriate audit evidence.

Choice “B” is incorrect. Auditing standards use the word reasonable to describe the type of assurance gained by the auditor as the basis for the opinion, and not to describe a specific requirement for audit evidence.

Choice “C” is incorrect. Auditing standards do not use the word disconfirming in describing the requirements for audit evidence.