Assurance CPA questions with answers.
Agency Risk ANS - Risk that managers are not acting in the best interest of shareholders.
How to avoid agency risk ANS - Employing external auditor to independently examine the company's
financial statements. The auditor will assess and report to the shareholders if the FS have been prepared
in accordance with the appropriate financial reporting framework.
Agency Cost ANS - Costs used to reduce agency risk. Includes cost of the audit an costs used to align
interest of management and shareholder ie. bonuses based on share price.
Information risk and cost ANS - Information risk: Risk that the financial information presented is not
reliable and that decisions made based on this information will not yield expected results
The audit cost is necessary to reduce information risk to an acceptable level.
Expectations Gap ANS - The difference between the understanding that the public has as about auditor
responsibilities and actual auditor responsibilities.
M: Auditors guarantee FS is 100% correct
F: Auditor expresses and opinion on the FS and provides reasonable assurance. There is always a risk
that misstatement in the FS are not identified by the auditor
M: Auditor is responsible for internal controls
F: Management is responsible for internal controls. Auditors are only responsible for gaining an
understanding of the controls to effectively carry out the audit.
M: Auditor is responsible to detect all fraud
F: Management is responsible to detect and prevent fraud through internal controls.
, Engagement Letter ANS - Where the auditor clarifies their responsibilities with management at the start
of the engagement.
It specifies terms of engagement which includes:
1) auditor responsibilities
2)Management responsibilities
3) applicable financial reporting framework
4) basis of fees and billing arrangements
5) scope of engagement
6) statement that there may be circumstances in which a report may differ from expected content
Also include that there is a risk that some material misstatements may not be detected even when
proper audit work is performed.
This needs to be acknowledged by the client prior to the audit.
Auditor's Report ANS - Contains an explanation of the auditors responsibilities and description of the
scope of the audit to assist in clarifying to shareholders the role of the auditor.
Client Acceptance and Continuance and where to find in the handbook ANS - CAS 220 A8<
Recommended
1) Integrity of principal owners, key management and those charged with governance
2) Whether engagement team is competent and is capable
3)Whether the firm can comply with relevant ethical requirements
4) Significant matters that have arisen and implications.
5)(Independence see CAS 220.11)
CSQC1. 26 and CAS210 for supplements
Agency Risk ANS - Risk that managers are not acting in the best interest of shareholders.
How to avoid agency risk ANS - Employing external auditor to independently examine the company's
financial statements. The auditor will assess and report to the shareholders if the FS have been prepared
in accordance with the appropriate financial reporting framework.
Agency Cost ANS - Costs used to reduce agency risk. Includes cost of the audit an costs used to align
interest of management and shareholder ie. bonuses based on share price.
Information risk and cost ANS - Information risk: Risk that the financial information presented is not
reliable and that decisions made based on this information will not yield expected results
The audit cost is necessary to reduce information risk to an acceptable level.
Expectations Gap ANS - The difference between the understanding that the public has as about auditor
responsibilities and actual auditor responsibilities.
M: Auditors guarantee FS is 100% correct
F: Auditor expresses and opinion on the FS and provides reasonable assurance. There is always a risk
that misstatement in the FS are not identified by the auditor
M: Auditor is responsible for internal controls
F: Management is responsible for internal controls. Auditors are only responsible for gaining an
understanding of the controls to effectively carry out the audit.
M: Auditor is responsible to detect all fraud
F: Management is responsible to detect and prevent fraud through internal controls.
, Engagement Letter ANS - Where the auditor clarifies their responsibilities with management at the start
of the engagement.
It specifies terms of engagement which includes:
1) auditor responsibilities
2)Management responsibilities
3) applicable financial reporting framework
4) basis of fees and billing arrangements
5) scope of engagement
6) statement that there may be circumstances in which a report may differ from expected content
Also include that there is a risk that some material misstatements may not be detected even when
proper audit work is performed.
This needs to be acknowledged by the client prior to the audit.
Auditor's Report ANS - Contains an explanation of the auditors responsibilities and description of the
scope of the audit to assist in clarifying to shareholders the role of the auditor.
Client Acceptance and Continuance and where to find in the handbook ANS - CAS 220 A8<
Recommended
1) Integrity of principal owners, key management and those charged with governance
2) Whether engagement team is competent and is capable
3)Whether the firm can comply with relevant ethical requirements
4) Significant matters that have arisen and implications.
5)(Independence see CAS 220.11)
CSQC1. 26 and CAS210 for supplements
