Sample Questions
Question 1
Easy
Which of the following best describes a significant risk?
Solution
C is correct.
Under AU-C 315.28, a significant risk is an identified risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. The determination considers the nature of the risk (such as whether it involves fraud, significant transactions, or significant judgments), the likelihood that the risk will result in a material misstatement, and the magnitude of the potential misstatement.
Under AU-C 315.28, a significant risk is an identified risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. The determination considers the nature of the risk (such as whether it involves fraud, significant transactions, or significant judgments), the likelihood that the risk will result in a material misstatement, and the magnitude of the potential misstatement.
Question 2
Medium
Which of the following would disqualify an entity from low-risk auditee status under the Uniform Guidance?
Solution
Under the Uniform Guidance (2 CFR 200.520), low-risk auditee status requires meeting all criteria for each of the two preceding audit periods: (1) annual single audits, (2) unmodified opinions on the financial statements and the SEFA, (3) no material weaknesses in internal control over financial reporting, (4) no material noncompliance findings in major programs, and (5) no going concern paragraph. A material weakness in internal control over financial reporting in either of the two preceding audit periods disqualifies the entity from low-risk status, increasing required coverage from 20% to 40%.
Question 3
Hard
An auditor of a nonissuer identifies material sales to an entity owned by the CEO's spouse that were not conducted at arm's length. Which of the following responses is most appropriate?
Solution
B is correct.
Under AU-C 550.18-.19 and AU-C 240, related-party transactions that are not at arm's length may indicate fraud risk and should be assessed as significant risks. The auditor must go beyond merely confirming amounts: the auditor should evaluate the business purpose and economic substance, inspect underlying contracts and agreements, and assess whether disclosures properly reflect the nature and terms (including non-arm's-length pricing).
Under AU-C 550.18-.19 and AU-C 240, related-party transactions that are not at arm's length may indicate fraud risk and should be assessed as significant risks. The auditor must go beyond merely confirming amounts: the auditor should evaluate the business purpose and economic substance, inspect underlying contracts and agreements, and assess whether disclosures properly reflect the nature and terms (including non-arm's-length pricing).
