Sample Questions
Question 1
Easy
In an audit, sampling risk is the risk that:
Solution
B is correct.
AU-C 530.05 defines sampling risk as the risk that the auditor's conclusion based on a sample may differ from the conclusion that would be reached if the entire population were subjected to the same audit procedure. This is an inherent limitation of sampling — the sample may not be perfectly representative of the population.
AU-C 530.05 defines sampling risk as the risk that the auditor's conclusion based on a sample may differ from the conclusion that would be reached if the entire population were subjected to the same audit procedure. This is an inherent limitation of sampling — the sample may not be perfectly representative of the population.
Question 2
Medium
Customers return positive accounts receivable confirmations with exceptions. What should the auditor do?
Solution
B is correct.
AU-C 505.A19 requires the auditor to investigate exceptions reported on returned confirmations. The auditor must determine whether each exception indicates a misstatement in the financial statements, a timing difference (such as an in-transit payment), or an error by the responding party. The nature and cause of the exception affects the auditor's assessment of the risk of material misstatement.
AU-C 505.A19 requires the auditor to investigate exceptions reported on returned confirmations. The auditor must determine whether each exception indicates a misstatement in the financial statements, a timing difference (such as an in-transit payment), or an error by the responding party. The nature and cause of the exception affects the auditor's assessment of the risk of material misstatement.
Question 3
Hard
An entity sells goods to foreign subsidiaries below market value. The auditor should:
Solution
C is correct.
The auditor evaluates the financial statement implications of transfer pricing arrangements. This includes verifying that intercompany profits are properly eliminated in consolidation, assessing whether the pricing exposes the entity to tax-related contingent liabilities such as penalties or additional assessments from transfer pricing challenges, and evaluating whether those contingencies require recognition or disclosure in the financial statements. AU-C 540, Auditing Accounting Estimates and Related Disclosures, and AU-C 501, Audit Evidence, Specific Considerations for Selected Items, govern this work.
The auditor evaluates the financial statement implications of transfer pricing arrangements. This includes verifying that intercompany profits are properly eliminated in consolidation, assessing whether the pricing exposes the entity to tax-related contingent liabilities such as penalties or additional assessments from transfer pricing challenges, and evaluating whether those contingencies require recognition or disclosure in the financial statements. AU-C 540, Auditing Accounting Estimates and Related Disclosures, and AU-C 501, Audit Evidence, Specific Considerations for Selected Items, govern this work.
