atg 457 final - chapter 16

an auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. the financial statements show a liability of $90,000.

$10,000 judgmental misstatement

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000, with all points in that interval equally likely. The judgmental misstatement in this situation is:

$30,000

the aggregated misstatement in the financial statements is made up of:

- factual misstatements: yes - projected misstatements: yes - judgmental misstatements: yes

which two letters are typically received near/at the end of the audit?

- representation letter: management - letter of inquiry/legal letter: client attorneys

which revenue and expense accounts are audited with accounts receivable?

- sales revenue - cost of goods sold

which of the following subsequent events might require an adjustment to the client's financial statements?

a major customer declares bankruptcy causing a material receivable to be uncollectible

type 1 subsequent event (recognized)

adjustments (JEs) conditions exist before balance sheet date

projected misstatement

arise from sampling results - projection to population

do attorneys make certain that disclosures are typed in the audit report? or do they simply provide the information for the footnote?

attorneys provide information for the footnote

what date must auditors perform subsequent events through?

auditor's report date

the audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?

cash

who signs the representation letter?

client management

which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

confirming accounts payable

what is the very last letter received in the audit?

representation letter

what date are unrecorded liabilities searched for through?

up until the audit report date - could be a few months

does most litigation take time to settle?

yes

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9

Hall accepted an engagement to audit the year 1 financial statements of Green Company. Green completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 2. The client's representation letter normally would be dated:

March 24, year 2

as a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. the auditors should:

consider the possibility of a misstatement in the financial statements

which of the following is most likely to be considered a Type 1 subsequent event?

customer checks deposited prior to year end but determined to be uncollectible after year end

the search for unrecorded liabilities for a public company includes procedures usually performed through the

date of the auditors' report

subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. after determining that the information is reliable, the auditor should next:

determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the informations

judgmental misstatement

differences arising from judgments of management that the auditor considers incorrect - estimate areas

which of the following types of matters do not generally require disclosure in the financial statements?

general risk contingencies

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:

if a loss is probable but... ...issue an unqualified opinion

which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

inquire management about transactions that occurred or were clarified by events happening after year end

which expense account is typically audited with notes payable?

interest expense

what type of misstatements relates to allowance for doubtful accounts proposed adjusting journal entries?

judgmental misstatement - relates to an estimate

the auditor's primary means of obtaining corroboration of management's information concerning litigation is a

letter of audit inquiry to the client's lawyer

what is the official name of the letter sent to client attorneys?

letter of inquiry

a possible loss, stemming from past events that will be resolves as to existence and amounts is referred to as a...

loss contingency

which of the following auditing procedures is ordinarily performed last?

obtaining a management representation letter

which of the following procedures is most likely to be performed near completion of an audit?

performing analytical procedures

type 2 subsequent event (nonrecognized)

possible disclosure - conditions came about after balance sheet date

The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a:

projected misstatement

in searching for unrecorded liabilities, an auditor most likely would examine the...

receiving reports for items received before year end, but not yet recorded

which of the following procedures would an auditor most likely perform prior to the balance sheet date?

review detail and test significant travel and entertainment expenses

in auditing the balance sheet, most revenue and expense accounts are also audited. which accounts are most likely to be audited when auditing accounts receivable?

sales and bad debt expense

which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?

settlement of litigation

which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

settlement of litigation in excess of the recorded liability

factual misstatement

specific misstatement identified during the course of the audit for which there is no doubt

which of the following is NOT correct relating to representation letters?

they often serve as a substitute for the application of other procedures

auditors should perform audit procedures relating to subsequent events...

through the date of the audit report