Chapter 17
Refusal by an entity's attorney to furnish information in a legal letter is a limitation on the scope of the audit, but not sufficient to preclude an unqualified opinion.
False
True or false: The auditor's treatment of subsequent events relating to internal control is similar to the engagement quality review performed at the conclusion of the audit.
False
To consider the overall reasonableness of the financial statement amounts, the auditor performs final....................
analytical procedures
There should be a review by an audit team member who is senior to the person in charge of preparing the__________
working papers
The Sarbanes-Oxley Act of 2002 requires the ______ to certify the appropriateness of the financial statements and related disclosures. A. CEO B. board of directors C. audit committee D. CFO
A. CEO D. CFO
Which of the following items that occurred after the balance sheet date but prior to issuance of the financial statements are considered Type II subsequent events? A. Losses on receivables caused by conditions arising such as a business failure. B. Purchase or disposal of a business by the entity. C. The settlement of a lawsuit for an amount different from the amount recorded in the year-end financial statements. D. A capital stock or bond issuance.
A, B, D
Which of the following statements is correct? A. It is expected that only material misstatements will be corrected. B. Immaterial misstatements are not communicated to the entity. C. It is expected that all known misstatements will be corrected. D. The auditor generally requires all proposed adjustments be booked.
C. It is expected that all known misstatements will be corrected.
Working papers prepared by the audit manager are reviewed by the ______. A. entity B. senior-in-charge C. engagement partner D. audit staff
C. engagement partner
The auditor reviews the financial statements to ______. A. ensure compliance with GAAP B. verify the inclusion of all necessary disclosures C. assist with drafting the footnotes D. check proper presentation of accounts
A. ensure compliance with GAAP B. verify the inclusion of all necessary disclosures D. check proper presentation of accounts
Gains and losses on derivatives and hedging instruments are reported ______. A. in Other Comprehensive Income B. as part of net income on the income statement C. as an adjustment to the beginning balance of Retained Earnings D. in a footnote to the financial statements
A. in Other Comprehensive Income D. in a footnote to the financial statements
Gains and losses on derivatives and hedging instruments are reported ______. A. in a footnote to the financial statements B. in Other Comprehensive Income C. as an adjustment to the beginning balance of Retained Earnings D. as part of net income on the income statement
A. in a footnote to the financial statements B. in Other Comprehensive Income
The legal letter routinely requests that the attorney _____. A. indicate if his or her response is limited in any way B. provide the amount that should be accrued for a loss related to general business risks C. comment on unasserted claims where his or her views differ from management D. identify short-term obligations expected to be refinanced
A. indicate if his or her response is limited in any way C. comment on unasserted claims where his or her views differ from management
The amount of loss associated with a contingent liability is accrued by a charge to income when it ______. A. is probable and can be reasonably estimated B. can be estimated and it is either possible or reasonably probable C. is reasonably possible and can be probably estimated D. can be estimated and it is either remote or reasonably probable
A. is probable and can be reasonably estimated
Regarding changes in internal control between the end of the reporting period and the date of the auditor's report that might adversely affect financial reporting, the auditor ______. A. must make inquires of management about these types of changes B. has no responsibility regarding these types of changes since they occur after the balance sheet date C. must make inquiries of outside legal counsel about these types of changes
A. must make inquires of management about these types of changes
If, during the planning, performance or completion of the audit there is substantial doubt about the entity's ability to continue as a going concern, the next step for the auditor is to ______. A. obtain management's plan to mitigate the going concern problem B. withdraw from the engagement and disclaim an opinion C. prepare the explanatory paragraph used in the audit report D. prepare the footnotes to the financial statements explaining the going concern problems and management's response
A. obtain management's plan to mitigate the going concern problem
An auditor has read the minutes of board of directors meetings, inquired of legal counsel regarding litigation, read the interim financial statements, and made inquiries of management. The auditor is most likely ______. A. performing audit procedures for subsequent events B. determining whether to issue a qualified or unqualified opinion C. performing the analytical procedures required during the final review stage of the audit D. determining whether to dual-date the audit report
A. performing audit procedures for subsequent events
The engagement partner generally reviews working papers ______. A. prepared by the manager B. reviewed by the senior-in-charge C. prepared by staff auditors D. related to critical audit areas
A. prepared by the manager D. related to critical audit areas
If management determines it is ______ that the entity will be unable to meet its obligations within the look-forward period, management is required to make appropriate disclosures. A. probable B. reasonably possible C. possible
A. probable
A Type II subsequent event: ______. A. provides evidence about conditions that did not exist at the balance sheet date B. is usually accounted for by disclosure in the notes to the financial statements C. provides evidence about conditions that existed at the balance sheet date D. requires adjustment of the numbers in the financial statements
A. provides evidence about conditions that did not exist at the balance sheet date B. is usually accounted for by disclosure in the notes to the financial statements
Audit procedures occurring after the balance sheet date that may detect subsequent events include ______. A. reading any available interim financial statements that are available after year end B. reviewing selected audit documentation related to judgments and evaluating conclusions reached C. testing proper sales and purchases cutoff D. asking legal counsel about any developments related to litigation, claims and assessments
A. reading any available interim financial statements that are available after year end D. asking legal counsel about any developments related to litigation, claims and assessments
The engagement quality control reviewer ______. A. reads the financial statements B. considers the appropriateness of the audit report C. evaluates significant judgments made by the engagement team D. ensures all audit documentation is archived E. prepares working papers
A. reads the financial statements B. considers the appropriateness of the audit report C. evaluates significant judgments made by the engagement team
To identify contingent liabilities an auditor might ______. A. review contracts, loan agreements and leases B. review tax returns and IRS reports C. review accounts and note payable D. read the minutes of board of directors meetings
A. review contracts, loan agreements and leases B. review tax returns and IRS reports D. read the minutes of board of directors meetings
The representation letter is addressed to ______. A. the auditor B. the PCAOB C. the SEC D. legal counsel
A. the auditor
In evaluating misstatements related to accounting estimates, if the auditor believes the estimated amount in the financial statements is unreasonable, the difference between the estimated amount and the closest reasonable estimate should be ______. A. treated as a misstatement B. disclosured in a footnote C. ignored D. accounted for as a correction of an error
A. treated as a misstatement
When misstatements are quantified based only on the amount of the error that originates in the current year income statement, the ______ method is being used. A. quantifying B. rollover C. iron curtain
B. rollover
If a misstatement is considered material to the financial statements the financial statements need to be adjusted ______. A. under the rollover, but not the iron curtain approach B. under both the iron curtain and rollover approaches C. so that any remaining misstatement would be considered immaterial D. under the iron curtain, but not under the rollover approach
B. under both the iron curtain and rollover approaches C. so that any remaining misstatement would be considered immaterial
Most firms have a policy that publicly traded companies and privately held companies whose financial statements are expected to be widely distributed will ______. A. review all of the auditor's working papers B. undergo an engagement quality review C. correct all projected errors D. evaluate the conclusions reached by the auditor
B. undergo an engagement quality review
The FASB recently issued an Accounting Standards Update ______. A. creating a departure from the standard role of auditors which is to evaluate and report on managements' assertions B. which relieves the auditor of addressing going concern issues C. requiring an entity's management to evaluate the entity's ability to continue as a going concern
C. requiring an entity's management to evaluate the entity's ability to continue as a going concern
True or false: In evaluating misstatements related to accounting estimates, if the auditor believes the estimated amount included in the financial statements is unreasonable, the difference between the estimated amount and the closest reasonable estimate should be disclosed in the footnotes.
False
Commitments entered into to obtain a favorable or predictable pricing agreement or to secure the availability of raw materials are known as - ____-____ hedges
cash-flow
Pending or threated litigation is an example of a(n)------------
contingent liability
The "carryover effects" of uncorrected prior year misstatements are ignored when misstatements are evaluated using the ___________ approach.
rollover
Reviewers evaluate whether the work was performed and documented and whether the objectives of the procedure were achieved when reviewing the ________
working papers
There should be a review by an audit team member who is senior to the person in charge of preparing the ____ ________
working papers
The settlement of a lawsuit after the balance sheet date but before the financial statements are issued for an amount different from the amount recorded in the year-end financial statements is considered a Type ______ subsequent event. A. I B. II
A. I
Which of the following statements is correct? A. It is expected that all known misstatements will be corrected. B. It is expected that only material misstatements will be corrected. C. The auditor generally requires all proposed adjustments be booked. D. Immaterial misstatements are not communicated to the entity.
A. It is expected that all known misstatements will be corrected.
Which of the following are evaluated during a working paper review? A. Was the work documented? B. Was the work performed? C. Was the correct audit opinion reached? D. Were the objectives of the procedure achieved?
A. Was the work documented? B. Was the work performed? D. Were the objectives of the procedure achieved?
In a legal letter management should request the attorneys provide information including ______. A. a list of pending or threatened litigation B. the amount or range of potential loss for any pending or threated litigation C. an indication of the attorney's response is limited in any way D. a description and evaluation of any ongoing litigation
A. a list of pending or threatened litigation B. the amount or range of potential loss for any pending or threated litigation C. an indication of the attorney's response is limited in any way
In a legal letter management should request the attorneys provide information including ______. A. an indication of the attorney's response is limited in any way B. the amount or range of potential loss for any pending or threated litigation C. a description and evaluation of any ongoing litigation D. a list of pending or threatened litigation
A. an indication of the attorney's response is limited in any way B. the amount or range of potential loss for any pending or threated litigation D. a list of pending or threatened litigation
The PCAOB requires that audit documentation be retained for 7 years from the date of the ______. A. auditor's report B. engagement quality review C. balance sheet
A. auditor's report
Accounting Standards Update Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern requires ______. A. auditors to make an independent assessment to evaluate the adequacy of management's going concerns disclosures B. managers to make an independent assessment to evaluate the adequacy of the auditor's going concerns disclosures C. auditors to first evaluate the entity's ability to continue in existence as a going concern D. management to first evaluate the entity's ability to continue in existence as a going concern
A. auditors to make an independent assessment to evaluate the adequacy of management's going concerns disclosures D. management to first evaluate the entity's ability to continue in existence as a going concern
All financial statements, including related notes, have been prepared and all significant audit documentation have reviewed and approved by the ______. A. date of the auditor's report B. subsequent events date C. balance sheet date D. date of issuance of the financial statements
A. date of the auditor's report
The PCAOB requires that the auditor retains all ______. A. documents that "form the basis of the audit or review" B. correspondence between members of the engagement team C. documents inconsistent with the final conclusion for significant matters
A. documents that "form the basis of the audit or review" C. documents inconsistent with the final conclusion for significant matters
Contingent liabilities include ______. A. income tax disputes B. customer advances C. unearned revenues D. product warranties
A. income tax disputes D. product warranties
The PCAOB requires that firms archive their public company audit files for retention within ______. A. 45 days following the time the auditor completes field work and prepares the audit report B. 45 days following the time the auditor grants permission to use the auditor's report in connection with the financial statements C. 60 days following the engagement quality review D. 60 days following the balance sheet date
B. 45 days following the time the auditor grants permission to use the auditor's report in connection with the financial statements
The entity's balance sheet date is December 31, 2018, the date of the auditor's report is February 8, 2019, and the financial statements are issued on March 2, 2019. The formal subsequent-events period is: A. February 8, 2019 to March 2, 2019 B. December 31, 2018 to February 8, 2019 C. December 31, 2018 to March 2, 2019 D. January 1, 2018 to December 31, 2018
B. December 31, 2018 to February 8, 2019
The entity's balance sheet date is December 31, 2018, the date of the auditor's report is February 8, 2019, and the financial statements are issued on March 2, 2019. The formal subsequent-events period is: A. January 1, 2018 to December 31, 2018 B. December 31, 2018 to February 8, 2019 C. December 31, 2018 to March 2, 2019 D. February 8, 2019 to March 2, 2019
B. December 31, 2018 to February 8, 2019
.The entity's balance sheet date is December 31, 2018, the date the auditor obtained sufficient evidence for the report is February 8, 2019, and the financial statements are issued on March 2, 2019. On February 27, 2019, the entity entered into an agreement to purchase a competitor. If the audit report is dated February 27, 2019, the auditor is ______. A. limiting responsibility for all events to February 8, 2019 B. accepting responsibility for identifying any material matters that occur up to February 27, 2019 C. limiting responsibility for events occurring after February 8, 2019 to the subsequent event (competitor purchase)
B. accepting responsibility for identifying any material matters that occur up to February 27, 2019
If a subsequent event related to internal control reveals information about a material weakness that existed as of the end of the reporting period, the auditor should issue a(n) ______ opinion on the effectiveness of internal control over financial reporting. A. unqualified B. adverse C. qualified D. disclaimer of
B. adverse
An auditor includes an explanatory paragraph that describes the event and its effects if a subsequent event related to internal control reveals ______. A. information that there were changes in internal control between the end of the reporting period and the date of the auditor's report B. adverse information about an internal control condition that did not exist as of the end of the reporting period C. information about a material weakness that existed as of the end of the reporting date
B. adverse information about an internal control condition that did not exist as of the end of the reporting period
The date of the representation letter is generally the date of the ______. A. issuance of the financial statements B. auditor's report C. balance sheet
B. auditor's report
The final evaluation of audit evidence from the financial statement audit is primarily concerned with _______. A. valuation of the audit evidence B. effects of detected misstatements in the financial statements C. sufficiency of the audit evidence D. completeness of the audit evidence
B. effects of detected misstatements in the financial statements C. sufficiency of the audit evidence
When misstatements that occurred in prior years were left uncorrected because they were deemed immaterial, the SEC requires that current year misstatements be ______. A. corrected immediately B. evaluated using the "rollover" approach C. considered material misstatements D. evaluated using the "iron curtain" approach
B. evaluated using the "rollover" approach D. evaluated using the "iron curtain" approach
An auditor perform analytical procedures to help evaluate overall financial statement presentation during the ______ stage of the audit. A. field work B. final review C. planning D. interim
B. final review
According to auditing standards, analytical procedures are required during the ______ stages of an audit. A. interim B. final review C. planning D. field work
B. final review C. planning
The FASB standard relating to going concern issues requires a "look-forward" period of ______. A. 1 year from the balance sheet date B. 45 days from the date of the auditor's report C. 1 year from the financial statement issuance date D. 120 days from the end of field work
C. 1 year from the financial statement issuance date
Refusal by an entity's attorney to furnish information in a legal letter is ______. A. acceptable if the attorney has probable cause to refuse B. against the law and prohibited by the SEC C. a limitation on the scope of the audit
C. a limitation on the scope of the audit
When misstatements that occurred in prior years were left uncorrected because they were deemed immaterial, the SEC requires that current year misstatements be evaluated using ______ approach. A. only the "iron curtain" B. only the "rollover" C. both the "iron curtain" and "rollover" D. either the "iron curtain" or "rollover"
C. both the "iron curtain" and "rollover"
If the final analytical procedures indicate material misstatements, exist the auditor should ______. A. issue a qualified opinion B. issue a disclaimer of opinion C. gather additional audit evidence D. withdraw from the engagement
C. gather additional audit evidence
When an auditor reviews the minutes of the board of directors meetings and makes inquiries of entity personnel during the audit of the revenue and purchasing processes, (sh)he is most likely trying to ______. A. determine if there are any unasserted claims B. identify Type I subsequent events C. identify long-term commitments D. identify Type II subsequent events
C. identify long-term commitments
The auditor ____ require all proposed adjustments to be booked. A. should always B. should never C. may or may not
C. may or may not
Any misstatements detected during the audit process ______. A. require the auditor to compare the likely misstatement to the aggregated misstatement and reject the account balance B. that are not corrected require the auditor to issue an adverse opinion C. must be considered in terms of the materiality of their effects on the financial statements D. that exceed the planned level of detection risk are considered material and must be corrected by management
C. must be considered in terms of the materiality of their effects on the financial statements
The auditor assesses the entity's ability to continue as a going concern ______. A. after the archival period for working papers B. throughout the testing phases of the engagement C. near the end of the engagement D. during the planning of the engagement
C. near the end of the engagement D. during the planning of the engagement
In general, an attorney is required to disclose an unasserted claim when it is ______ outcome. A. probable, regardless of the expected B. either probable or possible and there is a reasonable possibility of an unfavorable C. probable and there is a reasonable possibility of an unfavorable D. probable or possible, regardless of the expected
C. probable and there is a reasonable possibility of an unfavorable
Final analytical procedures provide a "smell test". Which of the following explains the meaning of this phrase? A. Where should audit effort and attention be focused? B. Are internal controls operating effectively? C. Were any errors made by the entity during the period under audit? D. Do the financial statement amounts make sense?
D. Do the financial statement amounts make sense?
Regarding responsibility for reporting changes in internal controls that might adversely affect financial reporting between the end of the reporting period and the date of the auditor report, auditors are ______. A. only responsible for reporting changes in internal control about material weaknesses that existed at the end of the reporting period B. never responsible for reporting these types of changes in internal controls C. only responsible for reporting changes in internal control relating to events that did not exist at the end of the reporting period D. always responsible for reporting these types of changes in internal controls
D. always responsible for reporting these types of changes in internal controls
The primary purpose of a legal letter is to ______. A. determine if there is substantial doubt about the entity's ability to continue as a going concern B. corroborate legal expense for the period C. identify a list of attorneys who have been consulted by the entity D. corroborate information provided by management about litigation, claims and assessments
D. corroborate information provided by management about litigation, claims and assessments
Misunderstandings between management and the auditor are reduced by the ______. A. legal letter B. minutes of board of directors meetings C. audit opinion D. representation letter
D. representation letter
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called ______. A. subsequent commitments B> contingent events C. contingent commitments D. subsequent events
D. subsequent events
When an auditor using wording in his or her report such as "February 19, 2019 except for Note 4 which is as of March 3, 2019" the audit report is said to be ........
Dual dated
True or false: When the auditor is evaluating the effects of detected misstatements in the financial statements, the auditor must consider both quantitative and qualitative aspects of the account and transaction involved.
True
The auditor is determining whether there is enough to support each relevant assertion when evaluating the sufficiency of the .....
audit evidence
To ensure all required footnotes have been properly included, most public accounting firms use some type of financial statement_______ _________
disclosure checklist
The loss of an entity's manufacturing facility resulting from an earthquake that occurred after the balance sheet date but before the financial statements are issued is considered a Type ______ subsequent event. A. II B. I
A. II
During the subsequent period, AS 22021 states the public company auditor should ______. A. inquire about and examine relevant internal audit reports B. exclude information about the effectiveness of ICFR obtained through other engagements from consideration C. inquire about and examine regulatory agency reports on ICFR D. exclude any independent auditor reports (other than the primary auditor's) of significant deficiencies or material weaknesses from consideration
A. inquire about and examine relevant internal audit reports C. inquire about and examine regulatory agency reports on ICFR
Audit procedures likely to identify conditions and events that indicate going concern problems include ______. A. inquiry of legal counsel B. engagement quality review C. risk assessment D. review of subsequent events
A. inquiry of legal counsel C. risk assessment D. review of subsequent events
The legal letter routinely requests that the attorney _____. A. provide the amount that should be accrued for a loss related to general business risks B. indicate if his or her response is limited in any way C. comment on unasserted claims where his or her views differ from management D. identify short-term obligations expected to be refinanced
B. indicate if his or her response is limited in any way C. comment on unasserted claims where his or her views differ from management
The entity's balance sheet date is December 31, 2018, the date of the auditor's report is February 8, 2019, and the financial statements are issued on March 2, 2019. Regarding the period between February 8, 2019 and March 2, 2019, the auditor ______. A. actively conducts audit procedures related to the current-year audit B. is not responsible for making any inquiries or conducting any audit procedures C. should not make any adjustments or disclosured for items discovered during this time
B. is not responsible for making any inquiries or conducting any audit procedures
The entity's balance sheet date is December 31, 2018, the date of the auditor's report is February 8, 2019, and the financial statements are issued on March 2, 2019. Regarding the period between February 8, 2019 and March 2, 2019, the auditor ______. A. should not make any adjustments or disclosured for items discovered during this time B. is not responsible for making any inquiries or conducting any audit procedures C. actively conducts audit procedures related to the current-year audit
B. is not responsible for making any inquiries or conducting any audit procedures
The auditor obtains the representation letter from ______. A. the board of directors B. management C. legal counsel D. the SEC
B. management
The engagement quality reviewer is a(n) ______. A. independent outside party hired by the auditor to ensure quality control B. partner not associated with the details of the engagement C. senior-in-charge who has previous experience auditing the entity
B. partner not associated with the details of the engagement
The Sarbanes-Oxley Act of 2002 requires the CEO and the CFO to certify the appropriateness of the financial statements and related disclosures for ______. A. monthly filings with financial institutions B. quarterly filings with the SEC C. annual filings with the SEC D. annual filings with the IRS
B. quarterly filings with the SEC C. annual filings with the SEC
When significant changes are made to the planned audit approach at any point during the audit, the final documentation should indicate ______. A. any subsequent proceedings or litigation B. rationale for the change in plan C. modifications to the plan D. the original plan E. the archival and retention periods for the documentation
B. rationale for the change in plan C. modifications to the plan D. the original plan
The date of the auditor's report is ______. A. the date before which all subsequent events are considered Type I subsequent events B. the date after which all subsequent events are considered Type II subsequent events C. no earlier than the date on which the auditor has obtained sufficient appropriate evidence D. the date on which management must have explicitly taken responsibility for the financial statements E. the date on which all significant audit documentation must have been reviewed and approved
C. no earlier than the date on which the auditor has obtained sufficient appropriate evidence D. the date on which management must have explicitly taken responsibility for the financial statements E. the date on which all significant audit documentation must have been reviewed and approved
A Type I subsequent event ______. A. is usually accounted for by disclosure in the notes to the financial statements B. provides evidence about conditions that did not exist at the balance sheet date C. requires adjustment of the numbers in the financial statements
C. requires adjustment of the numbers in the financial statements
True or false: The entity's balance sheet date is December 31, 2016, the date of the auditor's report is February 8, 2017, and the financial statements are issued on March 2, 2017. The auditor is not responsible for making any inquiries or conducting any audit procedures in the period between February 8, 2017 and March 2, 2017.
True
In order to be considered a Type I subsequent event, the condition must have ______ existed at the balance sheet date not already
already
Companies often enter into long-term agreements to purchase raw materials or sell products at a fixed price. Such agreements are called
commitment
Inquiry of entity personnel during the audit of the revenue and purchasing processes and a review of the minutes of the board of directors meetings is usually done to identify long-term ...........
commitments
When an auditor using wording in his or her report such as "February 19, 2019 except for Note 4 which is as of March 3, 2019" the audit report is said to be.........
dual dated
The sufficiency of the audit evidence and the effects of detected misstatements in the financial statements are the primary concerns of the ________ of audit evidence.
final evaluation
The period from the date of the financial statements to the date of the auditor's report is sometimes referred to as the ____________ subsequent-events period.
formal
The auditor has a responsibility to evaluate whether there is substantial doubt about an entity's ability to keep doing business or, in other words, whether or not the entity considered to be a(n)____ ______
going concern
If a misstatement accumulates to a material amount over two or more periods, the entire accumulated misstatement must be corrected under the ______ ______ approach
iron curtain
When misstatements are quantified based on the amount required to correct the misstatement in the balance sheet at period end, regardless of misstatement's year of origination, the ______ __________ approach is being used
iron curtain
Most firms have a policy requiring an engagement ______ ___________ be performed for publicly traded companies and for privately held companies whose financial statements are expected to be widely distributed.
quality review
