Exam 5

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Interest expense

satisfying professional requirements to communicate matters related to the client's internal control.

Investigate changes in long-term debt occurring after year end.

The Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports?

January 25 and February 1

Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects. The suit was filed on November 10, 2014 and properly disclosed in Krenzel's December 31, 2014 financial statements. Krenzel's auditors completed their engagement and their report (along with Krenzel's financial statements) were released on February 5, 2014. How would a settlement of this lawsuit on January 17, 2015 be properly reflected in Krenzel's financial statements?

Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.

Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements?

Loss of inventory as a result of a flood

Which of the following is NOT a condition that must be met before an accountant can conduct an engagement concerning a nonpublic entity's internal control over financial reporting?

Management has appropriately documented the internal controls.

During a review the auditor is required to obtain written representations from management. Which of the following is NOT one of the required elements of the representation?

Management has made all adjustments identified during the review

Which of the following is not a subject that appears in written representations in the audit of both public and nonpublic entities?

Management's assessment of the effectiveness of its internal control over financial reporting.

Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity?

Management's opinion as to the effectiveness of its internal control over financial reporting

The AICPA Assurance Services Executive Committee identified five megatrends that can affect public accounting firms' business. Which of the following is NOT one of the megatrends they identified?

Merging of corporations creating fewer audit opportunities

Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments?

Performing analytical procedures

Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events?

Performing cutoff testing near year end

Which of the following is NOT a principle of Trust Service engagements?

Proficiency in preparing transactions

Other Comprehensive Basis of Accounting (OCBOA) includes all of the following EXCEPT

statements that conform to accounting principles that are generally accepted.

If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n)

subsequently discovered fact.

Small and Tall, CPAs, completed the December 31, 2014 audit of Big Company on February 10, 2015. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2014 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs, should

take no action since the event took place after the audit report release date.

Compiled financial statements of a nonpublic entity should be accompanied by a report stating that

the accountant does not express an opinion or any other form of assurance on the financial statements.

An accountant's report includes the phrase "We are not aware." This phrase indicates

the auditor is providing negative assurance.

Attestation engagements may be more difficult than financial statement audits when

the establishment of suitable measurement criteria is difficult.

A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on

the fair presentation of the financial statements in conformity with GAAP.

A responsible party for information to subject to an attestation engagement would not include

the independent accountant.

Hamell Corporation is making a presentation to a perspective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. The CPA should insure that proper disclosure is made to indicate that

the range does not indicate a "best" and "worst" case scenario.

The reporting standards for an attestation are different from that of an audit because they require

the report to identify the subject matter of the assertion being reported on.

Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously-expressed opinion. Auditors need not try to perform the omitted procedure if

the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.

Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2014. On January 11, 2015, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2015. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to

treat the loss as a subsequent event and provide a footnote about the loss in the 2014 financial statements.

When providing limited assurance that the reviewed financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should

understand the accounting principles of the industry in which the entity operates.

On March 15, 2015, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2014. On May 4, 2015, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first

undertake to apply alternative procedures that would provide a satisfactory basis for the opinion.

When interim financial information is presented as supplementary information accompanying audited financial statements, the auditor should make reference to the information

when it has not been labeled as "unaudited."

Which of the following reporting options is available if the client refuses to provide auditors with written representations?

Qualified opinion or disclaimer of opinion

Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity?

Read the minutes of the board of directors' meetings.

ABC Company prepares financial statements showing the last two years, years X and Y. (Year X is the year prior to year Y.) The auditor performed an audit of year X and a review of year Y. The auditor may

report on the year Y review and reissue the year X audit report.

Near the end of an audit, the application of analytical procedures is

required by auditing standards.

In an agreed-upon procedures engagement, an accountant

restricts the report to specified users.

Which of the following is typically not included in the inquiry letter sent to the client's attorneys?

A disclaimer regarding the likelihood of settlement of pending litigation

If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event?

A significant acquisition that was announced on February 1 and will be finalized on October 1.

Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company?

An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure

AR 90 requires adequate documentation for a review engagement. Which items are required to be documented?

Analytical procedures: Yes; Management representations: Yes; Understanding of internal controls: No

Which of the following forms of communication ordinarily does not take place following completion of the audit examination?

Attorney letter.

Which of the following forms of communication serves as a critical part of auditors' examination of litigation, claims, and assessments?

Attorney letter.

To whom should written representations be addressed?

Auditors

Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity?

Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

Which of the following statements is not true with respect to the auditors' evaluation of going-concern uncertainties?

Auditors are required to gather specific evidence to assess going-concern uncertainties.

Which of the following account titles would not be appropriate for a company that prepared its financial statements using the tax basis of accounting?

Balance Sheet

Navarre, CPA has just issued his report on Big Blue's financial statements. Following the audit report release date, he learned of an event that occurred after the date of the auditors' report. What is Navarre's most appropriate response?

Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event.

Assume that Rory is auditing the financial statements of Augusta Inc. Rory completes his fieldwork on February 25 and his report (along with Augusta's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements?

Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.

Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?

Client

What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist?

Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report.

Which of the following would ordinarily not be performed in the auditors' examination of litigation, claims, and assessments?

Confirm litigation, claims, and assessments with parties bringing suit or action against the client.

Which of the following steps is NOT required in performing a compliance attestation engagement?

Confirm restrictions with applicable third parties

Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Confirming with third parties the details of arrangements to maintain financial support

Which of the following best describes the auditors' responsibility with respect to management's estimates?

Evaluating the reasonableness of management's estimates

In an audit of contingent liabilities, which of the following procedures would be least effective?

Examining customer confirmation replies

Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern?

Failure to meet forecasted earnings per share

If auditors are appointed on January 3, 2014, the date of the financial statements is December 31, 2014, the date of the auditors' report is February 7, 2015, and the audit report release date is March 3, 2015, what is the appropriate date of the written representations?

February 7, 2015

Auditors can gain sufficient understanding of the internal controls at a service organization by

reviewing a report on internal controls provided by the service organization's auditors.

Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts?

Current-year recorded (unaudited) balances

Management letters are not a means of

satisfying professional requirements to communicate matters related to the client's internal control.

Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take?

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments?

Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.

Which of the following parties provides a review of audit documentation for the primary purpose of ensuring that the quality of the work and reporting is consistent with the quality standards of the public accounting firm?

Engagement quality reviewer.

Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously-issued financial statements?

New information is discovered concerning undisclosed lease transactions during the period under audit.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity?

Obtain a client representation letter from members of management.

Which of the following procedures would not be performed in a review of financial statements of a nonpublic company?

Obtain an attorney's letter regarding litigation and unasserted claims.

For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit?

Obtaining evidence about assertions related to account balances or classes of transactions

Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?

Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonpublic entity?

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles

Which of the following is not ordinarily associated with the time period following the audit report release date?

Roll-forward work.

Which of the following is the most effective method of identifying potential earnings management attempts?

Scanning accounts for unusual items

Which of the following events or activities may occur following the audit report release date?

Subsequently discovered facts

During a review engagement, which of the following is NOT a required inquiry of management?

The changes made to internal controls during the period under review

Why is it the client's decision to record adjustments to the financial statements?

The financial statements are the responsibility of the client's management.

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses?

These accounts may represent attempts of earnings management.

Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork?

To ensure that the overall scope of the audit was appropriate

What is the primary purpose of obtaining written representations?

To impress upon management its primary responsibility for the financial statements

What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing integrity, availability, and confidentiality?

WebTrust

The phrase "Trust services" refers to

WebTrust and SysTrust Services.

A form of communication used by auditors to ensure that all significant matters have been disclosed to auditors during the engagement is a(n):

Written representations.

When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements

might influence users' conclusions about the business, if the disclosures were included.

Many individuals are apprehensive about using the Internet to purchase items. This apprehension mainly arises from users' concerns about

a lack of security for information transmitted over the Internet.

At a minimum, in order to comply with PCAOB AS 5, an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization

a type two service auditors' report.

Type 1 subsequent events require the financial statements to be _______ if needed.

adjusted

Type 2 subsequent events come into existence _____ the balance sheet date.

after

Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be

an attestation engagement.

The procedures used in a review engagement are

analytical procedures, inquiry, and obtaining a management representation letter.

The primary objective of analytical procedures used near the end of an audit is to

assist auditors in evaluating the overall financial statement presentation.

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the

audit report release date.

Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the

audit report release date.

An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the:

audit work meets the quality standards of the firm.

In order to perform a review of interim financial information, the auditor must have

audited or be in the process of auditing the entity's latest financial statements.

Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be _______.

misleading

When a company uses a service organization to prepare its payroll, the company's auditors

need to understand the internal controls over the transaction regardless of the location of the control.

An important method used by auditors to learn of material contingencies is

obtaining responses to an attorney letter.

Interim testing normally occurs between the ____ and the ____.

beginning of the year under audit; date of the financial statements

Enhanced Business Reporting (EBR) focuses on improving business reporting by developing a voluntary framework for presentation and disclosure of value drivers and nonfinancial measures of performance. The advantages of EBR include all of the following except

better footnote disclosure in companies' SEC filings.

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by

performing analytical procedures designed to disclose differences from expectations.

Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the

client's management.

The primary source of information auditors use to obtain information about litigation, claims, and assessments is the

client's management.

The accountant's standard report for a compilation service would not include a statement that

compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data.

Hamell Corporation is making a presentation to a prospective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. In order to provide such a report the CPA must do all of the following EXCEPT

confirm expected sales with customers.

Analytical procedures performed near the end of an audit generally include

considering unusual or unexpected account balances that were not previously identified.

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that

refers to the note to the financial statements that describes the special purpose framework.

Roll-forward work normally occurs between the ____ and the ____.

date of interim work; date of the auditors' report

Subsequent events occur between the ____ and the ____.

date of the financial statements; date of the auditors' report

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta's auditor. If Wall discovers that the statements are not suitably titled, Wall should

disclose any reservations in an explanatory paragraph and qualify the opinion.

In a compilation engagement, the accountant

does not express an opinion.

Attestation engagements include

examinations, reviews, and agreed-upon procedures.

The CPA's opinion on the ______ of the financial statements may be changed by subsequent events.

fairness

In an agreed-upon procedures engagement, an accountant must

follow the attestation standard related to evidential matter.

Assurance services are defined as independent professional services that

improve the quality of information, or its context, for decision makers.

Extensible Business Reporting Language (XBRL) provides a computer readable identifying tag for each individual item of data. The advantages of XBRL include all of the following except

improves the full disclosure of financial information.

In reporting on a nonpublic entity's internal control over financial reporting, an accountant should include a paragraph that describes the

inherent limitations of internal control.

A report on sustainability, as defined by the AICPA, might include all of the following except

internal control over financial reporting.

Reports on an entity's internal control over financial reporting

is required by the PCAOB for large public companies and may be performed by a CPA for nonpublic companies.

An auditor that is requested to provide a report on application of requirements of an appropriate financial reporting framework may not

issue an opinion on the accounting treatment of a hypothetical transaction.

Many subsequent events may involve the settling of ________.

litigation

In a compilation engagement,

managers or owners may choose to omit all the footnote disclosures.