Final: Quiz 7 - Audit Completion Activities (51)

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations: a. Complement, but do not replace, substantive tests designed to support the assertion. b. Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal control. c. Are not part of the audit evidence considered to support the assertion. d. Replace reliance on internal control as evidence to support the assertion.

a. Complement, but do not replace, substantive tests designed to support the assertion.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: a. Extend the due dates of existing loans. b. Operate at increased levels of production. c. Accelerate expenditures for research and development projects. d. Issue stock options to key executives.

a. Extend the due dates of existing loans.

Wilson, CPA, completed the fieldwork of the audit of Abco's December 31, 2001 financial statements on March 6, 2002. A subsequent event requiring adjustment to the 2001 financial statements occurred on April 10, 2002 and came to Wilson's attention on April 24, 2002. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated: a. March 6, 2002. b. April 10, 2002. c. April 24, 2002. d. Using dual dating.

a. March 6, 2002.

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to: a. Matters to which the attorney has given substantive attention in the form of legal representation. b. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. c. The attorney's opinion of the entity's historical experience in recent similar litigation. d. The probable outcome of asserted claims and pending or threatened litigation.

a. Matters to which the attorney has given substantive attention in the form of legal representation.

All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee. a. True b. False

a. True

Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying notes. a. True b. False

a. True

By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report. a. True b. False

a. True

If the auditor determines that informative disclosures are not reasonably adequate, the auditor must identify that fact in the auditor's report. a. True b. False

a. True

Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful in assessing whether certain relationships make sense in light of knowledge obtained during the audit. a. True b. False

a. True

Regarding loss contingencies, legal counsel should be instructed by the client to respond directly to the auditors. a. True b. False

a. True

Significant changes in the competitive market and a decrease in the competitiveness of the client's products are potential indicators of going-concern problems. a. True b. False

a. True

Assume that a major customer of the company that you are auditing files for bankruptcy during the subsequent period because of a deteriorating financial condition. Neither you nor the client becomes aware of the event until the bankruptcy filing is reported. What type of subsequent event would this be? a. Type I subsequent event. b. Type II subsequent event. c. Neither Type I nor Type II. d. Both Type I and Type II.

a. Type I subsequent event.

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered: a. Grounds for an adverse opinion. b. A limitation on the scope of the audit. c. Reason to withdraw from the engagement. d. Equivalent to significant deficiency.

b. A limitation on the scope of the audit.

Which of the following is not a required communication with the audit committee? a. Auditor's responsibility under GAAS. b. Analytical review. c. Audit adjustments. d. Uncorrected misstatements.

b. Analytical review.

Which of the following procedures is not performed as part of an engagement quality review? a. Evaluate judgments about materiality and the disposition of corrected and uncorrected identified misstatements. b. Call each board member to discuss the potential for fraud. c. Confirm with the lead audit partner that there are no significant unresolved matters. d. Evaluate whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit.

b. Call each board member to discuss the potential for fraud.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Examine changes in the quoted market prices of investments purchased since the year-end. b. Compare the latest available interim financial information with the financial statements being reported upon. c. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates. d. Inquire about payroll checks that were recorded before the year-end but cashed after the year-end.

b. Compare the latest available interim financial information with the financial statements being reported upon.

An auditor requests a client to send letters of audit inquiry to attorneys who have been consulted concerning litigation, claims, and assessments. The primary reason for this request is to obtain: a. The attorney's assurance that litigation, claims, and assessments that are probable of assertion are properly accounted for. b. Corroboration of the information furnished by management concerning litigation, claims, and assessments. c. A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcomes. d. The opinion of an expert whether any loss contingencies are possible, probable, or remote.

b. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

1. The auditor should discuss with the audit committee any control deficiencies that were identified and were not remediated prior to year-end. a. True b. False

b. False

An audit opinion is a guarantee that the business is a going concern. a. True b. False

b. False

If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations, then the auditor should withdraw from the engagement. a. True b. False

b. False

Type I subsequent events indicate conditions that did not exist at the balance sheet date, but that may require disclosure. a. True b. False

b. False

When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if this fact had been known at year-end. a. True b. False

b. False

After completing the audit report of Blair Corporation, but before delivering the audit report to the client, a tornado demolished the main production facility. In this case, what option is available to the auditor other than dual dating the report? a. Use the original audit report date. b. Go back to the client's office and extend testing to the date of the tornado, thereby taking responsibility for all events up to the date of the tornado. c. Report the situation in the management representation letter. d. Issue a scope limitation.

b. Go back to the client's office and extend testing to the date of the tornado, thereby taking responsibility for all events up to the date of the tornado.

In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by management to the auditor, which of the following is the client's lawyer not requested to provide? a. Information on the completeness of management's list. b. Information on the compliance of the disclosures with GAAP. c. Information on the likelihood and range of possible losses. d. Information on any limitations on the lawyer's response.

b. Information on the compliance of the disclosures with GAAP.

If substantial doubt remains about going concern for a client at the end of the audit, then which of the following reports should the auditor typically issue? a. Issue an unqualified audit report. b. Issue an unqualified audit report with an explanatory paragraph. c. Issue a qualified report. d. Issue an adverse report.

b. Issue an unqualified audit report with an explanatory paragraph.

Which of the following individuals should sign the management representation letter? a. The members of the audit committee and board of directors. b. The chief executive officer and the chief financial officer. c. The chief financial officer and the treasurer. d. The controller and the auditor.

b. The chief executive officer and the chief financial officer.

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by a. The staff accountant who performed the substantive auditing procedures. b. The managing partner who has responsibility for all audit engagements at that practice office. c. A manager or partner who has a comprehensive knowledge of the client's business and industry. d. The CPA firm's quality control manager or partner who has responsibility for the firm's peer review program.

c. A manager or partner who has a comprehensive knowledge of the client's business and industry.

Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies? a. Information about major contracts in which contingencies may be present. b. Documentation of communication with internal and external legal counsel of the client. c. Accounts receivable confirmations. d. Documentation of contingent liabilities contained in corporate minutes, correspondence from governmental agencies, and bank confirmations.

c. Accounts receivable confirmations.

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that: a. Irregularities exist among the relevant account balances. b. Internal control activities are not operating effectively. c. Additional tests of details are required. d. The communication with the audit committee should be revised.

c. Additional tests of details are required.

Assessing disclosures does not require reasonable assurance of which of the following? a. The disclosures are understandable to users. b. Disclosed events and transactions have occurred and pertain to the entity. c. All material and immaterial disclosures have been reported. d. The information is disclosed accurately and at appropriate amounts.

c. All material and immaterial disclosures have been reported.

When requiring a letter of audit inquiry from the client's attorney, which of the following information will be requested? a. A statement regarding conflicts of interest that the attorney may have with the client. b. The attorney's expert opinion of proper GAAP treatment related to client contingencies. c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies. d. Possible auditor defenses for third-party litigation related to ordinary negligence claims.

c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies.

An additional partner review of the audit and its findings is typically performed by an experienced member of the firm. Which of the following individuals is most qualified to perform this concurring partner review? a. The engagement partner who has worked on the client for three years. b. An employee of the enforcement division of the SEC. c. An experienced partner of the firm who did not actively participate on the audit. d. A partner of another firm or office who knows the client well and who was a vital member of the audit team.

c. An experienced partner of the firm who did not actively participate on the audit.

The date of the management representation letter should coincide with the date of the: a. Balance sheet. b. Latest interim financial information. c. Auditor's report. d. Latest related-party transactions.

c. Auditor's report.

Which one of the following is not a key condition indicating doubt about a client's ability to continue as a going concern? a. Adverse key financial ratios. b. Employee strike that halts operations for several months. c. Company has not paid dividends to date. d. Default on bank debt.

c. Company has not paid dividends to date.

Which of the following procedures is the least useful analytical procedure to indicate that further audit work needs to be performed before rendering the audit opinion? a. Developing a common-size analysis. b. Analyzing the dollar and percentage changes in each income statement item over the previous year. c. Comparing current earnings per share with earnings per share of the client's primary competitor. d. Developing a ratio analysis.

c. Comparing current earnings per share with earnings per share of the client's primary competitor.

Analytical procedures used in the overall review stage of an audit generally include: a. Gathering evidence concerning account balances that have not changed from the prior year. b. Retesting control procedures that appeared to be ineffective during the assessment of control risk. c. Considering unusual or unexpected account balances that were not previously identified. d. Performing tests of transactions to corroborate management's financial statement assertions.

c. Considering unusual or unexpected account balances that were not previously identified.

The date of the audit opinion of Upton Industries, Inc. reads: March 7, 20Y8 except for Note D, as to which the date is March 12, 20Y8. What is this an example of? a. Improper reporting. b. A GAAP violation. c. Dual dating. d. A contingent event.

c. Dual dating.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: a. Increase current dividend distributions. b. Reduce existing lines of credit. c. Increase ownership equity. d. Purchase assets formerly leased.

c. Increase ownership equity.

When responding to the auditor as a result of the audit client's letter of inquiry, how might the attorney limit the response? a. Limit the response to litigations in process. b. Limit the response to asserted claims. c. Limit the response to matters to which the attorney has given substantive attention in the form of legal consultation or representation. d. Limit the response to items which the attorney believes will result in loss to the client.

c. Limit the response to matters to which the attorney has given substantive attention in the form of legal consultation or representation.

An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was: a. Extended to subsequent events occurring through the date of issuance of the report. b. Extended to include all events occurring since the completion of fieldwork. c. Limited to the specific event referenced. d. Limited to include only events occurring up to the date of the last subsequent event referenced.

c. Limited to the specific event referenced.

For which of the following matters should an auditor obtain written management representation? a. Management's cost-benefit justifications for not correcting internal control weaknesses. b. Management's knowledge of future plans that may affect the price of the entity's stock. c. Management's compliance with contractual agreements that may affect the financial statements. d. Management's acknowledgement of its responsibility for employees' violations of laws.

c. Management's compliance with contractual agreements that may affect the financial statements.

If the auditor concludes that there may be a going-concern problem, which of the following is not typically evaluated to determine the reasonableness of management's plans to overcome this problem? a. Management's assumption about increasing prices or market share in relationship to current industry developments. b. Management's assumptions about cost savings related to a reduction in the work force should be recomputed and evaluated to determine any hidden costs. c. Management's past track record related to delaying unnecessary expenditures. d. Management's assumptions about selling off assets and their relationship to current market prices.

c. Management's past track record related to delaying unnecessary expenditures.

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? a. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. b. A contingency is resolved that had been disclosed in the audited financial statements. c. New information is discovered concerning undisclosed lease transactions of the audited period. d. A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

c. New information is discovered concerning undisclosed lease transactions of the audited period.

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies? a. Checking arithmetic accuracy of the accounting records. b. Performing appropriate analytical procedures. c. Obtaining a letter of audit inquiry from the client's lawyer. d. Reading the financial statements, including footnotes.

c. Obtaining a letter of audit inquiry from the client's lawyer.

A purpose of a management representation letter is to reduce: a. Audit risk to an aggregate level of misstatement that could be considered material. b. An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on. c. The possibility of a misunderstanding concerning management's responsibility for the financial statements. d. The scope of an auditor's procedures concerning related-party transactions and subsequent events.

c. The possibility of a misunderstanding concerning management's responsibility for the financial statements.

Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What is typically another purpose of analytical procedures at the end of the audit? a. To document planning in accordance with GAAS. b. To provide the client with a value-added service in conjunction with audit activities. c. To ask "hard questions" about the company's results and its relationship to external factors. d. To increase the number of items reported in the management letter.

c. To ask "hard questions" about the company's results and its relationship to external factors.

Which of the following would be a Type II subsequent event? a. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end. b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end. c. A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock dividend or split. d. A material change occurs in the value of investment securities after the balance sheet date.

d. A material change occurs in the value of investment securities after the balance sheet date.

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry? a. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit. b. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit. c. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible. d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? a. Confirming a sample of material accounts receivable established after year-end. b. Comparing the financial statements being reported on with those of the prior period. c. Investigating personnel changes in the accounting department occurring after year-end. d. Inquiring as to whether any unusual adjustments were made after year-end.

d. Inquiring as to whether any unusual adjustments were made after year-end.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Determine that changes in employee pay rates after year-end were properly authorized. b. Recompute depreciation charges for plant assets sold after year-end. c. Inquire about payroll checks that were recorded before year-end but cashed after year-end. d. Investigate changes in long-term debt occurring after year-end.

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

Zero Corp. suffered a loss that would have material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster ten days after Zero's balance sheet date, but one month before the issuance of the financial statements and the auditor's report. Under these circumstances: The financial statements should be adjusted; The event requires financial statement disclosure, but not adjustment; The auditor's report should be modified for a lack of consistency a. Yes; No; No b. Yes; No; Yes c. No; Yes; Yes d. No; Yes; No

d. No; Yes; No