AC461 CH 7, 11, 12

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. 1. Our responsibility is to express an opinion on these financial statements based on our audits. 2. The financial statements referred to above present fairly, in all material respects, the financial position of... 3. We have audited the accompanying financial statements of... 4. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 5. Management is responsible for the preparation and fair presentation of these financial statements...

1. Auditor's Responsibility Section 2. Opinion Paragraph 3. Introductory Paragraph 4. Auditor's Responsibility Section 5. Management's Responsibility Section

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements. 1. Departure from generally accepted accounting principles that is material but not pervasive. 2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. 3. Emphasis of a matter, no GAAP departure. 4. Material, but not pervasive, scope limitation. 5. Material and pervasive departure from GAAP.

1. Qualified 2. Unmodified 3. Unmodified 4. Qualified 5. Adverse

For each of the situations below, indicate, by letter, the type of report most likely to be issued. A. Unmodified opinion, no modification. B. Unmodified opinion, emphasis-of-matter paragraph for consistency. C. Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty. D. Qualified opinion. E. Disclaimer of opinion _____ 1. The entity has a lawsuit pending against them. There is significant uncertainty about the outcome of the lawsuit, which could have a highly material impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements. _____ 2. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern. _____ 3. The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss, but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern. _____ 4. Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year. _____ 5. The entity's management has not provided written representations requested by the auditors. The failure to provide these representations is considered to be a significant limitation on the scope of the auditors' work...

1. Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty. 2. Unmodified opinion, no modification. 3. Qualified opinion. 4. Unmodified opinion, no modification. 5. Disclaimer of opinion

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the:

Accounts receivable listing. Explanation This would have the balance for confirming.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to:

Estimate credit losses. Explanation The age of accounts is an indication of credit losses.

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

Evaluating the reasonableness of management's estimates

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report?

Optiol Explanation The report on internal control over financial reporting would be modified to reference the report on the financial statements; in addition, the report on the financial statements would be modified to reference the report on internal control over financial reporting.

Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements?

The Auditor's Responsibility section.

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

The auditors should disclaim an opinion and should state specifically that they are not independent.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

customers may not be inclined to report understatement errors in their accounts.

Subsequent events occur between the ________ and the ________.

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

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:

do nothing for immaterial balances.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n)

unmodified opinion.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

valuation or allocation. Previous

Which of the following statements is most likely to be included in an attorney letter?

"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information." Explanation The attorney letter would request that the attorney furnish this information to auditors.

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

"These goods were returned for credit on November 15." Explanation This should have been recorded as a reduction or credit to the receivable by 12/31.

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

"These goods were returned for credit on November 15th."

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. 1The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. 2The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840. 2The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the auditors believe the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. 3The entity hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory amount. 5The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as a part of the basic financial statements, has been omitted. 6. The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation and decide not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues. 7. The entity changed its depreciation method from units of production to straight line, and its auditors believe the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. 8. Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the auditors decide that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the auditors believe that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion.

1. Qualified or disclaimer of opinion 2. Qualified or adverse 3. Qualified or adverse 4. Qualified or disclaimer of opinion 5. Unmodified 6. Unmodified 7. Unmodified 8. Unmodified

Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor's report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility?

A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018. Explanation Because this event occurred following the release of Ambrose's report, he would not have responsibility for this event because it relates to the 2018 audit.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take?

Accept the confirmation but verify the source and content through a telephone call to the respondent. Explanation When a reply to a confirmation is received via fax the auditor must determine that the fax actually came from the appropriate person at the client. A telephone call to an appropriate person at the audit client is an acceptable method for verifying the legitimacy of the response.

Which of the following is not included in the standard (unmodified) report on the financial statements?

An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity. Explanation The standard (unmodified) report does not call for economic analysis or commentary in an emphasis-of-matter paragraph.

When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following?

An emphasis-of-matter paragraph. Explanation Emphasis-of-matter paragraphs discuss issues related to users' understanding of the financial statements, such as consistency.

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

Analyze transactions occurring within a few days before and after year-end.

To whom should written representations be addressed?

Auditors

Which of the following statements is not true with respect to the audit examinations and reports for public and nonpublic entities?

Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities. Explanation The reporting requirement for internal control over financial reporting is related to the audit of public entities, not nonpublic entities.

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

Client

Which of these persons generally does not participate in writing the management letter?

Client's outside attorneys. Explanation The client's attorneys would not ordinarily participate in drafting the management letter because this letter concerns helpful suggestions to increase the effectiveness and efficiency of the client's operations.

Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client?

Company A. Explanation The client is the entity or individual that engages the auditor (in this case, Company A).

Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?

Compare the latest available interim financial statements with the financial statements being audited. Explanation Comparing interim financial statements with the financial statements being audited would identify potential subsequent events.

The primary reason auditors request responses to attorney letters is to provide auditors

Corroboration of the information furnished by management about litigation, claims, and assessments. Explanation The attorney letter requests the attorneys to corroborate information furnished from management.

After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?

Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements. Explanation This is the initial course of action that would be taken upon the discovery of an omitted audit procedure.

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.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:

Do nothing for immaterial balances. Explanation Because the confirmations are a sample of the account balance, even immaterial items should be followed up as they represent other balances in the universe of receivables.

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. Explanation Checking the sequence for missing numbers identifies documents not yet fully processed in the revenue cycle. It does not provide evidence about accuracy, cutoff, or occurrence.

Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?

Entity changed its inventory costing method from FIFO to LIFO. Explanation Changing from FIFO to LIFO is a change in accounting principle, which requires an emphasis-of-matter paragraph related to consistency.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that:

Entries in the accounts receivable subsidiary ledger were properly invoiced. Explanation Vouching is used to establish support for recorded amounts.

In the audit of accounts receivable, the most important emphasis should be on the:

Existence assertion. Explanation Financial statement users are more likely to be damaged if assets are found not to exist or assets are overstated.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the:

Existence of the balances confirmed. Explanation Accounts receivable confirmation enables recipients to respond that they owe the company or that they dispute or disagree with the amount the company says they owe.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: a. Accounts receivable represent all amounts owed to the client company at the balance sheet date. b. The client company has a legal right to all accounts receivable at the balance sheet date. c. Accounts receivable are stated at net realizable value. d. Accounts receivable are properly described and presented in the financial statements. Required: For each of these assertions, select the following audit procedure that is best suited for the audit plan. 1. Analyze the relationship of accounts receivable and sales and compare with relationships for preceding periods. 2. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period. 3. Review the aged trial balance for significant past due accounts. 4. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances. 5. Review loan agreements for indications of whether accounts receivable have been factored or pledged. 6. Review the accounts receivable trial balance for amounts due from officers and employees. 7. Analyze unusual relationships between monthly accounts receivable and monthly accounts payable balances.

Explanation a. Accounts receivable represent all amounts owed to the client company at the balance sheet date. 2. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period. b. The client company has a legal right to all accounts receivable at the balance sheet date. 5. (best) Review loan agreements for indications of whether accounts receivable have been factored or pledged. 4. (possible) Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances. c. Accounts receivable are stated at net realizable value. 3. Review the aged trial balance for significant past due accounts to determine if they are realizable. d. Accounts receivable are properly described and presented in the financial statements. 6. (best) Review the accounts receivable trial balance for amounts due from officers and employees. 4. (possible) Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances.

When reporting under GAAS, certain statements are required in all auditors' reports ("explicit") and others are required only under certain conditions ("implicit"). Which combination that follows correctly describes the auditors' responsibilities for reporting?

Explicit, Implicit, Implicit, Explicit Option A Explanation Auditors explicitly report on GAAP and express an opinion; auditors implicitly report on consistency and going-concern.

If auditors are appointed on January 3, 2017, the date of the financial statements is December 31, 2017, the date of the auditors' report is February 7, 2018, and the audit report release date is March 3, 2018, what is the appropriate date of the written representations?

February 7, 2018

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about:

Fictitious sales. Explanation Fictitious sales would increase sales. Because no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for fictitious sales is accounts receivable, causing accounts receivable to increase.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Have customers send payments directly to the company's depository bank. Explanation The cash is not in the same physical place as the employees; therefore it cannot be stolen.

A major objective of written representations is to

Impress on management its ultimate responsibility for the financial statements and disclosures. Explanation This responsibility is explicitly included in the written representations.

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

Inflating sales for the year.

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

Inflating sales for the year. Explanation False sales journal entries made near the end of the year may have shipping or other documents that reveal later dates or show lack of sufficient documentation.

The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Inherent risk was particularly high for accounts receivable.

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Inherent risk was particularly high for accounts receivable. Explanation Because detection risk is lower for positive confirmations than negative confirmations, a positive confirmation is more likely when inherent risk is high.

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

Investigate changes in shareholders' equity occurring after the date of the financial statements. Explanation This procedure may provide information about sales and repurchases of the entity's stock.

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

A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form?

January 30, 2018, except as to Note X, which is dated February 5, 2018. Explanation The report date is the audit completion date and the dual date is the date related to the specific event.

Which of the following is not required by generally accepted auditing standards?

Management letter. Explanation Management letters, while helpful, are not required under generally accepted auditing standards.

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated

March 24, year 2. Explanation Written representations are dated as of the date of the auditor's report (in this case, March 24, Year 2).

An auditor is required to confirm accounts receivable if the accounts receivable balances are

Material to the financial statements. Explanation Confirmation are generally reserved for accounts that are material to the balance being examined, in this case, accounts receivable.

The scope of an audit is not restricted when an attorney letter limits the response to

Matters to which the attorney has given substantive attention in the form of legal representation. Explanation The attorneys' response should be limited to matters to which they have given substantive attention.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation?

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices. Explanation Reviewing the changes in pricing during the year and ensuring that customers were charged the new prices provides sufficient, reliable evidence to support the sales manager's representation.

Which of the following is ordinarily performed last in the audit examination?

Obtaining signed written representations. Explanation Written representations would be obtained on the date of the auditor's report.

The negative request form of accounts receivable confirmation is useful particularly when the:

Option A Low, Many, Likely

Which of the following controls is designed to meet the completeness assertion?

Prenumbering invoices, shipping documents, and sales orders.

Which of the following accounts is not normally part of the revenue and collection cycle?

Purchases Returns and Allowances. Explanation Even though this involves shipments, it is considered part of the expenditure and disbursement cycle, not part of the revenue and collection cycle.

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?

Qualified opinion or adverse opinion. Explanation Because this is a material departure from GAAP, the reporting options are to issue either a qualified or adverse opinion.

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

When financial statements are presented in comparative form and another firm audited the prior years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should

Refer to the report and type of opinion issued by the other firm on the prior years' financial statements. Explanation Both the report and type of opinion expressed on prior years' financial statements should be referenced in the report on the current year's financial statements.

If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should

Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years. Explanation If a previously issued opinion is no longer appropriate, the auditors' report would reference the type of opinion issued as well as the fact that the current opinion differs from the opinion originally issued.

When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that

Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion. Explanation Modification of the report to indicate the work of component auditors with an unmodified opinion is a viable reporting option.

Which of the following normally occurs earliest in the audit examination?

Review of audit documentation. Explanation The review of audit documentation occurs after the date of the financial statements but before the date of the auditor's report.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments?

Reviewing the response from the client's lawyer to a letter of audit inquiry. Explanation An attorney's letter is the primary method used to corroborate information on litigation, claims, and assessments.

Sales are normally recorded on the date of the:

Sales invoice. Explanation The sales is recognised on the date of the sales invoice.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to:

Sales invoices with shipping documents and customer sales invoices. Explanation The accounts receivable debits are supposed to represent sales that have been ordered by customers and actually shipped to them.

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Sales returns. Explanation Using the sales returns account would raise the least suspicion because this account is more commonly linked to accounts receivable. A bookkeeper could steal money and "write off" to unsuspecting customer's balance with a fictitious "sales return."

Which of these substantive procedures is not used to obtain evidence about contingencies?

Scanning expense accounts for credit entries. Explanation Scanning expenses is unlikely to reveal any information about a contingency.

A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

Send out positive confirmations on a large sample of these customers. Explanation The most likely audit step when there are a few large accounts is to send out positive confirmations.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with:

Sending negative confirmations to all customers as of the year-end date. Explanation Sending negative confirmations may not be important because the other three answer choices listed are appropriate work to do. Also, customers are likely to ignore negative confirmations after earlier responding to positive confirmations.

Which of the following internal control activities most likely would deter lapping of collections from customers?

Separation of duties between receiving cash and posting the accounts receivable ledger.

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?

Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements. Explanation Because an estimate had been made as of December 31, the event giving rise to the lawsuit had occurred, and the settlement introduced new information about the actual amount of the liability in February.

How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company?

Stated explicitly in the Auditor's Responsibility section. Explanation The auditors' responsibility is explicitly stated in the Auditor's Responsibility section of the report.

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

Subsequently discovered facts

Auditors have a responsibility related to management's disclosure of new information related to subsequent events until

The audit report release date. Explanation Auditors are responsible for ensuring that management properly discloses all information related to subsequent events that are known prior to the audit report release date.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. Explanation Since a large portion of the sales occur in the last month the auditor needs to test end of year sales, specifically the determination of the timing of sales is important to ensure sales were recorded in the proper period.

Under which of the following conditions can a disclaimer of opinion never be issued?

The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method. Explanation Auditors cannot disclaim an opinion when departures from GAAP exist and they have conducted a GAAS audit (qualified or adverse opinions are appropriate).

Revenues are normally considered to have been earned when:

The company has substantially accomplished what it must to be entitled to the benefits. Explanation The earning process is complete at this point.

The auditing standards regarding subsequently discovered facts refers to knowledge obtained after

The date of the auditor's report. Explanation Subsequently discovered facts are identified after the date of the auditor's report.

Which of the following statements is not true with respect to written representations?

The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. Explanation The failure of management to furnish representations would result in either a qualified opinion (not an adverse opinion) or a disclaimer of opinion.

Write-offs of doubtful accounts should be approved by:

The treasurer. Explanation The treasurer or another high-ranking manager should approve write-offs.

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.

R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year

To describe the prior audit and the opinion but not name Mason as the predecessor auditor. Explanation The predecessor auditors should be named only if their report is included.

Which of the following best describes the role of analytical procedures near the end of the audit engagement?

To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement. Explanation Performing analytical procedures near the end of the audit provides the auditors an overall review of the financial statements and allows auditors to assess the adequacy of evidence gathered during the audit.

Which of the following audit procedures is the most effective in testing sales for understatement?

Trace a sample of shipping documents to sales invoices recorded in the sales journal. Next

The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives?

Unmodified opinion with a reference to going-concern or disclaimer of opinion. Explanation The choice between an unmodified opinion with reference to going-concern matters or a disclaimer of opinion depends on the auditors' perception of the magnitude of the uncertainty.

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Unrecorded sales. Explanation Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator in the ratio, causing the ratio to decrease.)

The control procedure "credit sales approved by credit department" is directed toward which assertion?

Valuation/Accuracy. Explanation Credit approval helps ensure that the sale will be collectible.

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. Explanation Impropriety of write offs can be controlled by the review and approval of someone outside the credit department.

Each of the following statements is a communication from management. Indicate whether the inclusion of each statement in written representations is appropriate. a. "Certain representations in this letter are described as being limited to matters that are material." b. "No frauds involving management, employees who have significant roles in internal control, or other frauds that could have a material effect on the financial statements have occurred during the year under audit." c. "Based on our assessment, we conclude that the Company has maintained an effective internal control over financial reporting as of December 31, 2017." d. "We have prepared a description and evaluation of certain contingencies for which our attorneys have devoted substantive attention on our behalf in the form of legal representation." e. "There are no significant deficiencies, including material weaknesses, in the design or operation of internal controls that could adversely affect our ability to record, process, summarize, and report financial data." f. "Summarized below are important actions taken in response to comments provided by you in the management letter dated March 22, 2018, based on your prior audit." g. "Our assessment of internal control over financial reporting provides us absolute assurance that no material misstatements will occur and be undetected by our internal control." h. "We have made available to you all financial records and related data."

a. Appropriate b. Inappropriate c. Appropriate d. Inappropriate e. Inappropriate f. Inappropriate g. Inappropriate h. Appropriate Explanation b. Inappropriate. While written representations address fraud involving management and employees who have significant roles in internal control, they do not indicate that no frauds that could have a material effect exist. Management's assessment of internal control over financial reporting will not provide management a basis for a statement of this nature. A more appropriate statement would be "we have no knowledge of any fraud...." d. Inappropriate. The description and evaluation of contingencies would accompany the letter sent to the client's attorney. While written representations indicate that management is unaware of unasserted claims or assessments that are required to be disclosed in accordance with Accounting Standards Codification 450, they would not list contingencies in which attorneys have participated. e. Inappropriate. While written representations will indicate that all deficiencies in the design or operation of internal control have been disclosed to auditors, they will not state that no such deficiencies exist even in cases for which no deficiencies are noted. f. Inappropriate. Management letter comments are merely advisory to management, and no action is required to be taken on these comments. Accordingly, reference to action on previous management letter comments is not appropriate. g. Inappropriate. Management's assessment of internal control over financial reporting will not provide such a high level of assurance to management; as a result, a reference of this nature in written representations is not appropriate. A more appropriate statement would be that "we have maintained an effective internal control over financial reporting."

Classify each of the following issues according to whether they will be (1) included in written representations in all audits, (2) included in written representations in audits of public entities (under PCAOB standards), or (3) not included in written representations: a. Management acknowledgment of its responsibility for the fairness of the financial statements in accordance with U.S. GAAP. b. A list of pending or threatened litigation, claims, or assessments currently outstanding against the client. c. A description of recommendations that allow the client to improve the efficiency and effectiveness of its operations. d. Availability of all financial records and related data. e. Information related to the presentation and disclosure of items within the financial statements. f. Disclosure of all significant deficiencies and material weaknesses in internal control. g. Information concerning fraud involving management and employees who have significant roles in internal control. h. Auditors' judgment about the quality of the client's accounting principles. i. Management's conclusion about the effectiveness of its internal control over financial reporting. j. A statement that the financial statements are prepared according to U.S. generally accepted accounting principles.

a. Included in written representations in all audits b. Not included in written representations c. Not included in written representations d. Included in written representations in all audits e. Included in written representations in all audits f. Included in written representations in audits of public entities g. Included in written representations in all audits h. Not included in written representations. i. Included in written representations in audits of public entities j. Not included in written representations Explanation b. Not included in written representations. (This would accompany an attorney letter sent from the client to its attorneys.) c. Not included in written representations. (This would be included in a management letter prepared by auditors to the client.) h. Not included in written representations. (This would be communicated to the client's audit committee or those charged with governance.) j. Not included in written representations. (Written representations indicate that management believes the effects of uncorrected misstatements are immaterial to the financial statements and that management has fulfilled its responsibility for the preparation and presentation of financial statements according to GAAP. However, written representations should not express an opinion on the financial statements.)

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

assist auditors in evaluating the overall financial statement presentation.

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.

Interim testing normally occurs between the ________ and the ________.

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

In the audit of accounts receivable, the most important emphasis should be on the:

existence assertion.

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when:

no reply to a positive confirmation request is received.

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

obtaining responses to an attorney letter.

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by:

processing customer orders, granting credit, delivering goods, and billing customers.

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

required by auditing standards.

The most effective audit procedure for determining the collectability of an account receivable is the:

review of the subsequent cash collections.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to:

sales invoices with shipping documents.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that:

shipments to customers were invoiced.