Chapter 11 Review

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.

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.

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.

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

Current year recorded balances

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.

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

Examining customer confirmation replies

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

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

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

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 is not used in auditor's examination of litigation, claims, and assessments?

Performing analytical procedures

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

Scanning accounts for unusual items

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.

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

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.

Interim testing normally occurs between the ____ and the ____.

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

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

client

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

client's management.

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

Analytical procedures performed near the end of an audit generally include

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

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

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

evaluating the reasonableness of management's estimates

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

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

Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?

investment changes in long term debt occurring after year end

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 flood

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

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

obtaining responses to an attorney letter.

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

obtaining signed written representations

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.

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

performing cut off testing near year end

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

required by auditing standards.

Management letters are not a means of

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

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

scanning expense accounts for credit entries

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

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

subsequently discovered facts

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.

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

the audit report release date

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

the client's management

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

the date of the auditor's report

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.

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.

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

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.

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.