Chapter 16, 17 AUDIT

Which of the following is LEAST likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? 1. the company is a component of a larger business enterprise 2. an unusually important significant event 3. a decision not to confirm AR 4. a risk of uncertainty

3. a decision not to confirm AR An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. Accordingly, answer (3) is not a situation in which an emphasis-of-matter paragraph is appropriate since confirming accounts receivable relates to the scope of the audit.

The search for unrecorded liabilities for a public company includes procedures performed through the... 1. day the audit report is issued 2. end of the client's year 3. date of the auditor's report 4. date the report is filed with the SEC

3. date of the auditor's report The search for unrecorded liabilities should be completed as of the last day possible—ordinarily near the date of the audit report.

A material departure from GAAP will result in auditor consideration of... 1. whether to issue an adverse opinion rather than a disclaimer 2. whether to issue a disclaimer rather than a qualified op. 3. whether to issue an adverse op. rather than a qualified op. 4. nothing, because none of these opinions is applicable to this type of exception

3. whether to issue an adverse op. rather than a qualified op. When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.

Which of the following is LEAST likely to be considered a substation procedure relating to payroll? 1. investigate fluctuations in salaries, wages, and commissions 2. test computations of compensation under profit sharing for bonus plans 3. test commission earnings 4. test whether employee time reports are approved by supervisors

4. test whether employee time reports are approved by supervisors Testing whether employee time reports are approved by supervisors is an example of a test of a control, not a substantive procedure.

Which of the following is MOST likely to be considered a Type 1 subsequent event? 1. a business combination completed after year-end, but for which negotiations began prior to year-end 2. a strike subsequent to year-end for to employee complaints about working conditions which originated two years ago 3. customer checks deposited prior to year-end but determined to be uncollectible after year-end 4. introduction of a new line of products after year-end for which major research had been completed prior to year-end

3. customer checks deposited prior to year-end but determined to be uncollectible after year-end A Type 1 subsequent event relates to a condition that came into effect before year-end; Type 1 subsequent events result in an adjusting journal entry. In this situation, the customer's check may be assumed to have been uncollectible at year-end, and therefore it would be considered to be a Type 1 subsequent event. The other three replies refer to events most ordinarily considered to be Type 2 events—the events came into existence after year-end.

Which of the following ordinarily involves the addition of an "emphasis-of-matter" paragraph to an audit report? 1. a consistency modification 2. an adverse opinion 3. a qualified opinion 4. part of the audit has been performed by component auditors

1. a consistency modification A consistency modification results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.

When auditing the statement of cash flows, which of the following would an auditor NOT expect to be a source of receipts and payments? 1. capitalization 2. financing 3. investing 4. operations

1. capitalization The three sections of a statement of cash flows relate to operations, financing, and investing. Capitalization is not one of the sections.

The auditors report should be dated as of the date the... 1. report is delivered to the client 2. auditors have accumulated sufficient evidence 3. fiscal period under audit ends 4. peer review of the working papers is completed

2. auditors have accumulated sufficient evidence The audit report should be dated no earlier than when the auditors have accumulated sufficient appropriate evidence. This date is often the last day of fieldwork.

an auditor accepted an engagment to audit the 20X8 financial statements of EFG Corp and began fieldwork on Sep 30th, 20X8. EFG gave the auditor the 20X8 financial statements on Jan 17, 20X9. The auditor completed the audit on Feb 10, 20X9 and delivered the report on Feb 16, 20X9. The client's representation letter normally would be dated... 1. 12/31/20X8 2. 01/17/20X9 3. 02/10/20X9 4. 02/16/20X9

3. 02/10/20X9 The representation letter should be dated as of the date the audit was completed.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditors should... 1. express an opinion that is qualified due to the inability of the client company to continue as a going concern 2. evaluate management's performance in causing this decline 3. require note disclosure 4. consider the possibility of a misstatement of the financial statements

4. consider the possibility of a misstatement of the financial statements The purpose of analytical procedures is to locate potential misstatements in the financial statements. The auditors should investigate this significant fluctuation to determine whether it results from a financial statement misstatement.

Which of the following procedures is MOST likely to be included near the completion of an audit? 1. obtain an understanding of internal control 2. confirmation of receivables 3. observation of inventory 4. perform analytical procedures

4. perform analytical procedures The performance of analytical procedures is a required part of the final review stage of an audit and is therefore most likely to be included in that stage of the audit.

What type(s) of audit opinion are appropriate when F/S are materially and pervasively misstated?

When a misstatement is pervasive, an adverse opinion is appropriate.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as... 1. analytical process 2. loss contingency 3. probable loss 4. unasserted claim

2. loss contingency A loss contingency is a possible loss stemming from past events that will be resolved in the future.

The aggregated misstatement of the financial statements is made up of...

The total likely misstatements composed of (a) known misstatements, (b) projected misstatements and (c) other misstatements.

The auditors who wish to draw reader attention to a F/S note disclosure on significant transactions with related parties should disclose this fact in... 1. an emphasis-of-matter paragraph to the auditors report 2. a footnote on the F/S 3. the body of the F/S 4. the "summary of significant accounting policies" section of the F/S

1. an emphasis-of-matter paragraph to the auditors report The auditor communicates through the auditors' report and therefore only answer (1) is correct. Note that the client will include a discussion of the related party transactions in a note to the financial statements.

After the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the info is reliable, the auditor should... 1. notify the BoD that the auditor's report must no longer be associated with the F/S 2. determine whether there are persons relying or likely to rely on the F/S who would attach importance to the info 3. request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issues F/S 4. issue a revised pro forma F/S taking into consideration the newly discovered info

2. determine whether there are persons relying or likely to rely on the F/S who would attach importance to the info When the auditor becomes aware of facts existing at the report date that would have affected the report, s/he should next determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. If such persons are believed to exist, the next step is to determine the best manner in which to disclose the information.

An audit report for a public client indicates that the audit was performed in accordance with... 1. GAAS 2. standards of the PCAOB 3. GAAP 4. GAAP (PCAOB)

2. standards of the PCAOB An audit report of a public client indicates that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (United States).

When the matter is properly disclosed in the financial statement, the likely result of substantial doubt about the ability of the client to continue as a going concern in the issuance of what audit opinion...

3. Unqualified with Emphasis-of-Matter Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with explanatory language or a disclaimer of opinion. Accordingly answer (3) is correct since a qualified report is not appropriate.

Which of the following is the BEST way for the auditors to determine that every name on a company's payroll is that of a real employee currently on the job? 1. examine human resources records for accuracy and completeness 2. examine employee's names listed on the payroll tax returns for agreement with payroll accounting records 3. make a surprise observation of the company's regular distribution of paychecks on a test basis 4. visit the working areas and verify that employees exist by examining their badge and ID numbers

3. make a surprise observation of the company's regular distribution of paychecks on a test basis The best procedure for the detection of a fictitious employee is a surprise observation of the distribution of paychecks. The fictitious employee's paycheck will ordinarily not be picked up, and further audit procedures performed by the auditors may reveal that this is a fictitious employee.

In an audit report on combined F/S, reference to the fact that a portion of the audit was performed by a component auditor is... 1. not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms 2. not in accordance with GAAS 3. a qualification that lessens the collective responsibility of both CPA firms 4. an example of dual opinion requiring the signatures of both auditors

1. not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.

Which of the following events occurring in Jan 5, 20X2 is most likely to result in an adjusting entry to the 20X1 F/S? 1. a business combination 2. early retirement of B/P 3. settlement of litigation 4. plant closure due to strike

3. settlement of litigation The settlement of litigation is most likely to result in an adjusting entry (i.e., be a "Type 1 subsequent event) because the cause of the litigation most likely occurred before 20X2.

Assume that the opinion paragraph of an auditors report begins as follows: "With the explanation given in Note 6... the F/S referred to above present fairly..." This is... 1. an unmodified opinion 2. a disclaimer of opinion 3. an 'except for' opinion 4. an improper type of reporting

4. an improper type of reporting This phrase violates the fourth standard of reporting, because it does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.