Final: Chapter 16 Auditing Operations and Completing the Audit
state or federal revenue agents
the auditors should carefully review officer salaries, director fees, travel and entertainment, contributions, and casualty loss accounts because these accounts will be scrutinized by the:
Report release date
the date the auditors grant the client permission to use the audit report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit report.
after
to identify subsequent events, auditors should read available minutes from all meetings that have been held _______________ the date of the financial statements.
False
true or false: The CPA's opinion on the fairness of the financial statements may not be changed based on events after the balance sheet date.
an adjustment to the financial statement amounts
A subsequent event that provides additional evidence as to conditions that existed at the balance sheet date and affects the estimates inherent in the process of preparing financial statements requires:
An adjustment to the financial statements
A very large customer's check included in cash receipts of the last day of the year proves to be uncollectible and is charged back to the client's account by the bank. This subsequent requires:
prior to the auditors' appointment
PCAOB AS 1301 requires a discussion of significant issues the auditors have discussed with management _______________ and a discussion of significant unusual transactions the auditors have identified.
a special liability account
When wages are paid in cash, any unpaid wages should be deposited in the bank and credited to:
It is probable that a claim will be asserted. Legal counsel has devoted substantial attention to it.
Which of the following are required for a matter to be considered an unasserted claim?
Legal expenses Advertising Research and development Maintenance and repairs
expense accounts that are frequently considered in detail include:
a business combination
An example of subsequent event recording pro forma financial statements is:
liabilities
Disputes between the taxpayer and the IRS may create contingent ____________ not settled for several years.
True
True or False: Regarding the nature of the required communications, PCAOB Standard AS 1301 is more detailed than AIPCA AU-C 260.
Examining contract and supporting records to test commission earnings Analytical procedures to test the reasonableness of payroll expense.
Further audit procedures for payroll include:
False
True or False: When required supplementary information is omitted or improperly stated, both the AICPA and PCAOB require a modified/qualified audit opinion.
false
True or false: Dual-dating the audit report is required whenever a subsequent event occurs after the date of the audit report but before the report release date.
False
True or false: The payroll department should be responsible for printing direct deposit slips and distribution and distributing them to employees, but not the timekeeping function.
factual
If, after considering all of the misstatements, the auditors conclude the risk of material misstatement is too high, they should request management record adjustments needed to correct all ____________ misstatements.
registration statement
The Securities Act of 1933 extends the auditors' liability in connection with the registration of new securities with the SEC to the effective date of the ____________ ___________.
Conservatism
The accounting doctrine of __________ in the valuation of assets means that when two or more reasonable values are indicated, the accountant will choose the lower amount.
reduction of costs of goods sold
An auditor determines that proceeds from the sale of scarp were recorded to the miscellaneous revenue account. The auditor should propose an adjusting journal entry to classify the amount as (a):
cost of goods sold
An auditor reviews the miscellaneous revenue account and determines that proceeds from sales of scrap were recorded to the account. The auditor should propose an adjusting journal entry to classify the amount to the __________ account.
property, plant, and equipment
The repairs and maintenance account is often verified by the auditors in conjunction with the audit of:
minutes of directors' meetings
The endorsement of notes is very seldom recorded in the accounts, but may be reflected in the:
the partner in charge of the engagement
The review of the audit working papers at or near the completion of fieldwork is generally done by:
other-matter
If auditors choose to refer to other information in the auditors' report, they may include a(n) ___________-___________ paragraph disclaiming an opinion on the other information.
material misstatement
AICPA AU 501 provides guidance in the area of potential litigation, and requires that auditors design and perform audit procedures to identify litigation, claims, and assessments that may give rise to a risk of:
attempt to perform the omitted procedures
After issuing the audit report, a CPA firm determines the auditors omitted significant audit procedures. They believe the omitted procedures impair their ability to support their previously issued opinion that is being relied on by third parties. The CPA firm should:
advise the client to make appropriate disclosure to anyone relying upon the audit report
After the issuance of its audit report, a CPA firm encountered facts indicating the client's financial statements were materially misstated and, upon investigation, determined the facts were significant and existed at the date of the audit. The auditors should:
client's principal officers
The primary purpose of the representation letter is to have the _____________ knowledge that they are primarily responsible for the fairness of the financial statements.
with recourse
When accounts receivable are sold _____________ ____________, a guarantee of collectibility is given.
Representation letter
A single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations.
duel-date
A subsequent event requiring footnote disclosure occurs after the audit report date but before the report release date. If the auditors only want to extent their responsibility for disclosure to the specific item being footnoted, they must _______________-______________ their report.
factual
A $20,000 overstatement of prepaid rent is an example of a known or ________ misstatement.
should consider resignation if the client refuses to discuss the matter with the auditors is not required to describe the claim in the reply to the auditors
A client is aware of an unasserted claim that was not disclosed to the auditors. The auditors have sent a letter of inquiry to the client's attorney. The attorney:
letter of inquiry
A letter sent by auditors to a client's legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies is known as a(n) ___________ of _________.
disclosure checklist
A list of the specific disclosure required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosure in a set of financial statements is called a:
increases management's compensation
A misstatement is likely to be material from a qualitative perspective if it:
involves concealment of an unlawful transaction
A misstatement is likely to be material from a qualitative perspective if it:
miscellaneous revenue
A mixture of minor cash receipts, some nonrecurring and others likely to be received at irregular intervals, are often recorded as _____________.
contingency
A possible loss stemming from past events that will be resolved by some future event is called a loss _________.
other information
A report by management discussing this year's operating results, financial summaries, employment data, and the names of officers and directors are all examples of __________ __________.
disclosure in the financial statements
A subsequent event that involves conditions coming into existence after the balance sheet date requires:
analytical procedures
AICPA AU 240 requires auditors to evaluate whether _________ performed as substantive procedures or in the overall review stage indicate a previously unrecognized risk or risk of material misstatement due to fraud.
audit committee
AICPA AU 265 requires that the auditors communicate to the _____________ _____________ any significant deficiencies in internal control.
risks and uncertainties
AICPA Statement of Position 94-6 requires that companies disclose certain __________ and __________.
Conservatism
An accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen.
Subsequent event
An event occurring between the date of the financial statements and the date of the auditor's report.
client
Audit procedures to detect and evaluate loss contingencies include obtaining a representation letter from the __________ indicating that all liabilities known to officers are recorded or disclosed.
regulatory
Audit procedures to detect and evaluate loss contingencies include reviewing reports and correspondence from _________ agencies to identify potential assessments or fines.
different
Auditors often develop an expectation of account balances for selling, general, and administrative expense accounts, and investigate balances that are significantly _________ than the expectations.
officers
Auditors should obtain a summary of compensation of ____________ for the year and compare to contracts, minutes or directors' meetings, or other authorization.
True
True or False: An effective budgeting program reduces the risk of material misstatements in expense accounts.
required supplementary
Certain organizations are mandated by a designated accounting standard letter to present _____________ ____________ information as unaudited shedules accompanying the financial statements.
commitments
Closely related to contingent liabilities are obligations termed ___________, which include agreements to purchase inventory or sell merchandise at specified prices.
lower
Conservatism in the valuation of assets means that when two (or more) reasonable alternative values are indicated, the accountant will choose the ___________ amount.
management
Final responsibility for adjustments due to identified misstatements rests with:
Other information
Financial and nonfinancial information (other than the financial statements and the auditors' report thereon) that is included in a document containing audited financial statements and the auditors' report thereon but is not required by a designated accounting standards letter.
significantly
For auditors to issue an unmodified opinion, the estimate of the total misstatements has to be __________ less than a material amount.
need not be presented in the financial statements
General risk contingencies
supplementary
Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework is called the ____________ information.
Supplementary information
Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements.
Factual misstatements
Misstatements about which there is no doubt; for example, failure to record a purchase during the period. Previously, the auditing literature referred to factual misstatements as known misstatements. Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements -- see definitions of each.
contingent liabilities
Most loss contingencies may also appropriately be called ____________ ____________.
searching for unrecorded liabilities obtaining the representation letter
Procedures at the end of the audit include:
general risk
Risks of loss from numerous factors that all businesses face are called __________ ________ contingencies.
be disclosed in a note to the financial statement
Shortly after year end a client's customer suffered a major fire which resulted in the customer filing for bankruptcy. As a result, a large account outstanding at year end is now uncollectible. This subsequent event should:
result in an adjustment to the financial statements if caused by a condition outstanding at year end
Shortly after year end a client's major customer declared bankruptcy. As a result, a large account receivable outstanding at year end is now uncollectible. This subsequent event should:
conservatism; neutrality
The FASB rejected ____________ as a desirable characteristic of accounting information, suggesting that it is inconsistent with ____________.
liabilities
The Resource, Conservation, and Recovery Act, Superfund, and various clean air and water acts create potential ____________ for companies.
BOTH the rollover and the iron curtain for materiality
The SEC staff accounting bulletin no. 108 requires that in considering the effects of prior year uncorrected misstatements, the auditor must review the:
inventories
The cost of goods sold account is often verified by the auditors in conjunction with the audit of:
report release
The date auditors grant the client permission to use the audit report is called the _____________ ____________ date.
Someone who performs no other payroll activity
The distribution of pay should be performed by:
a person with no other functions related to payroll
The distribution of pay through paychecks should be performed by
audit report
The representation letter should be signed by the client's principal officers as of the date of the:
Auditors are required to compare RSI for consistency to the basic financial statements and other knowledge obtained during the audit. Auditors are required to obtain written representations from management regarding this information
Which of the following statements regarding required supplementary information (RSI) are correct?
A litigation settled after the balance sheet date resulting in a material liability.
Which of the following subsequent events requires an adjustment to the financial statement amounts?
A business combination with a competing company after the balance sheet date
Which of the following subsequent events requires disclosure in the notes to the financial statements?
Date of the financial statements
the date of the end of the latest period covered by the financial statements (e.g. balance sheet date).
analytical
Auditors should perform __________ procedures to test the reasonableness of payroll expense.
unexpired insurance
An auditor determines that rebates of insurance premiums were recorded to the miscellaneous revenue account. The auditor should propose an adjusting journal entry to classify the amount as:
probable; reasonably
In FASB ASC 450-20, "Loss Contingencies," the FASB states that contingent liabilities should be reflected in the accounting recorded when information available prior ro the issuance of the financial statements indicates that a loss is _________, and that the amount of the loss can be __________ estimated.
notes receivable
The interest revenue account is often verified by the auditors in conjunction with the audit of:
determine the presentation and disclosure are appropriate.
The most important audit objective when auditing the statement of cash flows is:
Uncorrected misstatements
Misstatements that have not been reflected in the financial statements. Ordinarily these are misstatements the auditors have identified and for which proposed adjusting entries have not been recorded.
intangible assets
The royalties revenue account is often verified by the auditors in conjunction with the audit of:
audit report
Auditors should review the minutes of meetings of stockholders and directors, including meetings held through the date of the :
provides the expertise that some companies lack is often cost beneficial
Outsourcing the payroll function:
limited. the auditors merely compare the amounts included in the statement of cash flows to other balances and amounts.
Auditors usually perform _________ substantive procedures in the statement of cash flows.
projected
Auditors' estimates of misstatements arising from audit sampling conclusions concerning populations result in _________ misstatements.
disclosure
The objectives for the audit of revenues and expenses include determining that the presentation and ______________ of revenue and expenses accounts are appropriate, including the proper classification of amounts and the proper presentation of earnings-per-share data.
Payroll distribution schedule Individual employee statements of earnings Payroll journal
The output of the payroll department includes:
representation
The primary purpose of the ______________ letter is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements.
prior year balance
Analytical procedures related to selling, general, and administrative expenses include developing an expectation of the account balance and comparing the __________ with the expected account balance.
Each person known to be relying on the audited financial statements the client's board of directors and regulatory agencies having jurisdiction over the client
If a CPA firm discovers a material misstatement in audited financial statements after the auditors report has been issued, and the client will NOT notify affected parties, the auditors should notify:
inquiry of management
The starting point for investigating significant variances in expenses is generally:
confirm by direct communication with the purchaser or assignee
If the client has sold or assigned any receivables, the auditor must:
Higher
Conservatism in the valuation of liabilities means that when two (or more) reasonable alternative values are indicated, the accountant will choose the _________ amount.
Rollover approach
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year. For example, if expenses were understated by $20,000 in the previous year, and $45,000 during the current year, the rollover method would quantify the misstatement as $45,000, ignoring the previous year misstatement. Also see iron curtain approach.
Iron curtain approach
An approach to making materiality judgments that quantifies the total likely misstatements as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach.
gain or loss on assets
An auditor determines that proceeds from sales of plant assets were recorded to the miscellaneous revenue account. The auditor should propose an adjusting journal entry to classify the amount as:
Judgmental misstatements
Differences arising from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate. For example, a difference related to the appropriate amount in the allowance for doubtful accounts. Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements. see the definition of each.
judgmental
Differences between management and the auditors concerning accounting estimates, or the selection or application of accounting policies the auditors consider inappropriate give rise to ___________ misstatements.
aggregated
If the auditors determine the ______________ (known and likely) misstatements are material to the financial statements, they will conclude that the risk of material misstatement is too high to issue an unqualified opinion on the financial statements.
attempt to perform the omitted procedures as needed assess the importance of the omitted procedures consider consulting legal counsel
If, after issuing the audit report, the auditors determine that they omitted significant audit procedures, the auditors should:
professional fees
The analysis of the ________ account furnishes the names of attorneys to whom letters should be sent requesting information as to pending litigation and other loss contingencies.
Known misstatements
The auditing literature now refers to these as factual misstatements (see the term). Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements -- see the definitions of each.
inherent
The auditors will use the understanding of the client and its environment to consider ___________ risks, including fraud risks, related to revenues and expenses.
Projected misstatements
The auditors' best estimate of the misstatement in the populations involving the projection of misstatements identified in audit samples to entire populations from which the samples were drawn; for example, a difference in the total accounts receivable based on a projection of sample results to the entire population of accounts receivable. Projected misstatements are sometimes referred to as known likely misstatements. Misstatements may be categorized as factual misstatements, judgmental misstatements, and projected misstatements.
human resources
The first significant step in establishing strong internal control over payroll should be taken by the _____________ department, when a new employee is hired.
cash and cash equivalents
When auditing the statement of cash flows, the auditors should determine that the concept of ___________ analyzed in the statement agrees with the amount shown on the balance sheet.