ACC404 CH. 11

Subsequent events provide evidence of conditions that ______.

existed at or arose following the date of the financial statements

Events occurring between the financial statement date and the date of the auditor's report are referred to as _____ events.

subsequent

The flow of correspondence related to the attorney letter begins when the ______ request the client to prepare a letter to its attorney.

auditors

When subsequently discovered facts are discovered prior to the audit report release date ______.

auditors generally dual date the audit report

After the audit report release date, the auditor ______.

may have to take steps to ensure the report is not relied on

The situation where auditors failed to perform necessary audit procedures prior to the audit report release date is referred to as _____ procedures.

omitted

Auditor recommendations for adjustments to the financial statements are considered to be _____ to indicate management's responsibility for the financial statements.

proposed

Audit documentation review _____.

provides an evaluation of the firm's audit practices; can be a component of staff training and evaluation; allows the firm to adhere to the performance principle

Professional standards procedures specifically performed to identify the existence of material subsequent events include ______.

reading applicable meeting minutes held after the financial statement date; obtaining written representations as to the existence of events; reviewing interim financial statements

Auditor communications to individuals charged with governance include ______.

representations requested from management; overview of audit scope and timing; significant difficulties encountered during the audit

Subsequently discovered facts become known to the auditor after the ______.

date of the auditor's report

The auditor's report on the entity's financial statements covers all events that occur up to the ______.

date of the auditor's report

The auditors have gathered sufficient, appropriate evidence on which to base their report at the ______.

date of the auditor's report

When subsequently discovered facts are discovered prior to the audit report release, auditors normally choose to _____ _____ the report.

dual date

Significant events occurring between the date of the audit report and the audit report release date may result in a(n) _____ _____ report.

dual dating

Auditors must be alert for adjustments made to meet analysts' profit expectations which is known as _____ _____.

earnings management

Reclassifying items that should be deferred or contra-assets or liabilities to miscellaneous or other revenues and expenses, especially at the end of a quarter or year is referred to as _____ _____.

earnings management

The persons responsible for overseeing the client's financial reporting process, including the internal control over financial reporting, are called individuals charged with _____.

governance

Reading minutes of meetings held after the date of the financial statements and reviewing the entity's latest interim financial statements are two procedures that can be performed specially to identify the existence of material _____ events.

subsequent

Facts that become known to auditors after the the date of the audit report that may have caused a report revision are known as _____ _____ facts.

subsequently discovered

Written representations ______.

support other evidence obtained during the audit; are written on client letterhead and addressed to the auditor

In most public organizations, the phrase "individuals charged with governance" typically refers to ______.

the audit committee of the board of directors

Auditors must rely on the attorney to inform ______ if an unasserted claim must be disclosed.

the client

Interim testing occurs between the beginning of the year and ______.

the date of the financial statements

Which of the following normally occurs earliest in the audit examination? Review of audit documentation. Discovery of an omitted audit procedure. Preparation of the management letter. Dual dating the auditor's report on the entity's financial statements for subsequent events that exist at the date of the financial statements.

Review of audit documentation.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? Examining legal invoices sent by the client's attorney. Reviewing the written representation letter obtained from management. Verifying attorney-client privilege through interviews. Reviewing the response from the client's lawyer to a letter of audit inquiry.

Reviewing the response from the client's lawyer to a letter of audit inquiry.

Which of these substantive procedures is not used to obtain evidence about contingencies? Examining terms of sale in sales contracts. Obtaining a letter from the client's attorney. Scanning expense accounts for credit entries. Reading the minutes of the board of directors' meetings.

Scanning expense accounts for credit entries.

J. Griffith audited the financial statements of Mets Magnificat Corporation for the year ended December 31, 2020. 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? December 31, 2020, except as to Note X, which is dated January 30, 2021. February 5, 2021, except for the date of the auditor's report, for which the date is January 30, 2021. January 30, 2021, except as to Note X, which is dated February 5, 2021. December 31, 2020, except as to Note X, which is dated February 5, 2021.

January 30, 2021, except as to Note X, which is dated February 5, 2021.

Ambrose is auditing the financial statements of Mays (dated December 31, 2020). The date of the auditor's report is February 17, 2021, and the audit report release date is February 20, 2021. 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, 2021. The obsolescence of inventory held on December 31, 2020, that was identified on January 20, 2021. A merger that was announced by Mays and known by Ambrose on February 12, 2021. A customer's deteriorating financial condition that was identified on February 19, 2021.

A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2021.

Hart, an assistant accountant with the firm of Better & Best, CPAs, is auditing the financial statements of Tech Consolidated Industries Inc. The firm's audit plan calls for the preparation of written representations. Determine if the following statements are True or False.

A. Auditors are required to obtain written representations in all audits conducted under generally accepted auditing standards. (True) B. The major categories of items covered by written representations are: 1. Management's responsibilities for the financial statements and internal control over financial reporting. (True) 2. Management's description of pending or threatened litigation, claims, or assessments currently outstanding. (False) 3. Management's statement that the financial statements are prepared according to U.S. generally accepted accounting principles. (True) 4. Management's belief that the effects of uncorrected misstatements are immaterial to the financial statements. (True) 5. Management's statement that all financial records and related data were made available. (True) C. Written representations should be addressed to management and dated as of the date of the report release date. (False) D. Written representations should be signed by members of management whom the auditors believe are responsible and knowledgeable about matters covered by the representations (usually the CEO or CFO). (True) E. Written representations replace some of the necessary audit work performed by the auditors. (False)

What does the auditor need to document when there is substantial doubt that a client will continue as a going concern? The conditions or events that suggest there is a going concern uncertainty. Management's plan (or lack thereof) to mitigate the conditions and to continue as a going concern. The auditor's conclusion on whether, after evaluating management's plan, substantial doubt exists regarding the company's ability to continue as a going concern and whether any report modifications are needed. All of the choices are correct.

All of the choices are correct.

Which of these persons generally does not participate in writing the management letter? Public accounting firm's consulting and tax experts. Client's accounting and production managers. Client's outside attorneys. Public accounting firm's audit team on the engagement.

Client's outside attorneys.

Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? Communicate material weaknesses in internal control to the client's audit committee. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests. Compare the latest available interim financial statements with the financial statements being audited. Review the cutoff bank statements for several months after the date of the financial statements.

Compare the latest available interim financial statements with the financial statements being audited.

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. A description and evaluation of litigation, claims, and assessments that existed at the date of the financial statements. The probable outcome of asserted claims and pending or threatened litigation. The attorney's opinions of the client's historical experiences in recent similar litigation.

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

True or false: The auditor has no responsibilities related to the audit after the audit report release date.

False After the release date the auditor has some communications with the client and, in some cases, may have to take steps to ensure the audit report is not relied on.

True or false: Auditors are only required to communicate misstatements detected during the audit to the audit committee if they have a material effect on the financial statements.

False All misstatements must be communicated

True or false: Auditors are expected to design and perform procedures solely for the purpose of identifying conditions that indicate going-concern uncertainties.

False Auditors are required to consider whether any evidence provides "substantial doubt" about going concern

True or false: If management refuses to provide written representations, the auditor must withdraw from the engagement.

False Either a qualified opinion or a disclaimer of opinion must be issued

A major objective of written representations is to Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory. Impress on management its ultimate responsibility for the financial statements and disclosures. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform. Shift responsibility for financial statements from the management to auditors.

Impress on management its ultimate responsibility for the financial statements and disclosures.

Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? Confirm bank accounts established after the date of the financial statements. Send confirmations to vendors with whom the client normally does business but for which no balance in accounts payable is noted. Recompute a sample of large-dollar transactions occurring after the date of the financial statements for arithmetic accuracy. Investigate changes in shareholders' equity occurring after the date of the financial statements.

Investigate changes in shareholders' equity occurring after the date of the financial statements.

Which of the following is not required by generally accepted auditing standards? Engagement letter. Attorney letter. Management letter. Written representations.

Management letter.

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 February 17, year 2. March 24, year 2. February 13, year 2. March 28, year 2.

March 24, year 2.

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

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

Which of the following is ordinarily performed last in the audit examination? Obtaining signed written representations. Performing tests of controls. Securing a signed engagement letter from the client. Performing a review for subsequent events.

Obtaining signed written representations.

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. Sale of an issue of new stock for $500,000 on January 30. Storm damage of $1 million to the entity's buildings on March 1. Settlement of a damage lawsuit for a customer's injury sustained February 15 for $10,000.

Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

The auditing standards regarding subsequently discovered facts refers to knowledge obtained after The date of the auditor's report. The date of the financial statements. The date interim audit work was complete. The date the fieldwork began.

The date of the auditor's report.

Auditors should ensure that ______ have been properly disclosed.

both favorable and unfavorable contingencies

Management letters ______.

can make the client aware of other business services offered; are delivered to and discussed with the client

A contingent liability that requires special consideration by auditors is ______.

the outcome of the litigation

Attorney letters should be sent ______.

to all attorneys who worked for a client during the period under audit

Because estimates, by their very nature, reflect _____ and future outcomes, auditors cannot "audit," "corroborate," or "verify" accounting estimates.

uncertainty

Which of the following statements is most likely to be included in an attorney letter? "Certain representations in this letter are described as being limited to matters that are material." "Our work enabled us to notice some actions that could enhance the profitability of the Company." "If any unasserted claims or assessments are omitted from this disclosure, please provide this information directly to our auditors." "Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."

"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."

Which of the following statements regarding auditor evaluation of the materiality of misstatements are correct? Auditors may evaluate misstatements using either the rollover or iron curtain method. Adjustments should not be recommended if the financial statements are not materiality misstated. The rollover method only considers current-period income effects. Adjustments must only be proposed if both methods indicate material misstatement.

Auditors may evaluate misstatements using either the rollover or iron curtain method. The rollover method only considers current-period income effects.

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? Perform the omitted procedure or an alternative procedure. Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements. Engage another public accounting firm to conduct a quality assurance review. Notify the board of directors and regulatory agencies that are currently relying on auditors' reports.

Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.

Which of the following statements is correct? The auditor has no responsibility for significant developments that occur after the date of the audit report. Significant events occurring between the date of the audit report and the audit report release date may result in a dual dated report. Significant events occurring between the date of the audit report and the release date increase auditor responsibility for all new developments.

Significant events occurring between the date of the audit report and the audit report release date may result in a dual dated report.

Auditors have a responsibility related to management's disclosure of new information related to subsequent events until The date of the auditor's report. The date of the financial statements. The following year's date of the financial statements. The audit report release date.

The audit report release date.

Which of the following statements is not true with respect to written representations? They should address management's responsibility for designing internal control to prevent and detect fraud. Auditors use them to corroborate information received during the audit from the client and its employees. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. They are dated the same date as the auditor's reports.

The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.

Which of the following best describes the role of analytical procedures near the end of the audit engagement? To gather evidence to support one or more assertion(s) related to the account balance or class of transactions. To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement. To identify possible deficiencies in the client's internal control over financial reporting. To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures.

To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.

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."---> Appropriate 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."---> Inappropriate c. "Based on our assessment, we conclude that the Company has maintained an effective internal control over financial reporting as of December 31, 2020."---> Appropriate 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."---> Inappropriate 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."---> Inappropriate f. "Summarized below are important actions taken in response to comments provided by you in the management letter dated March 22, 2021, based on your prior audit."---> Inappropriate 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."--->Inappropriate h. "We have made available to you all financial records and related data."---> Appropriate

Auditors are required to ______.

consider evidence that provides substantial doubt about the client's ability to continue as a going concern; obtain information from management regarding plans to mitigate the effects of going concern uncertainties

Potential warranty payments, tax disputes with the IRS and debt guarantees on behalf of another party are all examples of _____ liabilities.

contingent

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.------>Included in written representations in all audits. b. A list of pending or threatened litigation, claims, or assessments currently outstanding against the client.------>Not included in written representations. c. A description of recommendations that allow the client to improve the efficiency and effectiveness of its operations.------>Not included in written representations. d. Availability of all financial records and related data.------>Included in written representations in all audits. e. Information related to the presentation and disclosure of items within the financial statements.------>Included in written representations in all audits. f. Disclosure of all significant deficiencies and material weaknesses in internal control.------>Included in written representations in audits of public entities. g. Information concerning fraud involving management and employees who have significant roles in internal control.------>Included in written representations in all audits. h. Auditors' judgment about the quality of the client's accounting principles.------>Not included in written representations. i. Management's conclusion about the effectiveness of its internal control over financial reporting.------>Included in written representations in audits of public entities. j. A statement that the financial statements are prepared according to U.S. generally accepted accounting principles.------>Not included in written representations.

Auditors are required to communicate ______ to the client's audit committee.

all misstatement detected during the audit

An overall review of the reasonableness of accounting estimates is similar in nature and purpose to the role of _____ procedures conducted near the end of the audit.

analytical

Which of the following are included in auditor communications to individuals charged with governance? significant issues arising from the audit that were not discussed with management any disagreements with management auditors' responsibility under GAAS judgment about the quality of critical accounting policies and estimates

any disagreements with management; auditors' responsibility under GAAS; judgment about the quality of critical accounting policies and estimates

Responsibility for adjusting the financial statements for auditor proposed adjustments rests with the ______.

client

When subsequently discovered facts that would result in either the revision of the auditor's report or the financial statements are discovered after the audit report release date and individuals are continuing to rely on the statements, the ______ should notify the individuals that the statements should not be relied on.

client

The date of the auditor's report is also referred to as the audit _____ _____.

completion date

Audit work performed between the beginning of the year and the date of the financial statements is referred to as _____ _____.

interim testing

When auditors use the ______ method to evaluate the materiality of uncorrected mistakes, the aggregate effect of the misstatements on the entity's balance sheet are considered.

iron curtain

Auditors should discuss pending litigation with the client's ______.

management and attorneys

Near the end of the audit, recommendations to the client are summarized in a document commonly referred to as the _____ _____.

management letter

When subsequently discovered facts that would result in either the revision of the auditor's report or the financial statements are discovered after the audit report release date and individuals are continuing to rely on the statements, ______.

management must notify appropriate individuals that the financial statements should not be relied on; revised financial statements should be issued as soon as practicable (auditors must notify regulatory agencies that the auditor's report cannot be relied on ONLY IF management refuses to take action)

Written representations are also known as _____ or _____ representations.

management; client

An attorney letter _____.

must be sent directly from the client in response to auditors' inquiries

For nonpublic entities, the communication of all significant internal control deficiencies must be made to the client in writing ______.

no later than 60 days after the audit report release date

Lee and Kerzman is the auditor for Nance Corporation. During the course of the audit, the audit team noticed that Nance Corporation showed signs of financial distress. In particular, Nance Corporation was at risk for defaulting on several key loans and had therefore begun the process of restructuring their debt. This, among other indicators, led the audit team to have substantial doubt regarding Nance Corporation's ability to continue as a going concern. The next step the team should take is to: do nothing, as the auditors have no responsibility related to going concern assessments. obtain and discuss with management their plan to continue as a going concern and assess the likelihood the plan will be successful. issue an unmodified opinion with an emphasis of a matter paragraph related ability of Nance Corporation to continue as a going concern. resign from the engagement.

obtain and discuss with management their plan to continue as a going concern and assess the likelihood the plan will be successful.

For public entities, the communication of all significant internal control deficiencies must be made to the client in writing ______.

prior to the audit report release date

Engagement quality review ______.

reviews whether audit evidence was sufficient to support the audit opinion; is required by GAAS; is also known as concurring-partner review

When omitted procedures are discovered ______.

revised reports may or may not be required

Examining material account transactions that occur between the interim testing date and the date of the financial statements is a common _____ - _____ procedure.

roll forward

If relevant internal controls are effective, auditors may use _____ - _____ procedures to move interim conclusions to the year-end date.

roll; forward

When auditors use the ______ method to evaluate the materiality of uncorrected mistakes, only current-period income effect(s) are considered.

rollover

Management's refusal to provide written representations ______.

should cause auditor skepticism; constitutes a scope limitation

The attorney's response to an attorney letter ______.

should note any issues where the attorney's view is different from the client's view; should be provided directly to the auditor

A proposed adjustment to the financial statements that the client decides not to make is called a(n) ______ misstatement.

uncorrected

A proposed adjustment to the financial statements that the client decides not to make is called a(n) _____ _____.

uncorrected misstatement

Attorneys should encourage clients to disclose unasserted claims to auditors ______.

when the assertion of a claim is at least probable