Chapter 11 Auditing Terms/HW

When auditors assess the risk of material misstatement from pending litigation, they will request the client send a(n) _____ _____ to all lawyers who worked for the client during the period under audit.

Attorney Letter

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

audit completion date

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

False

The flow of correspondence related to the attorney letter begins when the ______ request the client to prepare a letter to its attorney. -company executives -senior management -auditors -HR department head

-auditors

Attorney letters should be sent ______. -only to a client's internal legal counsel -only to attorneys directly involved in pending litigation, claims and assessments -to all attorneys who worked for a client during the period under audit

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

Attorney Letter or letter of inquiry

A communication prepared by the client but sent by the auditors to the client's attorneys that details all pending litigation, claims, and assessments against the client and that requests the attorneys to comment on these matters directly to the client's auditors.

written representations

A written assertion provided by management to auditors related to the entity's financial statements, the information provided to the auditors, and management's internal control over financial reporting to confirm certain matters and support other evidence obtained during the audit; also referred to as management representation.

Contingency

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.

Which of the following activities is ordinarily performed prior to the date of the financial statements? -Audit documentation review. -Interim testing. -Roll-forward work. -Subsequent event review.

Interim Testing Interim testing is done prior to year end for efficiency purposes and when overall risk of material misstatement is low.

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

Roll-forward

Subsequent events provide evidence of conditions that ______. -arose following the date of the financial statements only -existed at or arose following the date of the financial statements -existed at the date of the financial statements only

existed at or arose following the date of the financial statements

analytical procedures

Procedures that allow auditors to evaluate financial information by studying relationships among both financial and nonfinancial data. When used near the end of the audit, analytical procedures allow auditors to assess the conclusions reached during the audit and evaluate the overall financial statement presentation.

roll-forward procedures

The procedure(s) performed by auditors to extend the conclusions from an interim date to the date of the financial statements.

Date of the Financial Statements

The year-end date of the latest period covered by the client's financial statements.

Select all that apply Auditors are required to ______. Multiple select question. a. consider evidence that provides substantial doubt about the client's ability to continue as a going concern b. obtain information from management regarding plans to mitigate the effects of going concern uncertainties c. modify the audit report if any evidence comes to their attention regarding going concern uncertainties d. design and perform procedures for the purpose of identifying conditions that indicate going-concern uncertainties

a, b

Auditor communications to individuals charged with governance include ______. Multiselect a. representations requested from management b. significant difficulties encountered during the audit c. all misstatements identified during the audit d. overview of audit scope and timing

a, b, c

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, ______. Multiselect a. revised financial statements should be issued as soon as practicable b. the auditor must immediately notify regulatory agencies that the auditor's report cannot be relied on c. management must notify appropriate individuals that the financial statements should not be relied on

a, c

Select all that apply Management's refusal to provide written representations ______. Multiple select question. a. should cause auditor skepticism b. results in the need for other substantive procedures c. requires the auditors to withdraw from the engagement d. constitutes a scope limitation

a, d

Auditor communications to individuals charged with governance include ______. Multiple select question. a. significant issues arising from the audit that were not discussed with management b. auditors' responsibility under GAAS c. any disagreements with management d. judgment about the quality of critical accounting policies and estimates

b, c, d

Select all that apply Written representations are ______. Multiple select question. a. dated as of the date of the financial statement date b. signed by a member of the Board of Directors c. required before the audit can be completed d. also known as client representations

c, d

Auditors must rely on the attorney to inform ______ if an unasserted claim must be disclosed. -the client -both the client and the auditor -the auditor

client

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

client

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

contingent

Subsequently discovered facts become known to the auditor after the ______. -date of the auditor's report -audit report release date -date of the financial statements but before the date of the auditor's report

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 financial statements -date of the auditor's report -completion of interim testing -audit report release date

date of the auditor's report

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

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

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

interim testing

Written representations are also known as _____ or _____ representations.

management client

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

proposed

When omitted procedures are discovered ______. -they must be performed whether or not they were important in supporting the audit opinion -revised reports may or may not be required -the original audit report must be withdrawn

revised reports may or may not be required

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

Omitted Procedures

the inadvertent failure of auditors to perform necessary audit procedures prior to the audit report release date

dual date

the use of two dates in the auditor's report to limit the responsibility beyond the date of the auditor's report to a specific subsequent event identified in the report

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

uncorrected misstatement

Procedures used by auditors near the end of the audit to identify unusual or unexpected relationships not previously identified during the audit are referred to as: -Analytical procedures. -Interim testing. -Roll-forward work. -Subsequently discovered facts.

-Analytical procedures. Analytical procedures are used in the final review of the audit to identify unusual or unexpected relationships that may have been missed during the audit.

Which of the following is typically the auditors' initial procedure performed to identify litigation, claims, and assessments? -Perform analytical procedures. -Confirm litigation, claims, and assessments with third-party litigants. -Obtain an attorney letter from the entity's legal counsel. -Inquire of the entity regarding the existence of litigation, claims, and assessments.

-Inquire of the entity regarding the existence of litigation, claims, and assessments. Inquiry would be the initial procedure performed to identify litigation, claims or assessments.

Procedures used to allow auditors to extend their conclusions to the end of the year under audit are referred to as: -Analytical procedures. -Interim testing. -Roll-forward work. -Tests of controls.

-Roll-forward work.

Which of the following information is not included in the attorney letter? -A listing of pending or threatened litigation, claims, or assessments. -A description of each item identified by management, including the nature of the case and management responses or intended responses to the case. -The attorney's expert opinion as to the probability of an unfavorable judgment against the entity. -An estimate of the range of potential loss.

-The attorney's expert opinion as to the probability of an unfavorable judgment against the entity.

Which of the following statements is true with respect to written representations? -Written representations are dated as of the date of the financial statements. -Written representations may serve as a substitute for various types of substantive procedures. -Written representations are signed by auditors and delivered to the entity's officers. -Written representations are used to corroborate information obtained during the audit.

-Written representations are used to corroborate information obtained during the audit.

Auditors should ensure that ______ have been properly disclosed. -only unfavorable contingencies -only contingencies that can be reasonably estimated -both favorable and unfavorable contingencies

-both favorable and unfavorable contingencies

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 -prior to the audit report release date -prior to the receipt of client representations -prior to the date of the audit report

-no later than 60 days after the audit report release date

For public 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 -prior to the receipt of client representations -prior to the date of the audit report -prior to the audit report release date

-prior to the audit report release date

Attorneys should encourage clients to disclose unasserted claims to auditors ______. -even if the likelihood of an assertion of a claim is remote -even if the likelihood of an assertion of a claim is remote -when the assertion of a claim is at least probable

-when the assertion of a claim is at least probable

With respect to contingencies, auditor should ensure?

1. all contingencies have been appropriately identified and 2. any client disclosure of contingencies reflects the most current information and all recent developments, both favorable and unfavorable to the client.

What are two important issues relating to pending litigation, claims and assessments are ensuring that all?

1. have been disclosed to auditors 2. are properly presented and disclosed in the client's financial statements.

management letter

A communication that provides a summary of auditors' recommendations resulting from the audit engagement that allows the client to improve the effectiveness and efficiency of its operations.

Unasserted Claim

A representation that no formal lawsuit or assertion has been filed or threatened on behalf of others against the audit client but that circumstances such as a catastrophe, accident, or other physical occurrence could result in a suit or assertion being filed in the future.

engagement quality review (concurring partner review)

A review of audit documentation by an additional person (normally, a partner or equivalent with the firm who has not been involved with the audit) to ensure that the quality of the audit work and reporting is consistent with the quality standards of the public accounting firm.

Which of the following procedures would typically not be performed prior to the audit report release date? -Conducting analytical review procedures to identify unusual and unexpected relationships. -Evaluating whether evidence obtained during the audit provides evidence of going-concern uncertainties. -Evaluating the effect of an omitted audit procedure on the auditors' ability to support a previously-expressed opinion. -Interim tests of controls to evaluate the operating effectiveness of the client's internal control.

Evaluating the effect of an omitted audit procedure on the auditors' ability to support a previously-expressed opinion. Omitted procedures are discovered after the audit report release date, therefore the effect would not be evaluated until that time.

subsequently discovered facts

Facts that become known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date, may have caused the auditor to revise the auditor's report.

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

False: Reason: 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.

Which of the following communications is ordinarily signed by auditors? -Attorney letter. -Written representation letter. -Internal control deficiency letter. -All of the choices are signed by the auditor.

Internal control deficiency letter.

Which of the following types of audit documentation review is focused on ensuring that the quality of audit work and reporting is consistent with the quality standards of the firm? -Review of staff work by audit supervisor. -Review of staff work by audit manager. -Review of work by audit manager and audit partner. -Review of work by second (reviewing) partner.

Review of work by second (reviewing) partner.

Which of the following procedures would not be performed by auditors to identify subsequent events? -Review prior-year financial statements and disclosures. -Inquire of officers and other executives about various matters. -Read minutes of meetings of shareholders, directors, and appropriate committees. -Review the entity's latest interim financial statements.

Review prior-year financial statements and disclosures.

Which of the following statements is correct? Multiple choice question. -Significant events occurring between the date of the audit report and the audit report release date may result in a dual dated report. -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 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.

audit report release date

The date on which auditors allow the client to use their reports in conjunction with the financial statements; also the date on which the client's financial statements are issued.

date of the auditor's report

The date on which auditors have gathered sufficient appropriate evidence on which to base their opinions on the financial statements and internal control over financial reporting; the date that will be used for the auditor's reports on clients' financial statements and internal control over financial reporting.

individual(s) charged with governance

The person(s) responsible for overseeing the client's financial reporting process, including the internal control over financial reporting; individuals charged with governance may include the client's management and full board of directors, but typically refers to public entities' audit committee of the board of directors.

rollover method

The process used when evaluating the effect of uncorrected misstatements that considers only the current-period income effect(s) of the potential adjustment

Select all that apply Audit documentation review ______. Multiple select question. a. allows the firm to adhere to the performance principle b. can be a component of staff training and evaluation c. provides an evaluation of the firm's audit practices d. ensures the audit is conducted in accordance with GAAP

a, b, c

Professional standards procedures specifically performed to identify the existence of material subsequent events include ______. Multiple select question. a. obtaining written representations as to the existence of events b. reading applicable meeting minutes held after the financial statement date c. obtaining an understanding of procedures internal auditing used to identify event d. reviewing interim financial statements

a, b, d

Management letters ______. Multiple select question. a. are delivered to and discussed with the client b. are required by generally accepted auditing standards c. can make the client aware of other business services offered

a, c

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

a, c

Written representations ______. Multiple select question. a. are written on client letterhead and addressed to the auditor b. may be a substitute for substantive procedures c. cover events up to the financial statement date d. support other evidence obtained during the audit

a, d

Select all that apply The attorney's response to an attorney letter ______. Multiple select question. a. should be provided directly to the auditor b. should only focus on the pending ligation, claims or assessment discussed in the letter c. must be approved by the client due to attorney-client privileges d. should note any issues where the attorney's view is different from the client's view

a, d,

Auditors are required to communicate Blank______ to the client's audit committee. -all misstatement detected during the audit -only misstatements that have a material effect on the financial statements -only misstatements that management disagree with

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

When subsequently discovered facts are discovered prior to the audit report release date ______. -auditors generally dual date the audit report -the auditor must revise the audit report -the auditor becomes responsible for all events that occurred up to --the date the facts were discovered

auditors generally dual date the audit report

Select all that apply Engagement quality review ______. Multiple select question. a. must be conducted by the partner in charge of the audit b. reviews whether audit evidence was sufficient to support the audit opinion c. is required by GAAS d. is also known as concurring-partner review

b, c, d

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. -auditor -client

client

iron curtain method

considers the aggregate effect of the adjustments on the entity's balance sheet The process used when evaluating the effect of uncorrected misstatements that considers the aggregate effect of current and prior misstatements in the entity's balance sheet.

Subsequent Events

events occurring between the date of the financial statements and the date of the auditor's report

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

false

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

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. -rollover -iron curtain -cost/benefit

iron curtain

Auditors should discuss pending litigation with the client's ______. a. board of directors b. management and attorneys c. attorneys only d. management only

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

After the audit report release date, the auditor ______. -should no longer be communicating with the client about the audit -has no responsibility for new information -may have to take steps to ensure the report is not relied on

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

After the audit report release date, the auditor ______. Multiple choice question. -may have to take steps to ensure the report is not relied on -should no longer be communicating with the client about the audit -has no responsibility for new information

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

An attorney letter ______. -must be sent directly from the auditor to ensure the information can be relied on -must be sent directly from the client in response to auditors' inquiries. -cannot be used during an audit due to client-attorney privilege

must be sent directly from the client in response to auditors' inquiries. Reason: The letter is sent by the client and the response is sent directly to the auditor.

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

omitted

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 -iron curtain -cost/benefit

rollover

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

subsequent

In most public organizations, the phrase "individuals charged with governance" typically refers to ______. -client management and the full board of directors -the audit committee of the board of directors -the full board of directors

the audit committee of the board of directors

Interim testing occurs between the beginning of the year and ______. -the date of the financial statements -the audit completion date -the date of the auditor's report -any date prior to the end of the year

the date of the financial statements

A contingent liability that requires special consideration by auditors is ______. Multiple choice question. -potential warranty payments for goods and services sold -pending tax payments due to late filing of tax returns -a guarantee of debt on behalf of another party -the outcome of litigation

the outcome of litigation

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

uncertainty