Chapter 11: Completing the Audit

To whom should written representations be addressed? A. Auditors B. Board of directors C. Client D. Stockholders

A. Auditors

A form of communication used by auditors to ensure that all significant matters have been disclosed to auditors during the engagement is a(n): A. Written representations. B. Confirmation letter. C. Engagement letter. D. Acceptance letter.

A. Written representations.

Analytical procedures performed near the end of an audit generally include A. considering unusual or unexpected account balances that were not previously identified. B. performing tests of transactions to corroborate management's financial statement assertions. C. gathering evidence concerning account balances that have not changed from the prior year. D. retesting control activities that appeared to be ineffective during the assessment of control risk.

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

What is the primary purpose of obtaining written representations? A. To provide auditors with substantive evidence of important assertions B. To impress upon management its primary responsibility for the financial statements C. To allow auditors to communicate important internal control deficiencies to management D. To allow auditors to communicate important suggestions for improvement to management

B. To impress upon management its primary responsibility for the financial statements

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Subsequent events are divided into two categories, those providing additional evidence about facts existing on or before the balance sheet date and those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories, those that provide more information about facts that already existed at the balance sheet date and those that involve facts after the balance sheet date. Type 1 subsequent events involve events that existed _____ the balance sheet date. A. after B. before C. between D. close to E. near F. on

B. before

If auditors are appointed on January 3, 2017, the date of the financial statements is December 31, 2017, the date of the auditors' report is February 7, 2018, and the audit report release date is March 3, 2018, what is the appropriate date of the written representations? A. January 3, 2017 B. December 31, 2017 C. February 7, 2018 D. March 3, 2018

C. February 7, 2018

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

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

Which of the following forms of communication serves as a critical part of auditors' examination of litigation, claims, and assessments? A. Written representations. B. Engagement letter. C. Management letter. D. Attorney letter.

D. Attorney letter.

Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork? A. To ensure that all appropriate steps in the audit plan were performed B. To ensure that referencing among audit documentation is clear C. To ensure that the explanations included in the audit documentation are understandable D. To ensure that the overall scope of the audit was appropriate

D. To ensure that the overall scope of the audit was appropriate

Near the end of an audit, the application of analytical procedures is A. recommended by auditing standards. B. not mentioned by auditing standards. C. not useful, since detailed substantive procedures have already been performed. D. required by auditing standards.

D. required by auditing standards.

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Attorney letter response. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From A. Attorney To A. Auditors When D. Near date of auditors' report

Which of the following is typically not included in the inquiry letter sent to the client's attorneys? A. A disclaimer regarding the likelihood of settlement of pending litigation B. A listing of pending or threatened litigation, claims, or assessments C. An evaluation of the likelihood of an unfavorable outcome D. An estimate of the range of potential loss

A. A disclaimer regarding the likelihood of settlement of pending litigation

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Auditors have responsibility for evidence not available at the close of the period but which becomes available before the auditors finish their fieldwork and issue their opinion. Subsequent events are divided into two categories: Type 1 are those providing additional evidence about facts existing on or before the balance sheet date and Type 2 are those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories--those that provide more information about facts that already existed at the balance sheet date (Type 1) and those that involve facts after the balance sheet date (Type 2). Type 2 A. A flood damages a significant portion of the operating facility after year-end. B. Additional evidence about conditions that existed at the balance sheet date. C. A lawsuit that was in progress as of year-end was settled shortly thereafter. D. Conditions that have come into existence after the balance sheet date. E. During the audit, a customer with a large A/R balance at year-end declares bankruptcy.

A. A flood damages a significant portion of the operating facility after year-end. D. Conditions that have come into existence after the balance sheet date.

Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor's report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility? A. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018. B. A customer's deteriorating financial condition that was identified on February 19, 2018. C. The obsolescence of inventory held on December 31, 2017, that was identified on January 20, 2018. D. A merger that was announced by Mays and known by Ambrose on February 12, 2018.

A. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018.

Which of the following forms of communication ordinarily do not take place following completion of the audit examination? A. Attorney letter. B. Communications with individuals charged with governance. C. Management letter. D. Internal control deficiency communications.

A. Attorney letter.

Navarre, CPA has just issued his report on Big Blue's financial statements. Following the audit report release date, he learned of an event that occurred after the date of the auditors' report. What is Navarre's most appropriate response? A. Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event. B. Inform users who are currently known to be relying on the financial statements of the nature of the event. C. Withdraw his report on Big Blue's financial statements and reissue the report following his substantive procedures. D. Perform the appropriate substantive procedures related to the event and dual date the audit report.

A. Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event.

Which of the following would ordinarily not be performed in the auditors' examination of litigation, claims, and assessments? A. Confirm litigation, claims, and assessments with parties bringing suit or action against the client. B. Read minutes of meetings of stockholders, directors, and appropriate committees. C. Examine documentary evidence maintained by the client with respect to litigation, claims, and assessments. D. Inquire of client management with respect to litigation, claims, and assessment.

A. Confirm litigation, claims, and assessments with parties bringing suit or action against the client.

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

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

Which of the following parties provides a review of audit documentation for the primary purpose of ensuring that the quality of the work and reporting is consistent with the quality standards of the public accounting firm? A. Engagement quality reviewer. B. Engagement partner. C. Audit manager. D. Audit supervisor.

A. Engagement quality reviewer.

A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. 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? A. January 30, 2018, except as to Note X, which is dated February 5, 2018. B. February 5, 2018, except for the date of the auditor's report, for which the date is January 30, 2018. C. December 31, 2017, except as to Note X, which is dated February 5, 2018. D. December 31, 2017, except as to Note X, which is dated January 30, 2018.

A. January 30, 2018, except as to Note X, which is dated February 5, 2018.

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

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

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? A. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements. B. Sale of an issue of new stock for $500,000 on January 30. C. Settlement of a damage lawsuit for a customer's injury sustained February 15 for $10,000. D. Storm damage of $1 million to the entity's buildings on March 1.Incorrect

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

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Subsequent events are divided into two categories, those providing additional evidence about facts existing on or before the balance sheet date and those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories, those that provide more information about facts that already existed at the balance sheet date and those that involve facts after the balance sheet date. Type 1 subsequent events require ______ of the financial statements. A. adjustment B. consideration C. disclosure D. documentation E. duplication

A. adjustment

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Subsequent events are divided into two categories, those providing additional evidence about facts existing on or before the balance sheet date and those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories, those that provide more information about facts that already existed at the balance sheet date and those that involve facts after the balance sheet date. Type 2 subsequent events come into existence _____ the balance sheet date. A. after B. before C. between D. close to E. near F. on

A. after

Subsequent events occur between the ____ and the ____. A. date of the financial statements; date of the auditors' report B. date of the auditors' report; audit report release date C. date of the financial statements; audit report release date D. audit report release date; beginning of subsequent year's audit

A. date of the financial statements; date of the auditors' report

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Auditors have responsibility for evidence not available at the close of the period but which becomes available before the auditors finish their fieldwork and issue their opinion. Subsequent events are divided into two categories: Type 1 are those providing additional evidence about facts existing on or before the balance sheet date and Type 2 are those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories--those that provide more information about facts that already existed at the balance sheet date (Type 1) and those that involve facts after the balance sheet date (Type 2). Type 1 A. A flood damages a significant portion of the operating facility after year-end. B. Additional evidence about conditions that existed at the balance sheet date. C. A lawsuit that was in progress as of year-end was settled shortly thereafter. D. Conditions that have come into existence after the balance sheet date. E. During the audit, a customer with a large A/R balance at year-end declares bankruptcy.

B. Additional evidence about conditions that existed at the balance sheet date. C. A lawsuit that was in progress as of year-end was settled shortly thereafter. E. During the audit, a customer with a large A/R balance at year-end declares bankruptcy.

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: A. Violation of debt covenants B. Failure to meet forecasted earnings per share C. Legal proceedings that may have a significant negative impact on the entity D. Negative cash flow from operations for each of the last three years

B. Failure to meet forecasted earnings per share

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? A. December 31 and January 25 B. January 25 and February 1 C. January 25 and February 15 D. February 1 and February 15

B. January 25 and February 1

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

B. 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 A. February 13, year 2. B. March 24, year 2. C. March 28, year 2. D. February 17, year 2.

B. March 24, year 2.

Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events? A. Reviewing the latest interim financial statements B. Performing cut-off testing near year end C. Inquiring of officers and other client executives D. Obtaining written representations

B. Performing cut-off testing near year end

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

B. The date of the auditor's report.

Why is it the client's decision to record adjustments to the financial statements? A. Having auditors adjust the financial statements would impair independence with respect to the client. B. The financial statements are the responsibility of the client's management. C. Auditors often do not have sufficient client-specific expertise to record adjustments to the financial statements. D. The client will ultimately suffer any losses related to misstated financial statements.

B. The financial statements are the responsibility of the client's management.

Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements? A. Settlement of long outstanding litigation B. Collection of a past due accounts receivable C. Loss of inventory as a result of a flood D. An additional tax assessment on prior income

C. Loss of inventory as a result of a flood

Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? A. Confirming a sample of material accounts receivable established after year-end B. Comparing the financial statements being reported on with those of the prior period C. Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements D. Inquiring as to whether any unusual adjustments were made just before year-end

C. Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? A. Storm damage of $1 million to the entity's buildings on March 1. B. Sale of an issue of new stock for $500,000 on January 30. C. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements. D. Settlement of a damage lawsuit for a customer's injury sustained February 15 for $10,000.

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

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses? A. These accounts are likely to relate to going-concern matters. B. These accounts are often more difficult to audit using normal substantive procedures. C. These accounts may represent attempts of earnings management. D. These accounts are likely to require the assistance of a specialist.

C. These accounts may represent attempts of earnings management.

The primary objective of analytical procedures used near the end of an audit is to A. obtain evidence from details tested to corroborate management assertions. B. obtain evidence on the validity of the assessment of control risk. C. assist auditors in evaluating the overall financial statement presentation. D. identify areas that represent specific risks relevant to the audit.

C. 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: A. date of the financial statements. B. date of the auditors' report. C. audit report release date. D. subsequent year's date of the financial statements.

C. 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 A. date of the auditors' report. B. final review of the audit documentation. C. audit report release date. D. delivery of the auditors' reports to the client.

C. audit report release date.

An important method used by auditors to learn of material contingencies is A. examining documents in the client's possession concerning contingencies. B. inquiring and discussing them with management. C. obtaining responses to an attorney letter. D. confirming accounts receivable with the client's customers.

C. obtaining responses to an attorney letter.

Management letters are not a means of A. reporting recommendations to the client. B. assisting the client in improving its operations. C. satisfying professional requirements to communicate matters related to the client's internal control. D. developing rapport with the client.

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

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

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

Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity? A. Statements related to management's responsibility for the entity's financial statements B. Statements related to management's responsibility for designing internal control to prevent and detect fraud C. An indication that all subsequent events have been disclosed to the auditors D. Management's opinion as to the effectiveness of its internal control over financial reporting

D. Management's opinion as to the effectiveness of its internal control over financial reporting

Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? A. Obtaining a description and evaluation of litigation, claims, and assessments from management B. Examining documentary evidence regarding litigation, claims, and assessments C. Reading minutes of meetings of stockholders, directors, and appropriate committees D. Performing analytical procedures

D. Performing analytical procedures

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

D. Scanning expense accounts for credit entries.

Which of the following events or activities may occur following the audit report release date? A. Interim testing B. Roll-forward work C. Subsequent events D. Subsequently discovered facts

D. Subsequently discovered facts

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

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

An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the: A. "to-do lists" are reviewed and cleared. B. audit plan procedures are "signed off." C. tick-mark notations are cleared. D. audit work meets the quality standards of the firm.

D. audit work meets the quality standards of the firm.

Roll-forward work normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. date of interim work; date of the auditors' report

D. date of interim work; date of the auditors' report

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Subsequent events are divided into two categories, those providing additional evidence about facts existing on or before the balance sheet date and those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories, those that provide more information about facts that already existed at the balance sheet date and those that involve facts after the balance sheet date. Type 1 subsequent events come into existence due to new ______becoming available. A. auditors B. clients C. documentation D. evidence E. judgement

D. evidence

Oftentimes a CPA's opinion on the fairness of the financial statements may be changed by subsequent events. Subsequent events are events that happen after the balance sheet date but before the financial statements are issued. Subsequent events are divided into two categories, those providing additional evidence about facts existing on or before the balance sheet date and those involving facts coming into existence after the balance sheet date. CONCEPT REVIEW: Accounting standards divide subsequent events into two categories, those that provide more information about facts that already existed at the balance sheet date and those that involve facts after the balance sheet date. Type 2 subsequent events occur after the balance sheet date but ____ the completion of fieldwork. A. after B. close to C. near to D. prior to E. subsequent to

D. prior to

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(an): A. omitted procedure. B. prior period adjustment. C. subsequent event. D. subsequently discovered fact.

D. subsequently discovered fact.

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Management letter. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From B. Auditors To B. Client When A. After audit

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Engagement letter. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From B. Auditors To B. Client When B. Before engagement

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Communication with individuals charged with governance. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From B. Auditors To C. Individuals charged with governance (audit committee) When A. After audit

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Internal control deficiency communication. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From B. Auditors To C. Individuals charged with governance (audit committee) When E. Prior to audit report release date

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Acceptance Letter From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After audit B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From C. Client To A. Auditors When B. Before engagement

For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public. Written representations. From A. Attorney B. Auditors C. Client To A. Auditors B. Client C. Individuals charged with governance (audit committee) When A. After engagement B. Before engagement C. Date of auditors' report D. Near date of auditors' report E. Prior to audit report release date

From C. Client To A. Auditors When C. Date of auditors' report