Chapter 14 Pre-Quiz

In completing the audit, the auditor communicates with management via the management letter. Which of the following statements is false about management letters? a. The management letter is used to make significant operational or control recommendations to management. b. The management letter is required for publicly traded companies in the U.S., but not privately held companies. c. The management letter is not required but simply a added document to make the audit more reliable. d. Many audit firms consider management's inattention to addressing comments in the letter to be an important risk factor in subsequent-year audits.

The management letter is required for publicly traded companies in the U.S., but not privately held companies

Objective criteria for evaluating the quality of the client's accounting policies is not available; assessing the quality, not just the acceptability of the significant accounting policies, is a matter of professional judgment. a. True b. False

True

The auditor is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for loss contingencies; management is responsible for determining that the auditor has properly identified, accounted for, and disclosed material loss contingencies. a. True b. False

True

The analytical procedures of the financial statements of Koss Corporation that are depicted in Exhibit 14.3 reveal which of the following indicators of the fraud? a. Cash balances had declined to their lowest level since FYE 2004. b. Cost of goods sold as a percentage of sales had risen sharply over the period, with a particularly significant increase from FYE 2008 to 2009. c. Net income as a percentage of sales had decreased sharply over the period, with a particularly significant decrease from FYE 2008 to 2009. d. All of these narrative answers are correct.

All of these narrative answers are correct.

In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have reasonable assurance about which of the following? a. The disclosed events and transactions have occurred and pertain to the entity. b. All the disclosures that should have been included are included. c. The disclosures are understandable to users. d. All of these.

All of these.

Which of the following is not a typical communication between the auditor and the audit committee at the end of an audit engagement? a. Discussion of the client continuance decision. b. Discussion about auditor independence. c. Discussion of the auditor's responsibility. d. Discussion about management judgments and accounting estimates.

Discussion of the client continuance decision.

Which of the following statements concerning review analytical procedures is false? a. Auditing standards require the use of review analytical procedures to assist in identifying ending account relationships that are unusual. b. Review analytical procedures helps auditors assess the overall presentation of the financial statements. c. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for performing review analytical procedures. d. The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics.

The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics.

The going-concern evaluation is based on information obtained from normal audit procedures performed to test management's assertions; no separate procedures are required, unless the auditor believes that there is substantial doubt about the client's ability to continue as a going concern. a. True b. False

True

The legal implications of a client's noncompliance with laws and regulations are ultimately a matter for the auditor to resolve before the auditor can issue the audit opinion. a. True b. False

True

The management letter confirms responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. a. True b. False

True