ACCT 4123 Chapter 11

Type 1 subsequent events involve events that existed _____ the balance sheet date.

before

Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?

Client

Engagement quality review ______.

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

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "We have made available to you all financial records and related data."

Appropriate

To whom should written representations be addressed?

Auditors

Type 1 subsequent events require the financial statements to be _______ if needed.

adjusted

Auditors should ensure that ______ have been properly disclosed.

both favorable and unfavorable contingencies

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

client

Auditors are responsible for ______ accounting estimates.

considering the reasonableness of

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

contingent

Subsequent events provide evidence of conditions that ______.

existed at or arose following the date of the financial statements

When omitted procedures are discovered ______.

revised reports may or may not be required

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

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

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

governance

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

uncorrected misstatement

Reviewers are concerned that the ________ all tie together.

working papers

Type 1 Subsequent Event - provide more information about facts that already existed at the balance sheet date

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

Type 2 Subsequent Event - involve facts after the balance sheet date

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

Auditor communications to individuals charged with governance include ______.

- any disagreements with management - judgment about the quality of critical accounting policies and estimates - auditors' responsibility under GAAS - significant difficulties encountered during the audit - representations requested from management - overview of audit scope and timing

Management letters ______.

- are delivered to and discussed with the client - can make the client aware of other business services offered - not required by GAAP - build rapport

Audit documentation review ______.

- provides an evaluation of the firm's audit practices - allows the firm to adhere to the performance principle - can be a component of staff training and evaluation - ensures the audit is conducted in accordance with GAAS

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

- reading applicable meeting minutes held after the financial statement date - reviewing interim financial statements - obtaining written representations as to the existence of events - obtaining an understanding of procedures management used to identify event

Written representations are ______.

- required before the audit can be completed - also known as client representations

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

A. Management letter.

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

A. Subsequently discovered facts

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "Certain representations in this letter are described as being limited to matters that are material."

Appropriate

Which of the following best describes the auditor's responsibility with respect to management's estimates? A. Identifying how the failure of the entity to achieve management's estimates will influence users' decisions. B. Assessing the likelihood that actual results will be consistent with management's estimates. C. Evaluating the reasonableness of management's estimates. D. Verifying the mathematical accuracy of management estimates.

C. Evaluating the reasonableness of management's estimates.

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. Collection of a past due accounts receivable. B. Settlement of long outstanding litigation. 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 statements is correct? A. Significant events occurring between the date of the audit report and the release date increase auditor responsibility for all new developments. B. The auditor has no responsibility for significant developments that occur after the date of the audit report. C. Significant events occurring between the date of the audit report and the audit report release date may result in a dual dated report.

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

What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist?

Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' 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 [Reason: Auditors are required to consider whether any evidence provides "substantial doubt" about going concern.]

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "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

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses?

These accounts may represent attempts of earnings management.

Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the

client's management.

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

date of the auditor's report

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

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

management letter

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):

subsequently discovered fact.

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

Written representations ______.

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

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "Based on our assessment, we conclude that the Company has maintained an effective internal control over financial reporting as of December 31, 2020."

Appropriate

Select the appropriate term to which it is most likely related. Each term is associated with only one statement. Based on the facts, known to us, after a full investigation, it is our opinion that no liability will be established against this entity.

Attorney letters.

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

B. Obtaining signed written representations.

For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit? A. Evaluating the adequacy of evidence gathered in response to unexpected account balances B. Identifying unusual or unexpected account balances or relationships among account balances that were not previously identified during the audit C. Evaluating the adequacy of evidence gathered in response to unexpected relationships among account balances D. Obtaining evidence about assertions related to account balances or classes of transactions

D. Obtaining evidence about assertions related to account balances or classes of transactions

Which of the following is the most effective method of identifying potential earnings management attempts? A. Detailed substantive procedures. B. Inquiry of client management and key financial personnel. C. Analytical procedures. D. Scanning accounts for unusual items.

D. Scanning accounts for unusual items.

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

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.

Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity? A. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist. B. Auditors are required to specifically gather evidence with respect to going-concern status and modify their report on the financial statements if substantial doubts exist. C. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and separately report on the entity's ability to continue as a going concern. D. Auditors are required to specifically gather evidence with respect to going-concern status and separately report on the entity's ability to continue as a going concern.

A. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

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

A. Performing analytical procedures.

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

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

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

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "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

Type 1 subsequent events require _____ of the financial statements.

adjustment

Type 2 subsequent events come into existence _____ the balance sheet date.

after

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

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

auditors generally dual date the audit report

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

Reviewers are concerned if immaterial passed misstatements have a ______ material effect.

cumulative

Subsequent events occur between the __________ and the __________.

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

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

dual date

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

dual date

Managers and partners typically review at the _____ of the engagement timeline.

end

Working papers are reviewed at _____ supervisory level(s) of a CPA firm.

every

Type 1 subsequent events come into existence due to new _____ becoming available.

evidence

The CPA's opinion on the _____ of the financial statements may be changed by subsequent events.

fairness

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

omitted

Many subsequent events may involve the settling of ________.

litigation

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

management and attorneys

Written representations are also known as _____ or _____ representations.

management; client

Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be _____.

misleading

A letter of inquiry to an attorney ______.

must be sent directly from the client [Reason: Reason: The letter is sent by the client and the response is sent directly to the auditor.]

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

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by

performing analytical procedures designed to disclose differences from expectations.

Type 2 subsequent events occur after the balance sheet date but ____ the completion of fieldwork.

prior to

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

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

proposed

Concurring partners are often concerned with _____ control standard compliance.

quality

Attorney letters should be ______.

requested by the client and mailed by the auditor with responses sent directly to the auditor

Near the end of an audit, the application of analytical procedures is

required by auditing standards.

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

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

subsequent

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

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

the audit committee of the board of directors

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

the date of the financial statements

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

the outcome of litigation

Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously-expressed opinion. Auditors need not try to perform the omitted procedure if

the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.

Attorney letters should be sent ______.

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

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

uncorrected

Auditors are required to ______.

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

If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event? A. The entity's announcement of a major restructuring plan on December 30 that will be implemented during the upcoming year. B. Losses from the devaluation of a foreign currency that became finalized on February 21. C. A significant acquisition that was announced on February 1 and will be finalized on October 1. D. A court settlement on March 3 related to a case that was pending on December 31.

C. A significant acquisition that was announced on February 1 and will be finalized on October 1.

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "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

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "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

The following statement is a communication from management. Indicate whether the inclusion of the statement in written representations is appropriate. "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