Audit- Chapter 16

An auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. The financial statements show a liability of $90,000. $10,000 judgmental misstatement. $10,000 projected misstatement. $20,000 judgmental misstatement. $20,000 projected misstatement.

$10,000 judgmental misstatement.

All information included in a financial report prepared and submitted by the auditors should be audited. True False

False

The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client. True False

True

The financial statements should not be adjusted for subsequent events that provide important evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date. True False

True

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The factual misstatement in this situation is: $0. $30,000. $40,000. $50,000.

$0.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000, with all points in that interval equally likely. The judgmental misstatement in this situation is: $0. $30,000. $40,000. $50,000.

$30,000.

Which of the following subsequent events might require an adjustment to the client's financial statements? A business combination with another company. A major customer declares bankruptcy causing a material receivable to be uncollectible. Loss of plant and equipment due to a fire. The loss in insured. Plant employees could possibly go on strike.

A major customer declares bankruptcy causing a material receivable to be uncollectible.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? The client decided to change depreciation methods in the coming year. A substantial portion of the company's inventory was written off as obsolete on January 31. The factory building was damaged by a fire on January 19. A major subsidiary was sold on February 7.

A substantial portion of the company's inventory was written off as obsolete on January 31.

The primary objective of analytical procedures used near the end of an audit is to: Obtain evidence from details tested to corroborate particular assertions. Identify areas that represent specific risks relevant to the audit. Assist the auditor when forming overall conclusions about the financial statements. Satisfy doubts when questions arise about a client's ability to continue in existence.

Assist the auditor when forming overall conclusions about the financial statements.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: Attempt to determine whether their report is still being relied upon by third parties. Notify regulatory agencies. Notify legal counsel. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.

Attempt to determine whether their report is still being relied upon by third parties.

Which of the following procedures would most likely be performed while evaluating findings at the conclusion of an audit? Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. Determine whether reportable conditions have been corrected. Calculate an estimate the total of uncorrected misstatements in the financial statements.

Calculate an estimate the total of uncorrected misstatements in the financial statements.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? Capitalization. Financing. Investing. Operations.

Capitalization.

Which of the following procedures would an auditor generally perform regarding subsequent events? Inspect inventory items that were ordered before the year end but arrived after the year end. Test internal control activities that were previously reported to management as inadequate. Review the client's cutoff bank statements for several months after the year end. Compare the latest available interim financial statements with the statements being audited.

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

Which of the following is most likely to be considered a Type 1 subsequent event? A business combination completed after year-end, but for which negotiations began prior to year-end. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. Customer checks deposited prior to year-end but determined to be uncollectible after year-end. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: Day the audit report is issued. End of the client's year. Date of the auditors' report. Date the report is filed with the SEC.

Date of the auditors' report.

Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date. True False

False

The representations letter from management should be dated and signed on the balance sheet date. True False

False

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: December 31, 20X8. January 17, 20X9. February 10, 20X9. February 16, 20X9.

February 10, 20X9.

An approach that quantifies a misstatement as based on its cumulative uncorrected total on the current year balance sheet is called the: Evaluation materiality approach. Iron curtain approach. Projected misstatement approach. Rollover approach.

Iron curtain approach.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: Letter of audit inquiry to the client's lawyer. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. Confirmation of claims and assessments from the other parties to the litigation. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

Letter of audit inquiry to the client's lawyer.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a: Letter of audit inquiry to the client's lawyer. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. Confirmation of claims and assessments from the other parties to the litigation. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

Letter of audit inquiry to the client's lawyer.

When an audit report is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is: Extended to include all events occurring until the date of the last subsequent event referred to. Limited to the specific event referred to. Limited to all events occurring through the date of issuance of the report. Extended to include all events occurring through the date of submission of the report to the client.

Limited to the specific event referred to.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): Analytical process. Loss contingency. Probable loss. Unasserted claim.

Loss contingency.

Hall accepted an engagement to audit the year 1 financial statements of Green Company. Green completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 2. The client's representation letter normally would be dated: February 13, year 2. February 17, year 2. March 24, year 2. March 28, year 2.

March 24, year 2.

The review of audit working papers by the audit partner is normally completed: Prior to year-end. Immediately as each working paper is completed. Near the completion of the audit. After issuance of the audit report, but prior to required subsequent event review procedures.

Near the completion of the audit.

Which of the following is a procedure normally performed while completing the audit of a public company? Obtain a lawyer's letter. Send out accounts receivable confirmations. Observe the count of year-end inventory. Fill out the internal control questionnaire.

Obtain a lawyer's letter.

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date? Review minutes of board of directors' meeting. Review the latest available interim financial statements. Inquire about any unusual adjustments made subsequent to the balance sheet date. Perform analytical procedures in the period subsequent to the balance sheet date.

Perform analytical procedures in the period subsequent to the balance sheet date.

Which of the following procedures is most likely to be included near completion of an audit? Obtaining an understanding of internal control. Confirmation of receivables. Observation of inventory. Performing analytical procedures.

Performing analytical procedures.

Analytical procedures are required as a part of the: Detailed tests of balances. Internal control assessment. Procedures performed near the end of the audit. Substantive testing.

Procedures performed near the end of the audit.

The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a: Factual misstatement. Judgmental misstatement. Projected misstatement. Relevance misstatement.

Projected misstatement.

An approach that quantifies a misstatement based on its effects on the current year income statement only is called the: Evaluation materiality approach. Iron curtain approach. Projected misstatement approach. Rollover approach.

Rollover approach.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? A business combination. Early retirement of bonds payable. Settlement of litigation. Plant closure due to a strike.

Settlement of litigation.

Auditors must communicate internal control "significant deficiencies" to: The audit committee. The shareholders. The SEC. The Federal Trade Commission.

The audit committee.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that: The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Management's written representations should be in the form of a letter addressed to: The audit committee of the board of directors. The stockholders of the entity. The auditor. The board of directors.

The auditor.

Which of the following is not correct relating to representation letters? They are ordinarily dated as of the date of the audit report. They are signed by members of top management. They must be obtained for audits. They often serve as a substitute for the application of other procedures.

They often serve as a substitute for the application of other procedures.

A loss on an account receivable because of a major customer declaring bankruptcy subsequent to the balance sheet date might or might not require adjustment of the financial statements, depending upon the cause of the customer's bankruptcy. True False

True

Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts. True False

True

Analytical procedures are often used for verification of income statement accounts. True False

True

CPAs have no responsibility to perform audit procedures after the date of their report but should still investigate events that are brought to their attention and might have affected their report. True False

True

The aggregated misstatement in the financial statements is made up of: Factual Misstatements Projected Misstatements Judgmental Misstatements (1)Yes Yes Yes (2)Yes Yes No (3)No Yes No (4)No Yes Yes

Yes Yes Yes

The date of the management representation letter should coincide with the: date of the auditor's report. balance sheet date. date of the latest subsequent event referred to in the notes to the financial statements. date of the engagement agreement.

date of the auditor's report.

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: a postdated footnote. the next scheduled interim visit. the final billing for audit services rendered. the auditors' report.

the auditors' report.

Which of the following auditing procedures is ordinarily performed last? Reading of the minutes of the directors' meetings. Confirming accounts payable. Obtaining a management representation letter. Testing of the purchasing function.

Obtaining a management representation letter.

The auditors should accumulate known, projected, and other estimated misstatements in the financial statements to determine whether an unmodified opinion should be issued on the financial statements. True False

True

When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report. True False

True

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? Obtaining a lawyers' letter. Confirming accounts payable. Reviewing the minutes of board of directors' meetings. Review correspondence with banks.

Confirming accounts payable.

Disclosure checklists are used to test the completeness of audit working papers. True False

False

Auditors should perform audit procedures relating to subsequent events: Through year-end. Through issuance of the audit report. Through the date of the audit report. For a reasonable period after year-end.

Through the date of the audit report.

Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. True False

True

Subsequent events, which provide additional evidence regarding conditions existing at the balance sheet date, may result in adjustment of the financial statements. True False

True

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: Notify the board of directors that the auditor's report must no longer be associated with the financial statements. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. Issue revised pro forma financial statements taking into consideration the newly discovered information.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to: Extend auditing procedures. Accept responsibility for year-end adjusting entries. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.

Extend auditing procedures.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): Extrapolation difference. Factual misstatement. Redundancy effect misstatement. Projected misstatement.

Factual misstatement.

Dual-dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements. True False

False

One reason why the independent auditors perform analytical procedures on the client's operations is to identify: Weaknesses of a material nature in internal control. Noncompliance with prescribed control procedures. Improper separation of accounting and other financial duties. Unusual transactions.

Unusual transactions.

Which of the following is not a procedure normally performed while completing the audit of a public company? Obtain a lawyer's letter. Obtain a representations letter. Perform an overall review using analytical procedures. Update internal control questionnaire.

Update internal control questionnaire.