Audit Chapter 24
Which of the following statements is correct?
A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source.
There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including
A) to evaluate the performance of inexperienced personnel. B) to make sure that the audit meets the CPA firm's standard of performance. C) to counteract the bias that often enters into the auditor's judgment.
Which of the following is not considered a commitment?
Each of the above is a commitment.
Which of the following is an accurate statement regarding audit documentation review?
For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit
Which of the following is an accurate statement regarding presentation and disclosure?
In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
Which of the following is not a reason why the auditor requests that the client provide a letter of representation?
It determines the type of opinion the auditor will issue on the financial statements.
Which of the following statements regarding the letter of representation is not correct?
It is optional, not required, that the auditor obtain such a letter from management.
Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering
NO-Management's intentional failure to disclose existing contingencies. YES-When management does not comprehend accounting disclosure requirements.
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?
NO-The date of the original last day of fieldwork only. YES-The date of the subsequent event only YES-The date on which the last day of fieldwork occurred along with the date of the subsequent event
Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?
Request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments.
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category?
Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
Which of the following is correct regarding supplementary information?
The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.
Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?
The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements?
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.
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?
The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel?
YES- Any pending threatened litigation with which the attorney has had significant involvement NO-The amount of legal fees paid by the client to the attorney
Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern?
YES-Discussions with management regarding potential financial difficulties YES-Evaluation of management's plans to avoid bankruptcy
If an auditor concludes there are contingent liabilities, then he or she must evaluate the
YES-Materiality of the potential liability YES- nature of disclosure included in the financial statements
Which type of subsequent event requires consideration by management and evaluation by the auditor?
YES-Subsequent events that have a direct effect on the financial statements and require adjustment YES-Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required
Auditors often integrate procedures for presentation and disclosure objectives with
YES-Tests for transaction-related objectives YES- Tests for balance related objectives
What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities?
YES-The attorneys refuse to disclose information they consider confidential. YES-The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities.
Which of the following is a contingent liability with which an auditor is particularly concerned?
YES-notes receivable discounted YES- product warranties
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements?
a significant decline in the market price of the corporation's stock
With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?
accounts receivable clerk
An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?
accuracy and valuation
Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent
additional new information related to events that were in existence on the balance sheet date.
The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to
adjust financial statements for the year under audit
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should
advise the client to disclose the event in the notes to the financial statements.
A commitment is best described as
an agreement to commit the firm to a set of fixed conditions in the future.
As directed by the Sarbanes-Oxley Act,
an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer.
Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is
analytical procedures
When reviewing the summary of misstatements found in the audit
auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the
balance sheet date, but prior to the audit report
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
The date of the management representation letter received from the client should
be dated no earlier than the date of the audit report
The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time
beginning with the balance sheet date and ending with the date the registration statement becomes effective.
The standard inquiry to the client's attorney should be prepared on
client's letterhead and signed by a company official
The auditor's primary concern relative to presentation and disclosure-related objectives is
completeness
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category?
correspond with attorneys
The letter of representation obtained from an audit client should be
dated as of the audit report date
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation
did not take place until after the balance sheet date
You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
disclose a liability and provide a range of outcomes
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?
discovery of management's intent to increase selling prices in the future
Auditors will generally send a standard inquiry to the client's attorney letter to
every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
Which of the following is not a common audit procedure used to search for contingent liabilities?
examine payroll reports
An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to
extend appropriate audit procedure
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 and assume responsibility for a greater period of time.
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
management
Which of the following would the auditor expect to find in the client's management representation letter?
management's compliance with contractual arrangements that impact the financial statements
At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the
managements letter of representation
Which of the following is not one of the categories of items included in the letter of representation?
materiality
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication
must be written
Auditors of accelerated filer public companies
must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting.
If a potential loss on a contingent liability is remote, the liability usually is
neither accrued or disclosed in footnotes
The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client's audited financial statements unless
new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to
obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except
obtain the management representation letter
Audit procedures related to contingent liabilities are initially focused on
occurence
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least
one year beyond the balance sheet date
In connection with the annual audit, which of the following is not a "subsequent events" procedure?
prepare any necessary closing journal entries
One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold.
probability
Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n)
qualified opinion or a disclaimer of opinion.
Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements.
read
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
regardless of materiality
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as
remote, reasonably possible or probable
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
review compliance with the terms of debt agreements
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
settlement of litigation in excess of the recorded liability
A management representation letter is
signed by high level corporate officials
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for
subsequent events
When dealing with contingencies,
the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment.
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,
the auditors must modify their audit report to reflect the lack of available evidence.
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of
the auditors report
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide
the client with the CPA's recommendations for improving any part of the client's business.
When communicating with the audit committee and management,
the communications should be made in a timely manner to allow those charged with governance to take appropriate actions.
Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions?
the outcome must be resolved by a 3rd party
Contingent liability disclosure in the footnotes of the financial statements would normally be made when
the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
When should auditors generally assess a client's ability to continue as a going concern?
throughout the entire audit process
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n)
unasserted claim
An auditor must obtain written client representations that might be signed by all but which of the following?
vice president of operations
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?
write-off of a substantial portion of inventory as obsolete
