Chapter 16 Pre-Work/HW

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An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take? A) Document the errors and the conclusion that the financial statements are free from material misstatement. B) Withdraw from the engagement because the client's refusal to correct the errors is a scope limitation. C) Issue a qualified, "except for" opinion on the financial statements because the client refuses to correct the errors. D) Correct the errors on the client's behalf, and then issue the audit report.

A) Document the errors and the conclusion that the financial statements are free from material misstatement.

Which of the following circumstances requires the auditor to include an other-matter paragraph in the audit report? A) When the financial statements are accompanied by required supplementary information. B) When there is a matter appropriately disclosed in the financial statements but which the auditor believes is of such importance as to be fundamental to users' understanding of the financial statements. C) When the report of a component auditor is being relied upon in an audit of consolidated financial statements. D) When a scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence regarding the results of operations.

A) When the financial statements are accompanied by required supplementary information.

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: A) Notify the board of directors that the auditor's report must no longer be associated with the financial statements. B) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. C) Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D) Issue revised pro forma financial statements taking into consideration the newly discovered information.

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

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

B) Loss contingency

Harriott, CPA is conducting an audit of Calashni Co. and receives a letter from Calashni Co.'s attorney stating the following regarding the company's only pending lawsuit: Harriott notes there is no entry in the accounting records regarding the effects of the pending litigation. As a result, what type and amount of adjusting journal entry should Harriott propose? A) A loss contingency of $500,000. B) None C) A gain contingency of $500,000. D) A loss contingency of $1,500,000.

B) None

In a situation where there is a justified departure from a promulgated accounting principle that is adequately disclosed, how will the auditor modify the standard report? A) By modifying the Auditor's Responsibility paragraph. B) By adding an other-matter paragraph after the opinion paragraph. C) By adding an emphasis-of-matter paragraph after the opinion paragraph. D) By modifying the Management's Responsibility paragraph.

C) By adding an emphasis-of-matter paragraph after the opinion paragraph.

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

C) 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: A) Day the audit report is issued B) End of the client's year C) Date of the auditor's report D) Date the report is filed with SEC

C) Date of the auditors report

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: A) December 31, 20X8 B) January 17, 20X9 C) February 10, 20X9 D) February 16, 20X9

C) February 10, 20X9

Identify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit. A) The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit. B) Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required. C) If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit. D) Analytical procedures used in the review near the conclusion of the audit are not required.

C) If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee on the job? A) Examine human resources records for accuracy and completeness B) Examine employees names listed on payroll tax returns for agreement with payroll accounting records C) Make a surprise observation of the company's regular distribution of paychecks on a test basis D) Visit the working areas and verify that employees exist by examining their badge or identification numbers

C) Make a surprise observation of the company's regular distribution of paychecks on a test basis

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) A business combination B) Early retirement of bonds C) Settlement of litigation D) Plant closure due to a strike

C) Settlement of litigation

An auditor determines that, due to accounting errors, both a company's expenses and revenues are materially understated, each by approximately the same amount. What is the auditor's most likely course of action in response to these findings? A) Document these findings but take no further action because net income will still be correct. B) Suggest adjusting entries to correct the understated expenses only. C) Suggest adjusting entries to correct both the understated expenses and understated revenues. D) Report the possible fraud scheme to the audit committee.

C) Suggest adjusting entries to correct both the understated expenses and understated revenues.

Communicating which of the following to the audit committee is not typically required of an auditor? A) Any disagreements with management B) Any significant reclassifying journal entries proposed as adjustments by the auditor. C) The auditor's judgment of management integrity. D) The process used by management to make accounting estimates.

C) The auditor's judgment of management integrity.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: A) Express an opinion that is qualified due to the inability of the client company to continue as a going concern. B) Evaluate management's performance in causing this decline. C) Require note disclosure. D) Consider the possibility of a misstatement in the financial statements.

D) Consider the possibility of a misstatement in the financial statements

Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management: A) Recalculating most estimates is typical at this stage B) Overly conservative estimates are preferable to overly aggressive estimates. C) A company's accounting for compensation plans involving stock options requires little additional scrutiny if the stock is publicly traded at a known market price. D) Estimates are reconsidered in relation to the financial statements as a whole.

D) Estimates are reconsidered in relation to the financial statements as a whole.

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

D) Performing analytical procedures

Which of the following is least likely to be considered a substantive procedure relating to payroll? A) Investigate fluctuations in salaries, wages, and commissions B) Test computations of compensation under profit sharing for bonus plans C) Test commission earnings D) Test whether employee time reports are approved by supervisors

D) Test whether employee time reports are approved by supervisors


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