chapter 16

Which of the following is not a procedure to discover unasserted claims or contingent liabilities? A) Review of Board of Director minutes B) Sending a letter of inquiry to a client's attorney C) Substantive testing of company prepaid assets D) Searching newspapers and other periodicals for stories on the client and its industry

c

A client's previous two years of financial statements understated estimated warranty payable by $15,000 and $25,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $30,000. In this year's audit $50,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A) $0. B) $30,000. C) $55,000. D) $70,000.

d

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A) Indicate in the auditors' report that the "other financial information" is unaudited. B) Consider whether the "other financial information" is accurate by performing a review. C) Obtain written representations from management as to the material accuracy of the "other financial information." D) Read and consider the manner of presentation of the "other financial information."

d

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 auditors' report. d. Date the report is filed with the SEC.

c

To have strong internal control over payroll, which of the following functions does not need to be separated from the others? A) Personnel B) Timekeeping C) Payroll preparation D) Personnel verification

d

A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue? A) Account payable B) Unasserted claim C) Valuation of oil & gas holdings D) General risk contingency

b

A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exists at year end? A)Rights B)Existence C)Completeness D)Presentation

c

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

What is ordinarily the primary concern when auditing the income statement? A) Overstatement of Revenues, Expenses and Net Income B) Overstatement of Revenues and Expenses, and understatement of Net Income C) Overstatement of Net Income and understatement of Revenues and Expenses D) Overstatement of Revenues and Net Income, and understatement of Expenses

d

Which of the following best describes the role of analytical procedures near the end of the audit engagement? a. To identify possible deficiencies in the client's internal control over financial reporting. b. To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures. c. To gather evidence to support one or more assertion(s) related to the account balance or class of transactions. d. To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.

d

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

Which of the following procedures is most likely to be included in the final review stage/near completion of an audit? a. Obtain an understanding of internal control. b. Confirmation of receivables. c. Observation of inventory. d. Perform analytical procedures.

d

Which of the following material events occurring subsequent to the balance sheet would require an adjustment to the financial statements before they could be issued? 1. Major purchase of a business which is expected to double the sales volume 2. Loss of a plant as a result of a flood 3. Sale of long-term debt or capital stock 4. Settlement of litigation in excess of the recorded liability

4

The aggregated misstatement in the financial statements is made up of: Known Projected Other Misstatements Misstatements Misstatements a. Yes Yes Yes b. Yes Yes No c. No Yes No d. No Yes Yes

a

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

a

A possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a(n): a. Analytical process. b. Loss contingency. c. Probable loss. d. Unasserted claim.

b

Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimate that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: A) $0. B) $15,000. C) $20,000. D) $25,000

b

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

What audit procedure is not ordinarily used to examine selling, general and administrative expenses? A) Analytical procedures B) Use of budgets to identify unexpected differences C) Confirmations to advertising agencies confirming payments D) Detailed tests of balances

c

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 payable. c. Settlement of litigation. d. Plant closure due to a strike.

c

A common audit procedure in the audit of payroll transactions involves vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit objective of determining that: A) Only bona fide employees worked and their pay was properly computed. B) Jobs on which employees worked were charged with the appropriate labor cost. C) Controls relating to disbursements are operating properly. D) Employees worked the number of hours for which their pay was computed.

d

Which of the following is not correct concerning a type I and a type II subsequent event? A) A type I may require adjustment to financial statements while a type II will not. B) Both a type I and a type II subsequent event may require note disclosure. C) A type I is an event that occurred prior to year end, but was discovered after, while a type II is one that arose subsequent to year end. D) A type II event may require adjustment to the financial statements and a type I may require note disclosure.

d

With respect to issuance of an audit report which is dual dated for subsequent event occurring after the completion of field work but before the issuance of the auditors'' report the auditor's responsibility for event occurring subsequent to the date of the audit report: 1. Limited to the specific events referred to 2. Limited to all events occurring through the date of the issuance report 3. Extended to include all event occurring through the date of submission of the report to the client 4. Extended to include all event occurring until the date of the last subsequent event referred to

1

Auditors should perform audit procedures relation to subsequent events: 1. For a reasonable period after year end 2. Through Year end. 3. Through the date of the audit report. 4. Through the issuance of the audit report

3

The date the auditor grans the client permission to use the audit report in connect with the financial statement is the: 1. report cutoff date 2. last day of significant field work 3. report release date 4. representation date

3

Which of the following auditing procedures is ordinarily performed last? 1. Reading of the minutes 2. Confirming accounts payable 3. Testing of the purchasing function 4. Obtaining a management representation letter

4

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to: 1. Accept responsibility for year-end adjusting entries 2. extend auditing procedures 3. assume responsibility for all events subsequent to the issuance of the auditor's report 4. Permit inclusion of a note caption: event (unaudited) subsequent to the date of the auditor's report

2

Which of the following is most likely to be considered a Type 1 subsequent event? (1) A business combination completed after year-end, but for which negotiations began prior to year-end. (2) A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. (3) Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. (4) Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

3

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