Chapter 17 - Audit
Select all that apply The engagement partner generally reviews working papers ______. prepared by staff auditors prepared by the manager related to critical audit areas reviewed by the senior-in-charge
prepared by the manager related to critical audit areas
Select all that apply The final evaluation of audit evidence from the financial statement audit is primarily concerned with _______. sufficiency of the audit evidence effects of detected misstatements in the financial statements completeness of the audit evidence valuation of the audit evidence
sufficiency of the audit evidence effects of detected misstatements in the financial statements
True or false: When the auditor is evaluating the effects of detected misstatements in the financial statements, the auditor must consider both quantitative and qualitative aspects of the account and transaction involved.
true
Regarding responsibility for reporting changes in internal controls that might adversely affect financial reporting between the end of the reporting period and the date of the auditor report, auditors are ______. always responsible for reporting these types of changes in internal controls only responsible for reporting changes in internal control relating to events that did not exist at the end of the reporting period only responsible for reporting changes in internal control about material weaknesses that existed at the end of the reporting period never responsible for reporting these types of changes in internal controls
always responsible for reporting these types of changes in internal controls
To consider the overall reasonableness of the financial statement amounts, the auditor performs final _____ _____
analytical procedures
With respect to the audit of internal control over financial reporting, the auditor must communicate all significant deficiencies and material weaknesses in writing to management and the
audit committee
The auditor is determining whether there is enough to support each relevant assertion when evaluating the sufficiency of the ______ ______
audit evidence
The date of the representation letter is generally the date of the ______. auditor's report issuance of the financial statements balance sheet
auditor's report
Select all that apply When facts are encountered that may affect the auditor's previously issued report, the auditor should ______. determine whether the facts are reliable discuss the matter with those charged with governance determine whether the facts existed at the balance sheet date inquire how management intends to address the issue notify the SEC that the audit report cannot be relied upon
determine whether the facts are reliable discuss the matter with those charged with governance inquire how management intends to address the issue
True or false: In a going concern evaluation, "substantial doubt" means is it reasonably possible that the entity will be unable to continue for a reasonable period of time.
false
Select all that apply Auditing standards identify four conditions and events which may indicate going concern issues including ______. internal problems other financial difficulties external matters neutral financial trends
internal problems other financial difficulties external matters
If a misstatement accumulates to a material amount over two or more periods, the entire accumulated misstatement must be corrected under the _____ _____ approach.
iron curtain
The auditor makes recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues by preparing a(n) ______. audit report legal letter representation letter management letter
management letter
The FASB standard relating to going concern issues requires a "look-forward" period of ______. 1 year from the balance sheet date 120 days from the end of field work 45 days from the date of the auditor's report 1 year from the financial statement issuance date
1 year from the financial statement issuance date
When facts are encountered that may affect the auditor's previously issued report, the auditor should ______. request that management take responsibility for the mistake consult with his or her attorney contact individual users of the financial statements who are relying on the auditor's report withdraw the audit opinion
consult with his or her attorney
An existing condition or set of circumstances involving uncertainty about a possible loss that will ultimately be resolved when some future event occurs or fails to occur is a(n) ______ ______
contingent liability
The primary purpose of a legal letter is to ______. determine if there is substantial doubt about the entity's ability to continue as a going concern corroborate information provided by management about litigation, claims and assessments corroborate legal expense for the period identify a list of attorneys who have been consulted by the entity
corroborate information provided by management about litigation, claims and assessments
Working papers prepared by the audit manager are reviewed by the ______. senior-in-charge audit staff engagement partner entity
engagement partner
The sufficiency of the audit evidence and the effects of detected misstatements in the financial statements are the primary concerns of the ______ ______ of audit evidence.
final evaluation
Auditing standards identify four conditions and events which may indicate going concern issues including ______. additional sources of financing are available at above-market rates negative financial trends long-term commitments
negative financial trends
The "carryover effects" of uncorrected prior year misstatements are ignored when misstatements are evaluated using the _____ approach
rollover
Select all that apply Which of the following are characteristics of a contingent liability? An unavoidable obligation that will occur sometime in the future. Uncertainty about the amount of loss. An existing condition or set of circumstances. Ultimate resolution when some future event occurs or fails to occur.
An existing condition or set of circumstances. Uncertainty about the amount of loss. Ultimate resolution when some future event occurs or fails to occur.
Final analytical procedures provide a "smell test". Which of the following explains the meaning of this phrase? Where should audit effort and attention be focused? Were any errors made by the entity during the period under audit? Do the financial statement amounts make sense? Are internal controls operating effectively?
Do the financial statement amounts make sense?
Auditing standards require auditors to communicate certain matters to "those charged with governance". For publicly traded companies, this refers to the ______ _____ in particular.
audit committee
Select all that apply The objectives of communication with the audit committee is to ______. communicate an overview of the overall audit strategy and timing establish an understanding of the terms of the audit engagement with the committee communicate the auditor's responsibilities provide information to the audit committee that is relevant to the audit
communicate the auditor's responsibilities communicate an overview of the overall audit strategy and timing establish an understanding of the terms of the audit engagement with the committee
Select all that apply If the auditor has evaluated management's plans to mitigate going concern issues and concludes that substantial doubt exists, the auditor will ______. withdraw from the engagement, notify legal counsel, and disclaim an opinion retain all audit documentation for 10 years because there is an increased chance of legal action consider the adequacy of the disclosures about the entity's ability to continue as a going concern include an explanatory paragraph in the audit report
consider the adequacy of the disclosures about the entity's ability to continue as a going concern include an explanatory paragraph in the audit report
All financial statements, including related notes, have been prepared and all significant audit documentation have reviewed and approved by the ______. balance sheet date date of issuance of the financial statements date of the auditor's report subsequent events date
date of the auditor's report
Select all that apply Auditing standards require auditors to communicate certain matters to "those charged with governance". For publicly traded companies, this includes the ______. auditing firm's head office SEC staff auditors entity's board of directors entity's audit committee
entity's board of directors entity's audit committee
True or false: The auditor's treatment of subsequent events relating to internal control is similar to the engagement quality review performed at the conclusion of the audit.
false
If the final analytical procedures indicate material misstatements, exist the auditor should ______. withdraw from the engagement issue a qualified opinion issue a disclaimer of opinion gather additional audit evidence
gather additional audit evidence
The auditor has a responsibility to evaluate whether there is substantial doubt about an entity's ability to keep doing business or, in other words, whether or not the entity considered to be a(n) ____ ____
going concern
An auditor is reviewing tax returns and the minutes of the board of directors meetings. The auditor is most likely trying to ______. measure the amount of a note payable ascertain if notes payable should be classified as short-term or long-term identify contingent liabilities determine if title has passed for the purchase of goods
identify contingent liabilities
When misstatements are quantified based on the amount required to correct the misstatement in the balance sheet at period end, regardless of misstatement's year of origination, the _____ _____ approach is being used.
iron curtain
A letter of audit inquiry sent to the entity's attorneys is often referred to as a(n) _____ _____
legal letter
To make recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues, the auditor normally prepares a(n) _____ _____
management letter
Select all that apply Accounting Standards Update Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern requires ______. auditors to first evaluate the entity's ability to continue in existence as a going concern management to first evaluate the entity's ability to continue in existence as a going concern auditors to make an independent assessment to evaluate the adequacy of management's going concerns disclosures managers to make an independent assessment to evaluate the adequacy of the auditor's going concerns disclosures
management to first evaluate the entity's ability to continue in existence as a going concern auditors to make an independent assessment to evaluate the adequacy of management's going concerns disclosures
Any misstatements detected during the audit process ______. that exceed the planned level of detection risk are considered material and must be corrected by management must be considered in terms of the materiality of their effects on the financial statements require the auditor to compare the likely misstatement to the aggregated misstatement and reject the account balance that are not corrected require the auditor to issue an adverse opinion
must be considered in terms of the materiality of their effects on the financial statements
Select all that apply. The date of the auditor's report is ______. no earlier than the date on which the auditor has obtained sufficient appropriate evidence the date before which all subsequent events are considered Type I subsequent events the date on which management must have explicitly taken responsibility for the financial statements the date on which all significant audit documentation must have been reviewed and approved the date after which all subsequent events are considered Type II subsequent events
no earlier than the date on which the auditor has obtained sufficient appropriate evidence the date on which all significant audit documentation must have been reviewed and approved the date on which management must have explicitly taken responsibility for the financial statements
If, during the planning, performance or completion of the audit there is substantial doubt about the entity's ability to continue as a going concern, the next step for the auditor is to ______. prepare the explanatory paragraph used in the audit report withdraw from the engagement and disclaim an opinion obtain management's plan to mitigate the going concern problem prepare the footnotes to the financial statements explaining the going concern problems and management's response
obtain management's plan to mitigate the going concern problem
If management concludes it is probable that the entity will not be able to meet its obligations within the look-forward period but develops a plan to mitigate the risk, the plan can be considered sufficient to overcome a substantial doubt conclusion ______. as long as management discloses the plan only if it is probable that the plans can be effectively implemented only if the auditor review determines that the plan is feasible as long as the plan is in writing and approved by the board of directors
only if it is probable that the plans can be effectively implemented
An auditor has read the minutes of board of directors meetings, inquired of legal counsel regarding litigation, read the interim financial statements, and made inquiries of management. The auditor is most likely ______. performing audit procedures for subsequent events determining whether to issue a qualified or unqualified opinion determining whether to dual-date the audit report performing the analytical procedures required during the final review stage of the audit
performing audit procedures for subsequent events
Select all that apply To identify contingent liabilities an auditor might ______. review contracts, loan agreements and leases read the minutes of board of directors meetings review tax returns and IRS reports review accounts and note payable
read the minutes of board of directors meetings review contracts, loan agreements and leases review tax returns and IRS reports
Select all that apply Audit procedures occurring after the balance sheet date that are performed SPECIFICALLY to detect subsequent events include ______. reviewing selected audit documentation related to judgments and evaluating conclusions reached reading any available interim financial statements that are available after year end asking legal counsel about any developments related to litigation, claims and assessments testing proper sales and purchases cutoff
reading any available interim financial statements that are available after year end asking legal counsel about any developments related to litigation, claims and assessments
Select all that apply The engagement partner generally reviews working papers ______. related to critical audit areas prepared by the manager reviewed by the senior-in-charge prepared by staff auditors
related to critical audit areas prepared by the manager
The FASB recently issued an Accounting Standards Update ______. creating a departure from the standard role of auditors which is to evaluate and report on managements' assertions which relieves the auditor of addressing going concern issues requiring an entity's management to evaluate the entity's ability to continue as a going concern
requiring an entity's management to evaluate the entity's ability to continue as a going concern
he FASB recently issued an Accounting Standards Update ______. which relieves the auditor of addressing going concern issues creating a departure from the standard role of auditors which is to evaluate and report on managements' assertions requiring an entity's management to evaluate the entity's ability to continue as a going concern
requiring an entity's management to evaluate the entity's ability to continue as a going concern
Select all that apply Audit procedures likely to identify conditions and events that indicate going concern problems include ______. engagement quality review review of subsequent events inquiry of legal counsel risk assessment
review of subsequent events inquiry of legal counsel risk assessment
When misstatements are quantified based only on the amount of the error that originates in the current year income statement, the ______ method is being used. quantifying iron curtain rollover
rollover
Select all that apply With respect to the audit of internal control over financial reporting, the auditor communicates in writing to management and the audit committee ______. significant deficiencies material weaknesses control deficiencies that are not significant deficiencies
significant deficiencies material weaknesses
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called ______ ______
subsequent events
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called ______. subsequent events contingent commitments subsequent commitments contingent events
subsequent events
The representation letter is addressed to ______. the SEC the auditor legal counsel the PCAOB
the auditor
There should be a review by an audit team member who is senior to the person in charge of preparing the ____ _____
working papers
