ACC 409 Ch. 14

Management letter

A letter from the auditor to the client identifying any problems and suggested solutions that may help management improve its effectiveness or efficiency.

Letter of audit inquiry

A letter that the auditor asks the client to send to its legal counsel to gather corroborative evidence concerning litigation, claims, and assessments.

Management representation letter

A letter to the auditors that the client's chief executive and chief financial officers are required to sign that specifies management's responsibility for the financial statements and confirms oral responses given to the auditor during the audit.

Judgmental misstatement

A misstatement that arises from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate.

Known misstatement

A misstatement that has been specifically identified; known misstatements are also referred to as factual misstatements.

Projected misstatement

A misstatement that the auditor's best estimate of the misstatement in a given population, and that is a projection of the misstatement identified in an audit sample to the entire population from which the sample was drawn.

Reasonable period of time

A period of time not to exceed one year beyond the date of the financial statements being audited.

Engagement quality review

A review at the end of each audit conducted by an experience auditor, usually a partner, who was not a part of the audit team, but who has appropriate competence, independence, integrity, and objectivity. The purposes are to help make sure that the audit and audit documentation are complete and support the audit opinion on the financial statements and, for public companies, on the client's internal controls. Also known as Concurring Partner Review.

Subsequent events review

A review of events occurring in the period between the balance sheet date and the audit report date to determine their possible effect on the financial statements.

Altman Z-score

A series of ratios that have predictive power in indicating the likelihood of bankruptcy. This score is named for the person that first introduced the concept and associated measurement.

Omitted procedures

After the audit report has been issued, the auditor may discover that an important audit procedure was not performed.

Which of the following statements is false regarding analytical procedures that help auditors assess the overall final presentation of the financial statements? A. By performing a final analytical review, the audit firm will identify any unusual, unexpected or unexplained relationships that should be resolved before the issuance of the audit report. B. A basic five step process for using analytical procedures applies. C. Analytical procedures provide evidence on whether certain relationships make sense in light of the knowledge obtained during the audit. D. Auditing standards require the use of analytical procedures in the final review phase of the audit to assist in identifying ending account relationships that are unusual.

B. A basic five step process for using analytical procedures applies.

If the auditor concludes that there may be a going-concern problem with the client, which of the following is the best course of action for the auditor to follow? A. Issue a qualified report. B. Identify and assess management's plan to overcome the situation. C. Chart the negative trends as an addendum to the audit report. D. Increase fees to cover the probable exposure.

B. Identify and assess management's plan to overcome the situation.

Management of AllTech, Inc. refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy. What does this refusal constitute? A. A violation of full and fair disclosure. B. A securities law violation. C. A scope limitation. D. A breakdown in internal controls.

C. A scope limitation.

Which one of the following is false regarding the adequacy of disclosures in a financial statement audit? A. The auditor should consider matters for disclosure while gathering evidence during the course of the audit, not just at the end of the audit. B. One of the key disclosures is a summary of significant accounting policies used by the company. C. Disclosures should be limited to only checklist items. D. The auditor's report does not specifically cover the statements made by management in the "Management Discussion and Analysis" (MD&A) section of the annual report.

C. Disclosures should be limited to only checklist items.

the date of the audit opinion of Upton Industries, Inc. reads: March 7, 2014 except for Note D, as to which the date is March 12, 2014. What is this an example of? A. Improper reporting. B. A GAAP violation. C. Dual dating. D. A contingent event.

C. Dual dating.

When responding to the auditor as a result of the audit client's letter of inquiry, how might the attorney limit the response? A. Limit the response to litigation in process. B. Limit the response to asserted claims. C. Limit the response to matters to which the attorney has given substantial attention in the form of legal consultation or representation. D. Limit the response to items which the attorney believes will result in loss to the client.

C. Limit the response to matters to which the attorney has given substantial attention in the form of legal consultation or representation.

Which of the following is not a typical communication between the auditor and the audit committee? A. The auditor should clearly communicate the auditor's responsibility under GAAS. B. The auditor should clearly communicate the planned scope of the audit engagement with the audit committee and discuss its adequacy. C. The auditor and management should discuss issues related to the retention of both client staff and audit firm staff during the period of audit. D. All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee.

C. The auditor and management should discuss issues related to the retention of both client staff and audit firm staff during the period of audit.

Which of the following is the best example of a Type II subsequent event? A. Election of new board members. B. Change in auditors. C. Inability to collect from a significant customer. D. Acquisition of a subsidiary.

D. Acquisition of a subsidiary

Which of the following is not a typical analytical procedure for the completion of the audit? A. Ratio analysis B. Common-size analysis C. Changes from the prior year D. All of the above would typically be used

D. All of the above would typically be used

Which of the following is not true regarding accounting estimates? A. Accounting estimates are based on management's knowledge and experience of past and current events. B. Accounting estimates are based on management's assumptions about conditions that are expected to exist and courses of action the company expects to take. C. Accounting estimates are based on both subjective and objective factors D. Because accounting estimates are based, in part, on management's knowledge and experience, they are not biased.

D. Because accounting estimates are based, in part, on management's knowledge and experience, they are not biased.

Subsequent events

Events occurring between the date of the financial statements and the date of the auditor's report.

Type II subsequent events

Events that did not exist at the balance sheet date.

Type I subsequent events

Events that existed at the balance sheet date.

Factual misstatement

Misstatements about which there is no doubt. See also Known Misstatement.

Report release date

The date the auditor grants the entity permission to use the auditor's report in connection with the financial statements.

Cooling off period

The number of years after which the individual auditor or audit firm may resume its prior role with the audit client.

Client acceptance decision

The process by which a new client is evaluated by the audit firm and individual engagement partner prior to being accepted into the audit firm's portfolio of clients.

Client continuance decision

The process by which existing clients for which the audit firm provided services in the preceding period are evaluated by the audit firm and individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provided services again in the next period.

Noncompliance

This involves acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations.

Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims? a. A letter of audit inquiry. b. A management representation letter. c. A management letter. d. A loss reserve confirmation.

a. A letter of audit inquiry.

What should an auditor do when becoming aware of violations of the FCPA (Foreign Corrupt Practices Act of 1977)? a. Contact foreign officials in the country where the client has business operations. b. Notify the audit committee about the violations, their circumstances, and the effects on the financial statements. c. Contact the U. S. marshals. d. Design internal controls to deter improper payments.

b. Notify the audit committee about the violations, their circumstances, and the effects on the financial statements.

Which of the following individuals should sign the management representation letter? a. The members of the audit committee and board of directors. b. The chief executive officer and the chief financial officer. c. The chief financial officer and the treasurer. d. The controller and the auditor.

b. The chief executive officer and the chief financial officer.

An audit firm culture that emphasizes "doing the right thing" does not incorporate which of the following to enhance audit quality? a. Encouraging auditors to seek consultation with other member of the audit firm. b. Yielding to management's demands in order to promote additional service engagements. c. Taking sufficient time to deal with difficult client issues. d. Emphasizing long-term reputation over the immediate satisfaction of client preferences.

b. Yielding to management's demands in order to promote additional service engagements.

During the course of an audit, misstatements that are individually immaterial may be detected. What should the auditor do with these? a. Permanently pass on these immaterial misstatements as they do not individually impact the financial statements. b. Request that management footnote the immaterial misstatements in the financial statements for fair presentation. c. Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate. d. Roll them forward for three years when they will become material enough to adjust.

c. Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate.

During which of the following phases of the audit are analytical review procedures required by the auditing standards? a. The planning phase of the audit. b. The final review phase of the audit. c. Both the planning and final review phases of the audit. d. Performance of tests of controls.

c. Both the planning and final review phases of the audit.

On what information does the auditor base a going concern evaluation? a. On separate procedures. b. On the management discussion and analysis (MD&A). c. On information obtained from normal audit procedures performed to test management's assertions. d. On the statement of cash flows for the current period.

c. On information obtained from normal audit procedures performed to test management's assertions.

In evaluating the reasonableness of an estimate, the auditor would not normally concentrate on which of the following factors and assumptions? a. Subjective judgments that introduce bias. b. Deviations from historical patterns. c. Amounts that are inconsistent with current economic trends. d. All of these are a focus of the auditor regarding reasonable estimates.

d. All of these are a focus of the auditor regarding reasonable estimates.

Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures? a. Management representation letter. b. GAAS. c. Inquiry of the CFO. d. Checklists.

d. Checklists.

The auditor discovers various errors in the client's financial statements during the audit. At the end of the audit, these misstatements are analyzed to determine if they need to be recorded and corrected. In which situation could management and the auditor decide not to correct the misstatement? a. If, by correcting the misstatement, net income would increase rather than decrease. b. If, by correcting the misstatement, net income would decrease rather than increase. c. If the misstatement is material. d. If the misstatement is immaterial.

d. If the misstatement is immaterial.

The auditor is responsible for evaluating the likelihood of a client not being a going concern for the next 12 months. What basis will the auditor use to assess this issue? a. Management integrity. b. Control environment. c. Absolute assurance. d. Substantial doubt.

d. Substantial doubt.