audit ch 24
A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee? a. Review minutes and resolutions of the board of directors. b. Review prior year's audit files with respect to such guarantees. c. Review the possibility of such guarantees with the chief accountant. d. Review the legal letter returned by the company's outside legal counsel.
a
A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the potential loss is required. a. True b. False
a
Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter. a. True b. False
a
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of: a. the auditor's report. b. a post-dated footnote. c. the next scheduled interim visit. d. the final billing for audit services rendered.
a
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to: a. extend auditing procedures and assume responsibility for a greater period of time. b. accept responsibility for subsequent events. c. permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. d. assume responsibility for events subsequent to the issuance of the auditor's report.
a
Auditors must communicate in writing about internal control weaknesses to the audit committee or those charged with governance. a. True b. False
a
Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting. a. True b. False
a
Because a client representation letter is a written statement from a non-independent source, it cannot be regarded as reliable evidence. a. True b. False
a
Client representation letters are required by professional auditing standards, whereas management letters are optional. a. True b. False
a
Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities. a. True b. False
a
Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit. a. True b. False
a
If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision. a. True b. False
a
If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion. a. True b. False
a
In connection with the annual audit, which of the following is not a "subsequent events" procedure? a. Review available interim financial statements. b. Read available minutes of meetings of stockholders, directors, and committees and, for meetings where minutes are not available, inquire about matters dealt with at such meetings. c. Make inquiries with respect to the financial statements covered by the auditor's previously issued report if new information has become available during the current examination that might affect that report. d. Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.
a
Refusal by a client to prepare and sign the representation letter would require a(n): a. qualified opinion or a disclaimer. b. adverse opinion or a disclaimer. c. qualified or an adverse opinion. d. unqualified opinion with an explanatory paragraph.
a
SAS 59 directs the auditor's assessment of going-concern issues. a. True b. False
a
SAS No. 59 requires auditors to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern. One of the most important types of evidence to assess the going concern question is: a. analytical procedures. b. confirmations of creditors. c. statistical sampling procedures. d. inquiries of client and its legal counsel.
a
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 category 2? a. Correspond with attorneys. b. Test the collectability of accounts receivable by reviewing subsequent period cash receipts. c. Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. d. Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.
a
The issuance of bonds by the client subsequent to year-end would require a footnote disclosure in, but no adjustment to, the financial statements under audit. a. True b. False
a
When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n): a. disclaimer of opinion. b. qualified opinion. c. standard unqualified opinion. d. unqualified opinion with a separate explanatory paragraph.
a
When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials. a. True b. False
a
When testing for contingent liabilities, the primary objective at the initial stage of the tests is to determine the existence of contingencies. a. True b. False
a
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? a. Review compliance with the terms of debt agreements. b. Confirmation of accounts receivable from principal customers. c. Reconciliation of interest expense with debt outstanding. d. Confirmation of bank balances.
a
Which of the following is not a purpose of the client letter of representation? a. To impress upon the audit firm its responsibility for the audit. b. To impress upon management its responsibility for the financial statement assertions. c. To remind management of potential misstatements or omissions in the financial statements. d. To document the responses from management to inquiries about various aspects of the audit.
a
Which of the following is not required to be communicated to the audit committee or similarly designated body under auditing standards? a. All material frauds and illegal acts of a material nature. b. Disagreements with management about the scope of the audit, applicability of accounting principles, or wording of the audit report. c. Difficulties encountered in performing the audit, such as lack of availability of client personnel and failure to provide necessary information. d. Auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal control and the concept of reasonable rather than absolute assurance.
a
A CPA has received an attorney's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after receipt of the letter should alert the auditor that: a. an adverse opinion will be necessary. b. undisclosed unasserted claims may have arisen. c. the auditor must begin a completely new examination of contingent liabilities. d. the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.
b
An independent review must be performed of all audits. a. True b. False
b
At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities. a. True b. False
b
Auditors are not required to evaluate the going concern assumption as part of each audit. a. True b. False
b
Auditors are required to communicate orally with the audit committee about internal control weaknesses. a. True b. False
b
Auditors are required to obtain a letter of representation that describes management's planned solutions to all internal control weaknesses identified during an audit. a. True b. False
b
Auditors will generally send a standard inquiry letter to: a. only those attorneys who have devoted substantial time to client matters during the year. b. every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. c. those attorneys whom the client relies on for advice related to substantial legal matters. d. only the attorney who represent the client in proceeding where the client is defendant.
b
Current professional auditing standards require the performance of analytical procedures during the testing phase of the audit. a. True b. False
b
Elise-Greer, LLP is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate's indebtedness have been detected? a. Send the standard bank confirmation request to all of the client's lender banks. b. Review client minutes and obtain a representation letter. c. Examine supporting documents for all entries in intercompany accounts. d. Obtain written confirmation of indebtedness from the auditor of the affiliate.
b
If a potential loss on a contingent liability is remote, the liability usually is: a. disclosed in footnotes, but not accrued. b. neither accrued nor disclosed in footnotes. c. accrued and indicated in the body of the financial statements. d. disclosed in the auditor's report but not disclosed on the financial statements.
b
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor issue an adverse opinion to reflect the lack of available evidence. a. True b. False
b
If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: additional evidence must be obtained, or either a qualified or an adverse opinion must be issued. a. True b. False
b
In a standard inquiry of client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date. a. True b. False
b
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? a. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. b. Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. c. Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. d. Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
b
Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report. a. True b. False
b
Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent the: a. culmination of conditions that existed at the balance sheet date. b. discovery of new conditions occurring in the subsequent events period. c. final estimates of losses relating to casualties occurring in the subsequent events period. d. preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
b
Subsequent events for which disclosure, but no adjustment, is required provide information about significant events/conditions which existed at the balance sheet date. a. True b. False
b
Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did not exist at the balance sheet date. a. True b. False
b
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? a. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. b. 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. c. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. d. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
b
The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner. a. True b. False
b
The letter of representation obtained from an audit client should be: a. dated as of the end of the period under audit. b. dated as of the audit report date. c. dated as of any date decided upon by the client and auditor. d. dated as of the issuance of the financial statement.
b
The process of "final evidence accumulation" is always done late in the engagement. Which one of the following would be done the earliest in the engagement? a. Final analytical procedures. b. Search for contingent liabilities. c. Evaluate the going concern assumption. d. Acquire the client's letter of representation.
b
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 end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation: a. took place before year-end. b. did not take place until after year-end. c. occurred both before and after year-end. d. are reimbursable through insurance policies.
b
Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that management is intentionally neglecting to disclose? a. Inquiries (orally and in writing) of management. b. Analyzing legal expense and review invoices and statements from outside legal counsel. c. Reviewing current and previous years' internal revenue agent reports. d. Obtaining a letter of representation from management that it is aware of no undisclosed contingent liabilities.
b
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? a. Merger or acquisition activities. b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance. c. Issuance of common stock. d. An uninsured loss of inventories due to a fire.
b
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? a. Sale of a major subsidiary. b. Adoption of accelerated depreciation methods. c. Write-off of a substantial portion of inventory as obsolete. d. Collection of 90% of the accounts receivable existing at December 31.
c
A client representation letter is: a. prepared on the CPA's letterhead. b. addressed to the client. c. signed by high-level officials (e.g. the president and chief financial officer). d. dated as of the client's year-end.
c
An auditor must obtain written client representations that might be signed by all but which of the following? a. Treasurer b. Chief financial officer c. Vice president of operations d. Chief executive officer
c
An auditor must obtain written client representations that normally should be signed by: a. the treasurer and the internal auditor. b. the president and the chairperson of the board. c. the chief executive officer and the chief financial officer. d. the corporate counsel and the audit committee chairperson.
c
As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter? a. To provide audit evidence. b. To emphasize to the client the client's responsibility for the correctness of the financial statements. c. To satisfy the CPA by means of other auditing procedures when certain customary auditing procedures are not performed. d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.
c
At what stages of the audit must analytical procedures be used? a. Planning and testing. b. Testing and completion. c. Planning and completion. d. Planning, testing, and completion.
c
One of the auditor's primary concerns relative to presentation and disclosure-related objectives is: a. accuracy. b. existence. c. completeness. d. occurrence.
c
SAS No. 59 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least: a. one quarter beyond the balance sheet date. b. one quarter beyond the date of the auditor's report. c. one year beyond the balance sheet date. d. one year beyond the date of the auditor's report.
c
SFAS 5 describes _____ levels of likelihood of occurrence. a. one b. two c. three d. four
c
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 category 1? a. Inquiries of client regarding contingent liabilities. b. Obtain a letter of representation written by client. c. Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. d. Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1.
c
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication: a. may be oral or written. b. must be oral. c. must be written. d. must be oral via direct communication.
c
The responsibility for identifying and deciding the appropriate accounting treatment for contingent liabilities rests with a company's _____. a. auditors. b. legal counsel. c. management. d. management and the auditors.
c
When should auditors generally assess a client's ability to continue as a going concern? a. Upon completion of the audit. b. During the planning stages of the audit. c. Throughout the entire audit process. d. During testing and completion phases of the audit.
c
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. Sale of a bond or capital stock issue. b. Loss of plant or inventories as a result of fire or flood. c. A significant decline in the market price of the corporation's stock. d. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.
c
Which of the following auditing procedures is ordinarily performed last? a. Reading minutes of the board of directors' meetings. b. Confirming accounts payable. c. Obtaining a client representation letter. d. Testing the purchasing function.
c
Which of the following determines the sufficiency of evidence? a. Generally Accepted Auditing Standards. b. Securities and Exchange Commission regulations. c. Auditor judgment. d. Adherence to the audit program.
c
Which of the following is an incorrect combination of the "likelihood of occurrence" and financial statement treatment? a. Remote: no disclosure. b. Probable (amount is estimable): financial statements are adjusted. c. Reasonably possible (amount is estimable): financial statements are adjusted. d. Probable (amount is not estimable): footnote disclosure is required.
c
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? a. Loss of a plant as a result of a flood. b. Sale of long-term debt or capital stock. c. Settlement of litigation in excess of the recorded liability. d. Major purchase of a business that is expected to double the sales volume.
c
Which of the following statements is correct? a. A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. b. A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. c. A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers. d. A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.
c
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: a. evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. b. a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. c. a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements. d. a summary of the auditor's observations that resulted from the auditor's special study of internal control.
c
With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? a. Controller. b. President. c. Accounts receivable clerk. d. Vice president of sales.
c
After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless: a. material adverse events occur after the date of the auditor's report. b. final determination or resolution was made of a contingency which had been disclosed in the financial statements. c. final determination or resolution was made on matters which had resulted in a qualification in the auditor's report. d. new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
d
An attorney is responding to an independent auditor as a result of the client's letter of inquiry. The attorney may appropriately limit the response to: a. asserted claims and litigation. b. asserted, overtly threatened, or pending claims and litigation. c. items which have an extremely high probability of being resolved to the client's detriment. d. matters to which the attorney has given substantive attention in the form of legal consultation or representation.
d
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: a. management letter. b. letter of inquiry. c. letters testamentary. d. letter of representation.
d
Audit procedures related to contingent liabilities are initially focused on: a. accuracy. b. completeness. c. existence. d. occurrence.
d
Commitments include all but which of the following? a. Agreements to purchase raw materials. b. Pension plans. c. Agreements to lease facilities at set prices. d. Each of the above is a commitment.
d
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? a. The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. b. Disclosure may be unnecessary if the contingency is highly remote or immaterial. c. Frequently, the CPA firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. d. Answers b and c are correct, but answer is not.
d
SAS No. 99 and SAS No. 54 require the auditor to communicate all management frauds and illegal acts to the audit committee: a. only if the act is immaterial. b. only if the act is material. c. only if the act is highly material. d. regardless of materiality.
d
The auditor has a responsibility to review transactions and activities occurring after the year-end 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: a. contingent liabilities. b. subsequent year's transactions. c. late unusual occurrences. d. subsequent events.
d
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: a. beginning with the balance sheet date and ending with the date of the auditor's report. b. beginning with the start of the fiscal year under audit and ending with the balance sheet date. c. beginning with the start of the fiscal year under audit and ending with the date of the auditor's report d. beginning with the balance sheet date and ending with the date the registration statement becomes effective.
d
The standard letter of inquiry to the client's legal counsel should be prepared on: a. plain paper (no letterhead) and be unsigned. b. lawyer's stationery and signed by the lawyer. c. auditor's stationery and signed by an audit partner. d. client's stationery and signed by a company official.
d
Which of the following is not a condition for a contingent liability to exist? a. There is a potential future payment to an outside party that would result from a current condition. b. There is uncertainty about the amount of the future payment. c. The outcome of an uncertainty will be resolved by some future event. d. The amount of the future payment is reasonably estimable.
d
Which of the following is not a matter that is typically included in the letter of representation obtained from an audit client? a. Availability of all financial records and related data. b. Absence of unrecorded transactions. c. Compliance with aspects of contractual agreements that may affect the financial statements. d. Assessment of management's efficiency of decision making.
d
Which of the following is not a reason why the auditor requests that the client provide a letter of representation? a. Professional auditing standards require the auditor to obtain a letter of representation. b. It impresses upon management its responsibility for the accuracy of the information in the financial statements. c. It provides written documentation of the oral responses already received to inquiries of management. d. It provides written documentation, which is a higher quality of evidence than management's oral responses to inquiries.
d
Which of the following is not one of the categories of items included in the client letter of representation? a. Subsequent events b. Completeness of information c. Recognition, measurement, and disclosure d. Materiality
d
Which of the following is not one of the three main reasons why it is essential that audit files be thoroughly reviewed by another member of the audit firm at the completion of the audit? a. To evaluate the performance of inexperienced personnel. b. To counteract the bias that frequently enters into the auditor's judgment. c. To make sure that the audit meets the CPA firm's standard of performance. d. To evaluate the accuracy of the auditing firm's time budget for the engagement.
d
Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities at the balance sheet date? a. Obtain an attorney's letter from the client's attorney. b. Confirm large accounts payable balances at the balance sheet date. c. Examine purchase orders issued for several days prior to the close of the year. d. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.
d
Which of the following items would ordinarily not be included in the standard letter of inquiry to the client's attorney? a. A list, prepared by management, of pending threatened litigation of material amounts. b. A request that the attorney furnish information or comment about the likelihood of an unfavorable outcome of litigation. c. A request that the attorney furnish an estimate of the amount or range of the potential loss. d. A request that the attorney confirm the amount of outstanding fees which client owes for legal services.
d
Which of the following statements regarding the letter of representation is not correct? a. It is prepared on the client's letterhead. b. It is addressed to the CPA firm. c. It is signed by high-level corporate officials, usually the president and chief financial officer. d. It is optional, not required, that the auditor obtain such a letter from management.
d
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor? a. Discovery of the inclusion of material nonexistent sales. b. Discovery of the failure to write off material obsolete inventory. c. Discovery of the omission of a material footnote. d. Decrease in the value of investments.
d
Why must audit documentation be reviewed? a. To ensure that the audit meets the CPA firm's standard of performance. b. To evaluate the performance of inexperienced personnel. c. To counteract bias that often enters into the auditor's judgment. d. All of the above are reasons for review of audit documentation.
d
