audit quiz 16
Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 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:
$140,000
A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 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:
$60,000
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
A substantial portion of the company's inventory was written off as obsolete on January 31.
Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?
A surprise observation of a paycheck distribution.
A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:
An emphasis-of-matter paragraph that should be added to the audit report.
If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
Attempt to determine whether their report is still being relied upon by third parties.
An example of an internal control weakness is to assign the payroll department the responsibility for:
Authorizing increases in pay.
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
Capitalization.
The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
Cash
Which of the following is an analytical procedure that should be applied to the income statement?
Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
Confirming accounts payable.
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:
Consider the possibility of a misstatement in the financial statements.
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditor with:
Corroborative audit evidence.
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
Corroborative audit evidence.
Which of the following is most likely to be considered a Type 1 subsequent event?
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:
Date of the auditors' report.
To minimize the opportunities for fraud, unclaimed cash payroll should be:
Deposited in a special bank account.
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:
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
Develop an estimate of the total likely misstatement in the financial statements.
A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
Distributing payroll checks to employees.
An example of an internal control weakness is to assign the personnel department responsibility for:
Distribution of paychecks.
A common audit procedure in the audit of payroll transactions involves tracing 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 proposition that:
Employees worked the number of hours for which their pay was computed.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:
Extend auditing procedures.
A surprise observation of the distribution of paychecks is designed to detect employees that are paid for more hours than they worked.
False
Business segment information required by the FASB is supplementary and need not be audited to provide a basis for an opinion on the client's financial statements.
False
Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end.
False
Disclosure checklists are used to test the completeness of audit working papers.
False
For effective internal control over payroll, the personnel department should prepare the payroll records and checks.
False
The representations letter from management should be dated and signed on the balance sheet date.
False
Unclaimed payroll checks should be returned to the payroll department for safekeeping.
False
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:
February 10, 20X9.
Which of the following types of matters does not generally require disclosure in the financial statements?
General risk contingencies.
An auditor will ordinarily examine invoices from lawyers primarily in order to:
Identify possible unasserted litigation, claims, and assessments.
To which of the following matters would materiality limits not apply when obtaining written client representations?
Instances of fraud involving management.
Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
Known misstatement.
In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
Known, projected, and other estimated misstatements in the financial statements.
The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
Letter of audit inquiry to the client's lawyer.
The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
Letter of audit inquiry to the client's lawyer.
With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report:
Limited to the specific event referred to.
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):
Loss contingency.
Which of the following subsequent events might require an adjustment to the client's financial statements?
Loss on the sale of a closely-held investment.
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 presently on the job?
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
In connection with the annual audit, which of the following is not a "subsequent events" procedure?
Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
For which of the following ledger accounts would the auditor be most likely to analyze the details?
Miscellaneous expense.
The review of audit working papers by the audit partner is normally completed:
Near the completion of the audit.
Which of the following is not a procedure normally performed while completing the audit?
Obtain confirmation of capital stockholdings from shareholders.
Which of the following auditing procedures is ordinarily performed last?
Obtaining a management representation letter.
Which of the following information need not be reported in the auditors' report if the information is considered to be properly stated after performing appropriate procedures?
Other information in documents containing audited financial statements.
Which of the following procedures is most likely to be included in the final review stage of an audit?
Perform analytical procedures.
It would be appropriate for the payroll accounting department to be responsible for which of the following functions?
Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:
Read and consider the manner of presentation of the "other financial information."
The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
Report release date.
Which of the following procedures is not a procedure that is completed near the end of the engagement?
Review cash transactions.
Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?
Review changes in internal control during the period subsequent to the balance sheet date.
The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
Separate the authorization of transactions from the custody of related assets.
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?
Settlement of litigation in excess of the recorded liability.
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
Settlement of litigation.
Which of the following is least likely to be considered a substantive procedure relating to payroll?
Test whether employee time reports are approved by supervisors.
Auditors must communicate internal control "significant deficiencies" to:
The audit committee.
The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that:
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.
Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
The company changed its capitalization policy for small tools in 200X.
Which of the following best describes proper internal control over payroll?
The duties of hiring, payroll computation, and payment to employees should be segregated.
In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule?
To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.
Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
Travel expense.
Analytical procedures are often used for verification of income statement accounts.
True
CPAs have no responsibility to perform audit procedures after the date of their report but must still investigate events that are brought to their attention and might have affected their report.
True
In the audit of a nonpublic company, the auditors have a responsibility to report on all FASB-required supplementary information.
True
Normally, general risk contingencies need not be disclosed in the financial statements.
True
Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
True
The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client.
True
The financial statements should not be adjusted for subsequent events that provide important evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.
True
The loss of an account receivable because of a major customer declaring bankruptcy subsequent to the balance sheet date might or might not require adjustment of the financial statements, depending upon the cause of the customer's bankruptcy.
True
When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.
True
One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
Unusual transactions.
Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
Write-off of trade accounts receivable.
When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:
cross referencing to balances and transactions audited in connection with the examination of the other financial statements.
The date of the management representation letter should coincide with the:
date of the auditor's report.
An example of an internal control weakness is to assign to a supervisor the responsibility for:
distributing payroll checks to subordinate employees.
All information included in a financial report prepared and submitted by the auditors must be audited.
f
Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.
f
Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and must return to complete the audit work on a later date.
f
Internal control over payroll is enhanced when the personnel department distributes payroll checks.
f
Payroll frauds are easier to conceal today than they were in the past.
f
The payroll department of a company should sign and distribute company paychecks.
f
A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
names on the company payroll are those of bona fide employees presently on the job.
When auditing the statement of cash flows of a profitable, growing company which combination is most likely?
positive negative
Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
revenue and expense account totals to the corresponding figures of the preceding years.
*Budgets are an important internal control over revenue and expenses.*
t
Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts.
t
If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.
t
If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.
t
Maintaining records of attendance of employees for payroll should be performed by the employees' supervisors.
t
Making payroll expenditures from an imprest payroll bank account ordinarily is a strength relating to internal control, rather than a weakness.
t
Subsequent events, which provide additional evidence regarding conditions existing at the balance sheet date, may result in adjustment of the financial statements.
t
Tests of revenue and expenses often involve analytical procedures.
t
The auditors generally perform an analysis of the miscellaneous revenue account to determine the nature of the items recorded to the account.
t
The auditors generally perform review procedures on FASB-required supplementary information.
t
The auditors should accumulate known, projected, and other estimated misstatements in the financial statements to determine whether an unmodified opinion should be issued on the financial statements.
t
Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
the auditors' report.
The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
transactions.
Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:
yes no no
The aggregated misstatement in the financial statements is made up of:
yes yes yes
