Ch. 14 MC
In completing the audit, the auditor must obtain a letter of audit inquiry. Which of the following is an accurate description of a letter of audit inquiry? a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel. b. A letter that is the primary source of corroborative evidence concerning cash valuation, which is received from the client's bank. c. A letter that is the primary source of corroborative evidence concerning accounts receivable valuation, which is received from the client's customer. d. A letter that is the primary source of corroborative evidence concerning inventory valuation, which is received from the client's supplier.
a) A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which his received from the client's legal counsel
Which of the following is not a typical communication between the auditor and the audit committee? a. Discussion of the cash confirmation process. b. Discussion of significant audit adjustments. c. Discussion of significant accounting policies. d. Discussion about the quality of the company's accounting principles.
a. Discussion of the cash confirmation process.
Which of the following is not a procedure that would be performed during an engagement quality review? a. Evaluating whether or not to continue providing audit services to the client in the subsequent year, based on information gained during the current audit period. b. Discussing significant matters related to the financial statements and internal controls. c. Evaluating judgments about materiality and the disposition of corrected and uncorrected identified misstatements. d. Reviewing the engagement team's evaluation of the firm's independence in relation to the engagement.
a. Evaluating whether or not to continue providing audit services to the client in the subsequent year, based on information gained during the current period audit.
Which of the following statements is true regarding audit partner rotation and audit firm rotation? a. Having a longstanding relationship with the client management could impair the willingness or ability to perform an unbiased assessment of audit evidence. b. Rules are essentially the same around the world in terms of requirements regarding audit partner rotation and audit firm rotation. c. A cooling off period is put in place when there is a disagreement between client management and the auditor; it is required to be one year for publicly traded companies according to SOX. d. The IAASB requires mandatory auditor firm rotation after 10 years.
a. Having a longstanding relationship with the client management could impair the willingness or ability to perform an unbiased assessment of audit evidence.
In completing the audit, the auditor must assess management's representations, including certifications required under SOX for public companies. Which of the following statements is true concerning this certification? a. Section 302 of SOX requires the signing officers of publicly traded companies (usually the CEO and CFO) to certify, among other things, that the financial statements are fairly presented in accordance with GAAP. b. Section 302 of SOX requires the auditor of publicly traded companies to certify, among other things, that the financial statements are fairly presented in accordance with GAAP. c. Section 302 of SOX requires the signing officers of publicly traded companies (usually the CEO and CFO) to certify, among other things, that no material fraud has taken place within the entity for a period not to exceed one year prior to the issuance of the financial statements. d. Section 302 of SOX requires the auditor of publicly traded companies to certify, among other things, that no material fraud has taken place within the entity for a period not to exceed one year prior to the issuance of the financial statements.
a. Section 302 of SOX requires the signing officers of publicly traded companies (usually the CEO and CFO) to certify, among other things, that the financial statements are fairly presented in accordance with GAAP.
If it is discovered after the report date that the auditor failed to confirm receivables, which of the following statements is true? a. The auditor should try to examine subsequent collections of accounts receivable to help determine whether the accounts receivables existed and whether they were properly valued at the balance sheet date. b. The auditor must resign immediately. c. The auditor must notify the SEC immediately. d. The auditor must notify users of the financial statements immediately.
a. The auditor should try to examine subsequent collections of accounts receivable to help determine whether the accounts receivables existed and whether they were properly valued at the balance sheet date.
The Altman Z-Score is a model used to help assess the likelihood that a company will go bankrupt. The model contains which of the following ratios? a. Working capital to total assets. b. Working capital to total sales. c. Sales to total debt. d. Sales to total accounts receivable.
a. Working capital to total assets.
The PCAOB's AS14 provides insight that auditors must consider as they decide whether management's refusal to correct a detected misstatement is indicative of intentional bias. Which of the following is a form of management bias in this setting? a. Refusal on the part of management to allow the auditor to communicate with the audit committee about the misstatement. b. The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor. c. Refusal on the part of management to allow the auditor to collect additional evidence to evaluate the materiality of the misstatement. d. The identification by management of procedures that the auditor omitted during the audit, which yield information about the misstatement.
b) The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor
Which of the following is not a typical communication between the auditor and the audit committee? a. Discussion of the auditor's responsibility under GAAS. b. Discussion of the client continuance decision. c. Discussion about auditor independence. d. Discussion about management judgements and accounting estimates.
b. Discussion of the client continuance decision.
After the report release date, the auditor may become aware of facts that may have affected the financial statements and auditor's report, had the facts been known at the time of issuance. With regard to this situation, which of the following statements is true? a. Because such facts became known after the report release date, the auditor cannon reasonably be held accountable for these issues; no action is required on the part of the auditor. b. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the client is advised to make appropriate and timely disclosure of these new facts. c. If such facts would have been investigated had they been known at the report date, the auditor should determine whether engagement personnel are competent and qualified to perform audits; action is required on the part of the auditor to assess whether engagement personnel should be retained to work on the engagement in the subsequent year. d. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the auditor should notify the audit committee immediately; no action beyond this is required on the part of auditor because of confidentiality concerns.
b. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the client is advised to make appropriate and timely disclosure of these new facts.
Which of the following statements concerning analytical review procedures at the completion of the audit is false? a. Analytical procedures help auditors assess the overall presentation of the financial statements. b. The auditor's expectations in final analytical procedures should be more precise than those for substantive analytics. c. 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. d. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for performing final analytical procedures.
b. The auditor's expectations in final analytical procedures should be more precise than those for substantive analytics.
With regard to client continuance decisions, which of the following is false? a. Client continuance decisions are one part of the audit firm's overall portfolio management activities. b. The primary driver of the client continuance decision is the level of audit fees that can be charged to the client. c. One can view an individual audit client like and individual stock in an investment portfolio. d. 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 proved services again in the next period.
b. The primary driver of the client continuance decision is the level of audit fees that can be charged to the client.
Which of the following is an important provision of the Foreign Corrupt Practices Act? a. Auditors of clients operating in foreign countries must hire a joint auditor in the foreign country to provide assurance that laws and regulations have been followed by the client. b. Auditors of clients operating in foreign countries must ensure that any inventory observations that occur in the foreign country are observed by at least some audit personnel from the U.S.; this requirement is in place because fraud often occurs in inventory accounts. c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls. d. Companies that have securities listed on U.S. markets must adhere to the internal control requirements of both the U.S. and the applicable foreign country.
c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls.
Which of the following statements is false concerning engagement quality reviews? a. The purpose of the engagement quality review is to provide reasonable assurance that the audit and audit documentation are complete and that they support the audit opinion on the financial statements. b. The engagement quality review must be documented, and the documentation should included who performed the review, which documents were reviewed, and the date the engagement quality reviewer provided approval of the issuance of the audit opinion. c. Engagement quality reviews are required for both publicly traded companies and private companies in the U.S. d. One of the procedures that would be performed during the engagement quality review is to determine if appropriate consultations have taken place on difficult or contentious matters.
c. Engagement quality reviews are required for both publicly traded companies and private companies in the U.S.
In completing the audit, the auditor must obtain a management representation letter. Which of the following statements about the management representation letter is false? a. The management representation letter is intended to remind management about its responsibility for the financial statements. b. The management representation letter is prepared on the client's letterhead, is addressed to the auditor, and should be signed by the CEO and the CFO. c. Management's refusal to sign the management representation letter is considered such a violation of ethics and professionalism that auditors of publicly traded clients must resign from the engagement immediately and require the client to file a Form 8K with the SEC. d. The contents of the management representation letter may be limited to matters that are considered material to the financial statements and should included representations about known fraud involving management or employees.
c. Management's refusal to sign the management representation letter is considered such a violation of ethics and professionalism that auditors of publicly traded clients must resign from the engagement immediately and require the client to file a Form 8K with the SEC.
In completing the audit, the auditor communicates with management via the management letter. Which of the following is false about management letters? a. The management letter is used to make significant operational or control recommendations to management. b. Many audit firms consider management's inattention to addressing comments in the letter to be an important risk factor in subsequent-year audits. c. The management letter is required for publicly traded companies in the U.S., but not privately held companies. d. All of the above are false.
c. The management letter is required for publicly traded companies in the U.S., but not privately held companies.
In completing the audit, the auditor should review management's significant accounting estimates. In this setting, the auditor is responsible for providing reasonable assurance about which of the following? a. The estimates are reasonable. b. The estimates are presented in conformity with GAAP. c. The disclosure about the estimates is adequate. d. All of the above.
d) All of the above
In evaluating the reasonableness of significant accounting estimates, the auditor should consider which of the following? a. The significance of the estimate. b. The sensitivity of the estimate to variations. c. The sensitivity of the estimate to misstatement and bias. d. All of the above.
d) All of the above
In obtaining evidence about loss contingencies, which of the following are sources of evidence that the auditor should obtain from management? a. A description and evaluation of contingencies that existed at the balance sheet date. b. Assurance that the accounting and disclosure requirements concerning contingent liabilities have been met. c. Documentation of communication with internal and external legal counsel of the client. d. All of the above.
d) All of the above
In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have a reasonable assurance that which of the following are characteristic of the disclosures? a. The disclosed events and transactions have occurred and pertain to the entity. b. All the disclosures that should have been included are included. c. The disclosures are understandable to users. d. All of the above.
d. All of the above.
In evaluating whether the client is a going concern, the auditor should ask which of the following questions? a. Are there indicators of going concern problems? b. Is it likely that management can mitigate the problems? c. Are discloses about the problems adequate? d. All of the above.
d. All of the above.
The analytical procedures of the financial statements of Koss Corporation that are depicted in Exhibit 14.5 reveal which of the following indicators of the fraud? a. Cash balances had declined to their lowest level since FYE 2004. b. Cost of goods sold as a percentage of sales had risen sharply over the period, with a particularly significant increase from FYE 2008 to 2009. c. Net income as a percentage of sales had decreased sharply over the period, with a particularly significant decrease from FYE 2008 to 2009. d. All of the above.
d. All of the above.
The auditor has responsibility regarding clients' noncompliance with laws and regulations. Obviously, management may try to hide acts involving noncompliance, which limits the auditor's ability to detect such acts. Which of the following are inherent limitations in the audit that limit the auditor's ability to detect acts involving noncompliance? a. Laws and regulation often relate to operational issues within the entity that do not necessarily relate to financial statements, so the information systems relating to financial reporting may not capture noncompliance. b. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor. c. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and are not a matter about which the auditor can resolve. d. All of the above.
d. All of the above.
Which of the following is an example of a risk relevant to the client continuance decision? a. Client entity characteristics. b. Independence risk factors. c. Third party/due diligence risk factors. d. All of the above.
d. All of the above.
Which of the following statements is true when considering omitted audit procedures discovered after the report date? a. After the audit report has been issued, the auditor may discover that an important audit procedure was not performed. b. Such an omission may be discovered when audit documentation is reviewed as part of an external or internal review program. c. The auditor should decide whether the previously issued audit report can still be supported in light of the omitted procedures. d. All of the above.
d. All of the above.
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.
Which of the following is an example of a Type II subsequent event? a. A lawsuit is settled for a different amount than was accrued. b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end. c. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end. d. None of the above.
d. None of the above.
The auditor's report does not provide assurance about which of the following element's of the client's financial reporting? a. The 10-K. b. The MD&A. c. The financial statements. d. The disclosures in the footnotes to the financial statements.
d. The disclosures in the footnotes to the financial statements.
In the Auditing In Practice feature, "KMPG and General Electric Company: A Relationship that has Lasted Over 100 Years," there is a letter from the United Brotherhood of Carpenters Pension Fund to General Electric. In this letter, the Fund requests that General Electric establish an audit firm rotation policy that requires that at least every seven years the Company's audit firm rotate off the engagement for a minimum of three years. Which of the following is not a rationale used in that letter? a. One important reform to the advance of independence, skepticism, and objectivity accounting firms have toward their audit clients is a mandatory auditor rotation requirement. b. For the largest 100 companies based on market capitalization, auditor revenue averages 28 years. These long term financial relationships results in the payment of substantial amounts of dollars over the average period of the engagement. c. General Electric has paid KPMG over $900 million in total fees over the last 7 years. d. There is substantive evidence that the large audit fees paid to KPMG have resulted in low audit quality.
d. There is substantive evidence that the large audit fees paid to KPMG have resulted in low audit quality.
In the Auditing in Practice feature, "An Example Management Letter to a College Foundation," which of the following items is not present in the management letter? a. The auditor's observations and recommendations to management. b. Management's response. c. The issue of whether/how management responded to the management letter related to the prior year's audit. d. What actions the auditor will take in the subsequent year audit to help management address the identified weakness.
d. What actions the auditor will take in the subsequent year audit to help management address the identified weaknesses.
