Chapter 11 Audit TB
19. Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork? A. To ensure that all appropriate steps in the audit plan were performed B. To ensure that referencing among audit documentation is clear C. To ensure that the explanations included in the audit documentation are understandable D. To ensure that the overall scope of the audit was appropriate
d
33. Near the end of an audit, the application of analytical procedures is A. recommended by auditing standards. B. not mentioned by auditing standards. C. not useful, since detailed substantive procedures have already been performed. D. required by auditing standards.
d
6. Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts? A. Current-year recorded (unaudited) balances B. Expected balances using a statistical analysis or relationships among accounts C. Internal budgets and reports D. Prior-year balances
a
15. What is the primary purpose of obtaining written representations? A. To provide auditors with substantive evidence of important assertions B. To impress upon management its primary responsibility for the financial statements C. To allow auditors to communicate important internal control deficiencies to management D. To allow auditors to communicate important suggestions for improvement to management
b
16. If auditors are appointed on January 3, 2014, the date of the financial statements is December 31, 2014, the date of the auditors' report is February 7, 2015 and the audit report release date is March 3, 2015, what is the appropriate date of the written representations? A. January 3, 2014 B. December 31, 2014 C. February 7, 2015 D. March 3, 2015
c
8. Which of the following is the most effective method of identifying potential earnings management attempts? A. Analytical procedures B. Detailed substantive procedures C. Inquiry of client management and key financial personnel D. Scanning accounts for unusual items
d
11. Which of the following is typically not included in the inquiry letter sent to the client's attorneys? A. A disclaimer regarding the likelihood of settlement of pending litigation B. A listing of pending or threatened litigation, claims, or assessments C. An evaluation of the likelihood of an unfavorable outcome D. An estimate of the range of potential loss
a
13. To whom should written representations be addressed? A. Auditors B. Board of directors C. Client D. Stockholders
a
20. Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the A. client's management. B. audit manager. C. engagement partner. D. engagement quality review partner.
a
51. If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event? A. A significant acquisition that was announced on February 1 and will be finalized on October 1. B. A court settlement on March 3 related to a case that was pending on December 31. C. Losses from the devaluation of a foreign currency that became finalized on February 21. D. The entity's announcement of a major restructuring plan on December 30 that will be implemented during the upcoming year.
a
18. Why is it the client's decision to record adjustments to the financial statements? A. Having auditors adjust the financial statements would impair independence with respect to the client. B. The financial statements are the responsibility of the client's management. C. Auditors often do not have sufficient client-specific expertise to record adjustments to the financial statements. D. The client will ultimately suffer any losses related to misstated financial statements.
b
22. Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events? A. Reviewing the latest interim financial statements B. Performing cut-off testing near year end C. Inquiring of officers and other client executives D. Obtaining written representations
b
1. Which of the following events or activities may occur following the audit report release date? A. Interim testing B. Roll-forward work C. Subsequent events D. Subsequently discovered facts
d
10. Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? A. Obtaining a description and evaluation of litigation, claims, and assessments from management B. Examining documentary evidence regarding litigation, claims, and assessments C. Reading minutes of meetings of stockholders, directors, and appropriate committees D. Performing analytical procedures
d
14. Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity? A. Statements related to management's responsibility for the entity's financial statements B. Statements related to management's responsibility for designing internal control to prevent and detect fraud C. An indication that all subsequent events have been disclosed to the auditors D. Management's opinion as to the effectiveness of its internal control over financial reporting
d
28. An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the: A. "to-do lists" are reviewed and cleared. B. audit plan procedures are "signed off." C. tick-mark notations are cleared. D. audit work meets the quality standards of the firm.
d
44. Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity? A. Auditors are required to specifically gather evidence with respect to going-concern status and separately report on the entity's ability to continue as a going concern. B. Auditors are required to specifically gather evidence with respect to going-concern status and modify their report on the financial statements if substantial doubts exist. C. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and separately report on the entity's ability to continue as a going concern. D. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.
d
48. What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist? A. Modify their report on the financial statements to describe management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. B. Prepare a separate report that describes management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. C. Require financial statement disclosure of management's plan to mitigate going-concern uncertainties with no modification to the auditors' report on the financial statements or no separate report on going concern. D. Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report.
d
49. If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n) A. omitted procedure. B. prior period adjustment. C. subsequent event. D. subsequently discovered fact.
d
34. The primary source of information auditors use to obtain information about litigation, claims, and assessments is the A. client's attorney. B. court records. C. client's management. D. independent auditors.
c
21. Subsequent events occur between the ____ and the ____. A. date of the financial statements; date of the auditors' report B. date of the auditors' report; audit report release date C. date of the financial statements; audit report release date D. audit report release date; beginning of subsequent year's audit
a
32. In an audit of contingent liabilities, which of the following procedures would be least effective? A. Examining customer confirmation replies B. Reviewing a bank confirmation letter C. Examining invoices for professional services D. Reading the minutes of the board of directors meetings
a
37. A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on A. the fair presentation of the financial statements in conformity with GAAP. B. irregularities involving the client's management and its employees. C. the materiality of the adjusting entries proposed by the audit staff. D. the communication of internal control deficiencies to the client's audit committee (or those charged with governance).
a
39. Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take? A. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. B. Request that management disclose the newly-discovered information by issuing revised financial statements. C. Issue revised pro forma financial statements taking into consideration the newly discovered information. D. Give public notice that auditors are no longer associated with financial statements.
a
4. For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit? A. Obtaining evidence about assertions related to account balances or classes of transactions B. Evaluating the adequacy of evidence gathered in response to unexpected account balances C. Identifying unusual or unexpected account balances or relationships among account balances that were not previously identified during the audit D. Evaluating the adequacy of evidence gathered in response to unexpected relationships among account balances
a
40. Analytical procedures performed near the end of an audit generally include A. considering unusual or unexpected account balances that were not previously identified. B. performing tests of transactions to corroborate management's financial statement assertions. C. gathering evidence concerning account balances that have not changed from the prior year. D. retesting control activities that appeared to be ineffective during the assessment of control risk.
a
23. Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern? A. Violation of debt covenants B. Failure to meet forecasted earnings per share C. Legal proceedings that may have a significant negative impact on the entity D. Negative cash flow from operations for each of the last three years
b
25. The Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports? A. December 31 and January 25 B. January 25 and February 1 C. January 25 and February 15 D. February I and February 15
b
35. Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2014. On January 11, 2015, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2015. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to A. record the loss on uncollectible accounts as a routine transaction in the year 2015. B. treat the loss as a subsequent event and provide a footnote about the loss in the 2014 financial statements. C. treat the loss as a subsequent event and adjust the 2014 financial statements to record the loss on uncollectible accounts. D. file a lawsuit against the customer in hopes of collecting some of the money owed to the client.
b
41. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A. Accounts receivable B. Interest expense C. Accounts payable D. Travel and entertainment expense
b
42. On March 15, 2015, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2014. On May 4, 2015, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first A. advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied on. B. undertake to apply alternative procedures that would provide a satisfactory basis for the opinion. C. reissue the auditors' reports and add an explanatory paragraph describing the departure from generally accepted auditing standards. D. compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.
b
52. Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral B. Confirming with third parties the details of arrangements to maintain financial support C. Reconciling the client's cash balance with the cut-off bank statement and the bank confirmation D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry
b
31. The primary objective of analytical procedures used near the end of an audit is to A. obtain evidence from details tested to corroborate management assertions. B. obtain evidence on the validity of the assessment of control risk. C. assist auditors in evaluating the overall financial statement presentation. D. identify areas that represent specific risks relevant to the audit.
c
12. Which party should request a letter regarding litigation, claims, and assessments from the client's attorney? A. Attorney B. Auditors C. Client D. Securities and Exchange Commission or other regulatory body
c
17. Which of the following reporting options is available if the client refuses to provide auditors with written representations? A. Unmodified or qualified opinion B. Qualified or adverse opinion C. Qualified opinion or disclaimer of opinion D. Disclaimer of opinion or adverse opinion
c
2. Interim testing normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. end of the year under audit; date of the auditors' report
c
24. Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements? A. Settlement of long outstanding litigation B. Collection of a past due accounts receivable C. Loss of inventory as a result of a flood D. An additional tax assessment on prior income
c
26. Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the A. date of the financial statements. B. date of the auditors' report. C. audit report release date. D. subsequent year's date of the financial statements.
c
27. Management letters are not a means of A. reporting recommendations to the client. B. assisting the client in improving its operations. C. satisfying professional requirements to communicate matters related to the client's internal control. D. developing rapport with the client.
c
29. Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the A. date of the auditors' report. B. final review of the audit documentation. C. audit report release date. D. delivery of the auditors' reports to the client.
c
45. Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments? A. Request the client's attorney to evaluate whether the client's pending litigation claims, and assessments indicate a going concern problem. B. Examine the legal documents in the client's attorney's possession concerning litigation, claims, and assessments to which the attorney has devoted substantive attention. C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. D. Confirm directly with the client's attorney that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.
c
46. Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? A. Confirming a sample of material accounts receivable established after year-end B. Comparing the financial statements being reported on with those of the prior period C. Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements D. Inquiring as to whether any unusual adjustments were made just before year-end
c
47. Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously-issued financial statements? A. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. B. A contingency is resolved that had been disclosed in the audited financial statements. C. New information is discovered concerning undisclosed lease transactions during the period under audit. D. A subsidiary is sold that accounts for 25% of the entity's consolidated net income.
c
5. Which of the following best describes the auditors' responsibility with respect to management's estimates? A. Verifying the mathematical accuracy of management estimates B. Assessing the likelihood that actual results will be consistent with management's estimates C. Evaluating the reasonableness of management's estimates D. Identifying how the failure of the entity to achieve management's estimates will influence users' decisions
c
7. Why should auditors be particularly concerned with "miscellaneous", "other", and "clearing" accounts classified as revenues or expenses? A. These accounts are likely to relate to going-concern matters. B. These accounts are often more difficult to audit using normal substantive procedures. C. These accounts may represent attempts of earnings management. D. These accounts are likely to require the assistance of a specialist.
c
9. An important method used by auditors to learn of material contingencies is A. examining documents in the client's possession concerning contingencies. B. inquiring and discussing them with management. C. obtaining responses to an attorney letter. D. confirming accounts receivable with the client's customers.
c
3. Roll-forward work normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. date of interim work; date of the auditors' report
d
30. Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously-expressed opinion. Auditors need not try to perform the omitted procedure if A. the risk of adverse publicity or litigation is low. B. some financial statement users are currently relying on the auditors' reports. C. the auditors' opinion was qualified because of a departure from generally accepted accounting principles. D. the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.
d
36. Small and Tall, CPAs completed the December 31, 2014 audit of Big Company on February 10, 2015. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2014 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should A. determine whether persons are currently relying on the auditors' reports. B. advise the client to make appropriate changes in the financial statements and reissue them. C. notify each member of the board of directors of Big Company. D. take no action since the event took place after the audit report release date.
d
38. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by A. tracing a sample of journal entries to the general ledger. B. evaluating the effectiveness of the internal control policies and procedures. C. investigating the reconciliations between controlling accounts and subsidiary records. D. performing analytical procedures designed to disclose differences from expectations.
d
43. Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events? A. Determine that changes in employee pay rates after year end were properly authorized. B. Recompute depreciation charges for plant assets sold after year end. C. Inquire about payroll checks that were recorded before year end but cashed after year end. D. Investigate changes in long-term debt occurring after year end.
d
50. Assume that Rory is auditing the financial statements of Augusta Inc. Rory completes his fieldwork on February 25 and his report (along with Augusta's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements? A. Because the inventory was included in the financial statements audited by Rory, he is required to perform additional procedures and reissue his report on the revised financial statements. B. Because the hurricane occurred after the date of Rory's report, he has no responsibility to perform additional procedures or reissue his report. C. Because the hurricane occurred prior to the next fiscal quarter, Rory is required to perform additional procedures and reissue his report on the revised financial statements. D. Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.
d
