Chapter 14
An example of a situation in which the auditor discovers omitted procedures after the report date would be one in which the auditor failed to confirm receivables, and this fact comes to light as part of an internal review program
True
Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to the entity's compliance with laws and regulations
True
One of the key disclosures to the financial statements is a summary of significant accounting policies used by the company
True
One of the purposes of a management representation letter is to confirm oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses
True
The PCAOB provides guidance that auditors must consider as they decide whether management's refusal to correct a detected misstatement is indicative of intentional bias
True
The auditor is required to communicate certain issues to the audit committee; this communication is important because the audit committee serves as an independent subcommittee of the board of directors, and the audit committee can also assist the auditor should disagreement occur between the auditor and management
True
The auditor's expectations when performing review analytical review can be less precise than those for substantive analytics
True
The going-concern evaluation is based on information obtained from normal audit procedures performed to test management's assertions; no separate procedures are required, unless the auditor believes that there is substantial doubt about the client's ability to continue as a going concern
True
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 varied 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
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 SOX requires the auditors of publicly traded companies to certify, among other things, that the financial statements are fairly presented in accordance with GAAP c. Section 302 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 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
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 accounts receivable valuation, which is received from the client's customer c. A letter that is the primary source of corroborative evidence concerning inventory 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
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
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-period audit 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
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
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 reasonable assurance that which o 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
B
The PCAOB's AS 14 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 auditor's report does not provide assurance about which of the following elements 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
B
Which of the following is not a typical communication between the auditor and the audit committee at the end of an audit engagement? 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 judgments and accounting estimates
B
Which of the following statements concerning review analytical procedures is false? a. Review analytical procedures help auditors assess the overall presentation of the financial statements b. The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics c. Auditing standards require the use of review analytical procedures 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 review analytical procedures
B
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 become known after the report release date, the auditor cannot reasonably be held accountable for these issues; no action is required on the part of the auditor b. If the auditor decided 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 decided 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 the auditor because of confidentiality concerns
C
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
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 8-K 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 include representations about known fraud involving management or employees
C
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 provide reasonable assurance 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 transaction of the company and must design and maintain an adequate system internal accounting controls d. Companies that have securities listed on U.S. markets must adhere to the internal control requirements of both U.S. and the applicable foreign country
C
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 include 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 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
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
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
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 any identified going-concern problems? c. Are disclosures about the going-concern problems adequate? d. All of the above
D
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
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 or 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 weaknesses
D
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
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 that affect the auditor's ability to detect acts involving noncompliance a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the 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
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
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 procedures 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
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 misstatements? 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.
An engagement quality review is required for publicly traded companies, and engagement quality reviews for privately held company audits rarely happen
False
An example of a Type I subsequent even would be when a significant lawsuit is initiated relating to an incident that occurred after the balance sheet date
False
Auditors should not challenge management estimates that result in current-period reductions in income and associated increases in reserve accounts
False
Auditors should not issue a going-concern audit opinion if it would be a self-fulfilling prophecy that the company will, indeed, go bankrupt
False
If after the audit report date the auditor discovers that an important audit procedure was not performed, SOX requires that the auditor file a Form 8-K with the SEC
False
One of the issues that the auditor is required to communicate to the audit committee is the competence, training, and industry specialization of each of the highest ranking members of the engagement team (the partner, manager, and audit senior)
False
One source of evidence concerning contingencies is client's management; a primary source of corroborative evidence concerning contingencies is the client's legal counsel, which is obtained in the management representation letter
False
Performing review analytical procedures is optional
False
Section 404 of SOX requires the signing officers of publicly traded companies (usually the coo and CFO) to certify, among other things, that the financial statements are fairly presented in accordance with GAAP
False
The audit report includes reasonable assurance about information contained in the MD&A section of the annual report
False
The auditor is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies; management is responsible for determining that the auditor has properly identified, accounted for, and disclosed material contingencies
False
The auditor should consider only quantitative factors when assessing the materiality of detected misstatements
False
The legal implications of a client's noncompliance with laws and regulations are ultimately a matter for the auditor to resolve before the audit opinion can be issued
False
The management representation letter and the management letter are both required for the audits of publicly traded companies
False
The management letter helps to provide management comfort that the auditor has done a quality job and that the auditor knows and understands the client's business
True
The terms engagement quality review and concurring partner review are synonymous
True
Type I subsequent events provide evidence about conditions that existed at the balance sheet date, while Type II subsequent events provide evidence about conditions that did not exist at the balance sheet date but that may require disclosure
True
With regard to reviewing significant estimates, the auditor is responsible for providing reasonable assurance that the estimates are reasonable
True