Quiz 11

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is: a. $0 b. $30,000 c. $40,000 d. $50,000

A. Known misstatements are specific misstatements that the auditor identifies. When there are difference in estimates this is referred to as likely misstatement

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: a. Confirmation of related lawsuits with the claimants b. Qualification of the audit report c. An assessment that loss of the litigation is probable d. An adverse opinion

B

Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimates that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: a. $0 b. $15,000 c. $20,000 d. $25,000

B Be conservative

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as: a. Extrapolation difference b. Known misstatement c. Likely misstatement d. Projected misstatement

B Known misstatements: Specific misstatements identified Likely misstatements: Extrapolation or estimates Material Misstatements: Must be corrected, consider quantitative and qualitative factors

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a: a. Analytical process b. Loss contingency c. Probably loss d. Unasserted claim

B Loss contingency: An existing condition, situation or set of circumstances involving uncertainty as to possible loss that will be resolved in the future

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: a. Notify the board of directors that the auditor's report must no longer be associated with the financial statements b. Determine whether there are persons relying on or likely to rely on the financial statements who would attach importance to the information. c. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements d. Issue revised pro forma financial statements taking into consideration the newly discovered information

B. When the auditor becomes aware of facts existing at the report date that would have affected the report, s/he should next determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. If such persons are believed to exist, the next step is to determine the best manner in which to disclose the information.

Which of the following events occurring on Janurary 4, 20X2 is most likely to result in an adjusting entry to the 20X1 financial statements? a. A business combination b. Early retirement of bonds payable c. Settlement of litigation d. Plant closure due to a strike

C

Which of the following is most likely to be considered a Type 1 subsequent event? a. A business combination completed after year-end, but for which negotiations began prior to year-end b. A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. c. Customer checks deposited prior to year-end, but determined to be uncollectible after year-end d. Introduction of a new line of products after year-end for which major research had been completer prior to year-end

C

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the: a. Evaluation materiality approach b. Iron curtain approach c. Projected misstatement approach d. Rollover approach

D

TRUE or FALSE: The auditor does not have to tell those charger with governance over the client firm about correct misstatements that were brought to management's attention by the auditor

False Auditor needs to tell those charged with governance: Auditor's responsibilities under GAAS (or PCAOB for public) Over of the planned scope and timing of audit Significant findings from the audit

TRUE or FALSE: Dual-dating of an audit report extends the auditor's liability for disclosure through the later date for all areas of the financial statements

False Dual-date limits liability to the portion that was signed later

TRUE or FALSE: For public companies, the auditor must retain audit documentation for 7 years from the date of completion of the audit engagement

True

TRUE or FALSE: Something is likely to be material when it hides a failure to meet analyst's consensus expectation about the company

True

Which of the following is not a procedure to discover unasserted claims or contingent liabilties? a. Review of Board of Director minutes b. Sending a letter of inquiry to a client's attorney c. Substantive testing of company prepaid assets d. Searching newspapers and other periodicals for stories on the client and its industry

C The search for unasserted claims or contingent liabilities does not involve testing prepaid assets (like prepaid rent)

The search for unrecorded liabilities for a public company includes procedures usually performed through the: a. Day the audit report is issued b. End of the client's year c. Date of the auditor's report d. Date the report is filed with the SEC

C The search for unrecorded liabilities occurs as part of the auditor's fieldwork which is completed on the date of the auditor's report, not the date that the report is filed with the SEC in conjunction with the financial statements

TRUE or FALSE: The Iron Curtain method quantifies income statement errors based on the amount by which the income statement would be misstated if the accumulated amount of the errors that remain in the statement of cash flows were corrected through the income statement in the current period.

False The Iron Curtain method is concerned with the accumulated amount of errors in the balance sheet

TRUE or FALSE: Sarbanes-Oxley requires auditors to archive their public company audit files for retention within 45 days following the time the auditor grants permission to use the auditor's report in connection with the issuance of the company's financial statements

True

TRUE or FALSE: 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

True Material misstatements must be corrected in order for the auditor to issue a clean opinion

TRUE or FALSE: Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.

True Type I: Conditions existed before balance sheet date and affect estimates that are part of financial statements Type II: conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements