(A4)M7-M10

Question 1

management rep letter typically includes info in 4 categories, what are those categories?

Answer 1

FS
completeness
recognition, measurement, and disclosure
subsequent events

Question 2

what do materiality limits not apply to in obtaining written representations from management?

Answer 2

fraud involving management/key employees, management’s acknowledgement of its responsibility for the FS, availability of financial records, and completeness and availability of minutes

Question 3

what party actually contacts the client’s legal counsel, requests audit inquiry letter (i.e., prepares the letter)?

Answer 3

client management

Question 4

concerning an entity’s ability to continue as a going concern, the emphasis-of-matter paragraph should contain what two phrases?

Answer 4

“substantial doubt; going concern”

Question 5

if there substantial doubt about going concern, an auditor may issue which two types of opinions?

Answer 5

Disclaimer; unmodified with emphasis-of-matter (most common)

Question 6

an auditor is likely to request clarification if a client’s lawyer’s letter does not implicitly or explicitly mention what?

Answer 6

the likelihood of an unfavorable outcome

Question 7

when evaluating the reasonableness of management’s estimates, what is the procedure that an auditor would first perform?

Answer 7

obtaining an understanding of how management developed its estimates

Question 8

letters of inquiry from client’s attorneys are ___ evidence

Answer 8

corroborative

Question 9

reviewing any type of transaction that is already recorded on the FS will not identify a ___?

Answer 9

contingency

Question 10

when evaluating reasonableness of an estimate, an auditor would normally concentrate on key factors that are what? (4 things)

Answer 10

significant to the estimate
sensitive to variation
deviation from historical pattern
subjective and susceptible misstatement/bias

Question 11

legal responses should be dated within two weeks of what?

Answer 11

the audit report date

Question 12

responses from legal counsel that are dated (received) after the audit report date requires the auditor to update what?

Answer 12

the audit report date

Question 13

if insurance carrier will cover the loss attributable to a lawsuit, does that still have to be accrued and disclosed in the FS?

Answer 13

Yes!

Question 14

is the cost of correcting a misstatement a quantitative or qualitative standard?

Answer 14

qualitative

Question 15

the term “open” as it relates to purchase orders and invoices means what?

Answer 15

they are not matched to the related receiving report

Question 16

as it pertains to internal controls, auditors should separately identify ___ and ___.

Answer 16

significant deficiencies and material weaknesses

Question 17

is the auditor required to search for significant deficiencies in internal controls?

Answer 17

No, but should document and communicate when discovered

Question 18

what are two things that are required to be communicated to those charged with governance?

Answer 18

significant audit adjustments (unless all those charged with governance are also involved with management)
changes in significant accounting policies

Question 19

what are the two key words that indicate a control deficiency would be considered a material weakness?

Answer 19

Reasonable (likelihood)

Material (magnitude)

Question 20

T or F, the SEC requires companies to establish audit committees.

Answer 20

F, but it strongly recommends

Question 21

how many times a year should the auditors and audit committee meet without management present?

Answer 21

once

Question 22

when communicating findings to management, the auditor is not responsible for what?

Answer 22

requesting management’s explanation for uncorrected material misstatements

Question 23

is the auditor required to communicate significant deficiencies/material weaknesses by the report release date for a nonissuer FS audit?

Answer 23

No, can communicate within 60 days of the release date

if it is an audit of IC, must be by report release date

Question 24

when is a sale recorded?

Answer 24

depending on shipping terms (shipping point, destination), when customer takes ownership of goods

Question 25

what type of deficiency in IC is communicated to management only and can be oral or written?

Answer 25

control deficiency (lowest severity)

Question 26

what are some examples of a deficiency in the design of internal controls?

Answer 26

insufficient control consciousness
inadequate documentation of the components of internal control
lack of appropriate qualifications or training of client personnel

Question 27

what is considered evidence of failure in the operations of internal controls?

Answer 27

management override
undue bias or lack of objectivity
misrepresentation by client personnel to auditor
observed deviation rate that exceeds auditor’s expected rate