AUD 2 - Chapter 15 Q's

Question 1

Toward the end of an audit, it is not necessary that external auditors consider the revenue and expense accounts that were not audited in connection with balance sheet accounts.

Answer 1

Toward the end of an audit, it is not necessary that external auditors consider the revenue and expense accounts that were not audited in connection with balance sheet accounts.
FALSE

Question 2

An analysis of the comparative balances of minor expense accounts is often sufficient to decide whether the amounts are fairly presented.

Answer 2

An analysis of the comparative balances of minor expense accounts is often sufficient to decide whether the amounts are fairly presented.
TRUE

Question 3

All revenue accounts designated “miscellaneous” or “other” are generally immaterial in amount and, therefore, not audited.

Answer 3

All revenue accounts designated “miscellaneous” or “other” are generally immaterial in amount and, therefore, not audited.
FALSE

Question 4

Analytical procedures are used during the overall evaluation of the financial statements.

Answer 4

Analytical procedures are used during the overall evaluation of the financial statements.
TRUE

Question 5

The client signs the enquiry letter about claims and possible claims that is sent to the company’s law firm for confirmation.

Answer 5

The client signs the enquiry letter about claims and possible claims that is sent to the company’s law firm for confirmation.
TRUE

Question 6

Auditors draft the letter of representation that will be prepared on company letterhead and signed by the officers of the company.

Answer 6

Auditors draft the letter of representation that will be prepared on company letterhead and signed by the officers of the company.
TRUE

Question 7

A written letter of representation from a client can provide a good defence for not
performing audit procedures.

Answer 7

A written letter of representation from a client can provide a good defence for not
performing audit procedures.
FALSE

Question 8

A type I subsequent event requires only footnote disclosure.

Answer 8

A type I subsequent event requires only footnote disclosure.

FALSE

Question 9

When a report is double-dated, the auditor has no responsibility for other events that have occurred after the end of fieldwork.

Answer 9

When a report is double-dated, the auditor has no responsibility for other events that have occurred after the end of fieldwork.
TRUE

Question 10

The primary purpose of the second partner review is to help in forming the audit opinion.

Answer 10

The primary purpose of the second partner review is to help in forming the audit opinion.
FALSE

Question 11

The auditor writes a letter to the audit committee concerning material weaknesses in internal controls.

Answer 11

The auditor writes a letter to the audit committee concerning material weaknesses in internal controls.
TRUE

Question 12

The audit of the year-end franchise revenue balances is normally conducted in conjunction with which related account group?
A. Fixed assets, receivables.
B. Receivables, intangibles.
C. Receivables, investments.
D. Revenues, receivables

Answer 12

The audit of the year-end franchise revenue balances is normally conducted in conjunction with which related account group?

B. Receivables, intangibles.

Question 13

Procedures for the audit of warranty expense are generally coordinated with which of the following audit programs?
A. Inventory, accruals, and payables.
B. Inventory, sales, and repairs and maintenance.
C. Sales, cost of goods sold, and interest expense.
D. Sales, inventory, and interest expense.

Answer 13

Procedures for the audit of warranty expense are generally coordinated with which of the following audit programs?

A. Inventory, accruals, and payables.

Question 14

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all
A. Expenditures for repairs and maintenance have been recorded in the proper period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Expenditures for repairs and maintenance have not been charged to capital accounts.
D. Expenditures for property and equipment have not been charged to expense.

Answer 14

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

D. Expenditures for property and equipment have not been charged to expense.

Question 15

The primary objective of performing analytical procedures in the final review stage 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 the auditor in evaluating the overall financial statement presentation.
D. Identify areas that represent specific risks relevant to the audit

Answer 15

The primary objective of performing analytical procedures in the final review stage of an audit is to

C. Assist the auditor in evaluating the overall financial statement presentation.

Question 16

An entity’s income statements were misstated due to the recording of a journal entry that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor is likely to most likely to detect this irregularity by
A. Tracing a sample of journal entries to the general ledger.
B. Evaluating the effectiveness of the internal control system policies and procedures.
C. Investigating the reconciliation of control accounts with the subsidiary records.
D. Performing analytical procedures designed to disclose differences between the balances in the accounts and budgeted amounts

Answer 16

An entity’s income statements were misstated due to the recording of a journal entry that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor is likely to most likely to detect this irregularity by

D. Performing analytical procedures designed to disclose differences between the balances in the accounts and budgeted amounts

Question 17

At the review stage 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 tests have already been performed.
D. Required by auditing standards

Answer 17

At the review stage of an audit, the application of analytical procedures is

D. Required by auditing standards

Question 18

Analytical procedures used in the overall review stage 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. Re-testing control procedures that appeared to be ineffective during the assessment of control risk

Answer 18

Analytical procedures used in the overall review stage of an audit generally include

A. Considering unusual or unexpected account balances that were not previously identified.

Question 19

The primary source of information that the auditor can use in corroborating information about litigation, claims, and assessments is the
A. Client's lawyer.
B. Court records.
C. Client's management.
D. Independent auditor

Answer 19

The primary source of information that the auditor can use in corroborating information about litigation, claims, and assessments is the

A. Client’s lawyer.

Question 20

The primary reason an auditor asks that enquiry letters be sent to a client’s lawyers is to provide the auditor with
A. The probable outcome of asserted claims and pending or threatened litigation.
B. Corroboration of the information furnished by management about litigation, claims, and assessments.
C. The lawyer’s opinion of the client’s historical experiences in recent similar litigation.
D. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date

Answer 20

The primary reason an auditor asks that enquiry letters be sent to a client’s lawyers is to provide the auditor with

B. Corroboration of the information furnished by management about litigation, claims, and assessments.

Question 21

A major means by which an auditor obtains evidence about material contingencies is
A. Examining documents in the client’s possession concerning contingencies.
B. Enquiring and discussing them with management.
C. Obtaining a response from the client’s lawyer to the client’s letter of enquiry.
D. Reading minutes of stockholders’ meeting

Answer 21

A major means by which an auditor obtains evidence about material contingencies is

C. Obtaining a response from the client’s lawyer to the client’s letter of enquiry.

Question 22

The refusal by a client’s lawyer to provide a representation about the legality of a act committed by the client is generally
A. Sufficient reason to issue an adverse opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditor’s report due to the attorney’s obligation of confidentiality.
D. Proper grounds to withdraw from the engagement

Answer 22

The refusal by a client’s lawyer to provide a representation about the legality of a act committed by the client is generally

B. Considered to be a scope limitation.

Question 23

Which of the following representations would be made by the client in writing?
A. Losses from sales commitments.
B. Unasserted claims and assessments.
C. That all transactions have been recorded.
D. Noncompliance with contractual agreements

Answer 23

Which of the following representations would be made by the client in writing?

C. That all transactions have been recorded.

Question 24

Which of the following items would appear in a management letter of representation?
A. That a physical inventory was taken, and properly valued.
B. That the control systems are operating effectively.
C. That management has adequate insurance to ensure its ongoing operations.
D. That all financial records and related data were made available to the auditors

Answer 24

Which of the following items would appear in a management letter of representation?

D. That all financial records and related data were made available to the auditors

Question 25

Having identified related party transactions, the auditor should:
A. Confirm the terms and amounts of the transactions with the related parties.
B. Inform the audit committee in writing.
C. Consult with a fraud specialist to consider extended procedures.
D. Consider including an emphasis of matter paragraph in the audit opinion.

Answer 25

Having identified related party transactions, the auditor should:

A. Confirm the terms and amounts of the transactions with the related parties.

Question 26

An auditor might is most likely to suspect the existence of undisclosed related parties by noticing:
A. Large sales transactions.
B. Abnormal long collection terms for a receivable.
C. A large number of sales to numbered corporations.
D. A significant increase in sales over the prior year

Answer 26

An auditor might is most likely to suspect the existence of undisclosed related parties by noticing:

B. Abnormal long collection terms for a receivable.

Question 27

For audit purposes, subsequent events are defined as events that occur after the
A. Balance sheet date.
B. Date of the audit report.
C. Balance sheet date but prior to the date of the audit report.
D. Date of the audit report and concern contingencies that are not reflected in the financial statements

Answer 27

For audit purposes, subsequent events are defined as events that occur after the

C. Balance sheet date but prior to the date of the audit report.

Question 28

Which of the following can illustrate a subsequent event that requires disclosure but not adjustment?
A. Settlement of long outstanding litigation.
B. Collection of a customer debt that had been written off.
C. Loss of inventory as a result of a flood occurring after year end.
D. An additional tax assessment on prior income

Answer 28

Which of the following can illustrate a subsequent event that requires disclosure but not adjustment?

C. Loss of inventory as a result of a flood occurring after year end.

Question 29

Auditors must complete phases of an audit after the balance sheet date. This subsequent period extends from the balance sheet date to the date of the
A. Audit report.
B. Final review of the audit working papers.
C. Public issuance of the financial statements.
D. Delivery of the audit report to the client.

Answer 29

Auditors must complete phases of an audit after the balance sheet date. This subsequent period extends from the balance sheet date to the date of the

A. Audit report.

Question 30

The Orange Corporation was audited for the year ended December 31, the fieldwork was completed on January 25, and the audit report was delivered on February 15. The auditor learned about a two-for-one stock split on February 1. How should the report be dated?
A. December 31 and January 25.
B. January 25 and February 1.
C. January 25 and February 15.
D. February 1 and February 15

Answer 30

The Orange Corporation was audited for the year ended December 31, the fieldwork was completed on January 25, and the audit report was delivered on February 15. The auditor learned about a two-for-one stock split on February 1. How should the report be dated?

B. January 25 and February 1.

Question 31

Auditors have a responsibility to perform audit procedures
A. After the report date.
B. Until the report date.
C. After the report issuance date.
D. After the report date for events between the report date and a later dual dated event

Answer 31

Auditors have a responsibility to perform audit procedures

B. Until the report date.

Question 32

Subsequent to the issuance of the audit 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
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 the auditor is no longer associated with the financial statements

Answer 32

Subsequent to the issuance of the audit 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

B. Request that management disclose the newly discovered information by issuing revised financial statements.

Question 33

Which of the following procedures should an auditor generally perform regarding
subsequent events?
A. Compare the latest available interim financial statements with the financial statements being reported on.
B. Send second requests to the client’s customers who failed to respond to initial accounts receivable confirmation requests.
C. Communicate material weaknesses in the internal control system to the client’s audit committee.
D. Review the cut-off bank statements for several months after the year end

Answer 33

Which of the following procedures should an auditor generally perform regarding
subsequent events?

A. Compare the latest available interim financial statements with the financial statements being reported on.

Question 34

Before adjusting entries proposed by the auditors are included in financial statements, they must be approved by the
A. Client's management.
B. Audit manager.
C. Engagement partner.
D. Cold review partner

Answer 34

Before adjusting entries proposed by the auditors are included in financial statements, they must be approved by the

A. Client’s management.

Question 35

A second-partner review of the working papers and financial statements is performed to ensure that the
A. To-do lists are reviewed and cleared.
B. Audit program procedures are signed off as evidence of completion.
C. Tick-mark notations are cleared.
D. Audit work meets the quality standards of the firm.

Answer 35

A second-partner review of the working papers and financial statements is performed to ensure that the

D. Audit work meets the quality standards of the firm.

Question 36

Management letters are a means of:
A. Reporting recommendations to the client.
B. Making the client aware of the firm’s consulting services.
C. Communicating matters related to control risk.
D. Identifying frauds and material misstatements

Answer 36

Management letters are a means of:

C. Communicating matters related to control risk.