Ch 11 HW

Question 1

1. A form of communication used by auditors to ensure that all significant matters have been disclosed to auditors during the engagement is a(n):
A. Written representations.
B. Confirmation letter.
C. Engagement letter.
D. Acceptance letter.

Answer 1

Written representations.

Question 2

2. Which of the following statements is most likely to be included in an attorney letter?
   A. “Certain representations in this letter are described as being limited to matters that are material.”
   B. “Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information.”
   C. “Our work enabled us to notice some actions that could enhance the profitability of the Company.”
   D. “If any unasserted claims or assessments are omitted from this disclosure, please provide this information directly to our
   auditors.”

Answer 2

“Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information.”

Question 3

3. The auditing standards regarding subsequently discovered facts refers to knowledge obtained after
   A. The date the fieldwork began.
   B. The date of the auditor’s report.
   C. The date interim audit work was complete.
   D. The date of the financial statements.

Answer 3

The date of the auditor’s report.

Question 4

4. Reviewing the latest interim financial statements is one method of identifying subsequent events.
   True
   False

Answer 4

True

Question 5

5. The engagement quality review of audit documentation by a different partner focuses on whether all appropriate steps in the audit were
   performed and whether the referencing among all audit documentation is clear.
   True
   False

Answer 5

False

Question 6

6. Which of the following normally occurs earliest in the audit examination?
   A. Preparation of the management letter.
   B. Review of audit documentation.
   C. Discovery of an omitted audit procedure.
   D. Dual dating the auditor’s report on the entity’s financial statements for subsequent events that exist at the date of the financial
   statements.

Answer 6

Review of audit documentation.

Question 7

7. Interim testing is ordinarily done prior to the date of the financial statements.
   True
   False

Answer 7

True

Question 8

8. Which of the following statements is not true with respect to written representations?
   A. They are dated the same date as the auditor’s reports.
   B. Auditors use them to corroborate information received during the audit from the client and its employees.
   C. They should address management’s responsibility for designing internal control to prevent and detect fraud.
   D. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer
   of opinion.

Answer 8

The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion

Question 9

9. Which of the following is ordinarily performed last in the audit examination?
   A. Securing a signed engagement letter from the client.
   B. Performing a review for subsequent events.
   C. Obtaining signed written representations.
   D. Performing tests of controls.

Answer 9

Obtaining signed written representations.

Question 10

10. The primary reason auditors request responses to attorney letters is to provide auditors
    A. Corroboration of the information furnished by management about litigation, claims, and assessments.
    B. The probable outcome of asserted claims and pending or threatened litigation.
    C. The attorney’s opinions of the client’s historical experiences in recent similar litigation.
    D. A description and evaluation of litigation, claims, and assessments that existed at the date of the financial statements.

Answer 10

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

Question 11

11. Written representations should be dated as of the date of the financial statements.
    True
    False

Answer 11

False

Question 12

12. The existence of “miscellaneous” revenue or expense accounts may signal the practice of earnings management.
    True
    False

Answer 12

True

Question 13

13. Which of the following is not ordinarily associated with the time period following the audit report release date?
A. Subsequently discovered facts.
B. Management letters.
C. Omitted audit procedures.
D. Roll-forward work.

Answer 13

Roll-forward work.

Question 14

14. It is ultimately the client’s responsibility for adjusting the financial statements for matters identified during the audit.
    True
    False

Answer 14

True

Question 15

15. Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
    A. Storm damage of $1 million to the entity’s buildings on March 1.
    B. Settlement of a damage lawsuit for a customer’s injury sustained February 15 for $10,000.
    C. Sale of an issue of new stock for $500,000 on January 30.
    D. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

Answer 15

Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

Question 16

16. Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
    A. Send confirmations to vendors with whom the client normally does business but for which no balance in accounts payable is
    noted.
    B. Confirm bank accounts established after the date of the financial statements.
    C. Recompute a sample of large-dollar transactions occurring after the date of the financial statements for arithmetic accuracy.
    D. Investigate changes in shareholders’ equity occurring after the date of the financial statements.

Answer 16

Investigate changes in shareholders’ equity occurring after the date of the financial statements.

Question 17

17. What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?
    A. Reviewing the response from the client’s lawyer to a letter of audit inquiry.
    B. Verifying attorney-client privilege through interviews.
    C. Examining legal invoices sent by the client’s attorney.
    D. Reviewing the written representation letter obtained from management.

Answer 17

Reviewing the response from the client’s lawyer to a letter of audit inquiry.

Question 18

18. If a necessary audit procedure has been omitted, auditors should first identify whether individuals are currently relying on the client’s financial
    statements and auditors’ reports.
    True
    False

Answer 18

True

Question 19

19. Roll-forward procedures are normally conducted prior to the date of the financial statements.
    True
    False

Answer 19

False

Question 20

20. Written representations should be signed by the chief executive officer, chief financial officer, or other executive-level client personnel.
    True
    False

Answer 20

True

Question 21

21. Auditors have a responsibility related to management’s disclosure of new information related to subsequent events until
    A. The following year’s date of the financial statements.
    B. The audit report release date.
    incorrect The date of the auditor’s report.
    D. The date of the financial statements.

Answer 21

The audit report release date.

Question 22

22. The scope of an audit is not restricted when an attorney letter limits the response to
    A. The probable outcome of asserted claims and pending or threatened litigation.
    B. The attorney’s opinion of the entity’s historical experience in recent similar litigation.
    C. Matters to which the attorney has given substantive attention in the form of legal representation.
    D. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.

Answer 22

Matters to which the attorney has given substantive attention in the form of legal representation.

Question 23

23. While useful, analytical procedures are not required near the end of the audit as a final review of financial statements.
    True
    False

Answer 23

False

Question 24

24. After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
    A. Engage another public accounting firm to conduct a quality assurance review.
    B. Perform the omitted procedure or an alternative procedure.
    C. Determine whether the omitted procedure is important in supporting the auditors’ opinion on the entity’s financial statements.
    D. Notify the board of directors and regulatory agencies that are currently relying on auditors’ reports.

Answer 24

Determine whether the omitted procedure is important in supporting the auditors’ opinion on the entity’s financial statements.

Question 25

25. A)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When: Acceptance Letter

Answer 25

From Client

To Auditor

Before Engagement

Question 26

25. B)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When: Attorney letter response

Answer 26

From attorney

To auditor

Near date of auditors report

Question 27

25. C)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When:

Communication with individuals charged with governance

Answer 27

From auditors

To individuals charged with governance (audit committee)

After Audit

Question 28

25. D)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When: Engagement letter

Answer 28

From Auditor

To Client

Before engagement

Question 29

25. E)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When:

Internal control deficiency communication

Answer 29

From auditors

To individuals charged with governance (audit committee)

Prior to audit report release date

Question 30

25. F)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When: Management letter

Answer 30

From auditors

To client

After audit

Question 31

25. G)
    For each of the following types of communications, indicate the party issuing or providing the communication, the party receiving the communication, and the time period during which the communication is typically issued. When addressing the time period for item (e), assume the entity is public.

From To When: Written representations

Answer 31

From Client

To Auditors

Date of auditors’ report

Question 32

26. For items included in the attorney letter, attorneys should always provide a dollar estimate of the amount of potential loss.
    True
    False

Answer 32

False

Question 33

27. If the client refuses to provide written representations, auditors should issue either a qualified opinion or adverse opinion, depending upon the
    importance of the omission.
    True
    False

Answer 33

False

Question 34

28. 
Which of the following is not required by generally accepted auditing standards?
A. Attorney letter.
B. Management letter.
C. Engagement letter.
D. Written representations.

Answer 34

Management letter.

Question 35

29. Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
    A. Review the cutoff bank statements for several months after the date of the financial statements.
    B. Compare the latest available interim financial statements with the financial statements being audited.
    C. Communicate material weaknesses in internal control to the client’s audit committee.
    D. Send second requests to the client’s customers who failed to respond to initial accounts receivable confirmation requests.

Answer 35

Compare the latest available interim financial statements with the financial statements being audited.

Question 36

30. Which of the following forms of communication ordinarily does not take place following completion of the audit examination?
    A. Internal control deficiency communications.
    B. Attorney letter.
    C. Management letter.
    D. Communications with individuals charged with governance.

Answer 36

Attorney letter.

Question 37

31. Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects. The suit
    was filed on November 10, 2014 and properly disclosed in Krenzel’s December 31, 2014 financial statements. Krenzel’s auditors completed
    their engagement and their report (along with Krenzel’s financial statements) were released on February 5, 2014. How would a settlement of
    this lawsuit on January 17, 2015 be properly reflected in Krenzel’s financial statements?
    A. Krenzel would provide a separate disclosure to persons known to be relying on its financial statements to describe the effects
    of this settlement.
    B. Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.
    C. Krenzel would prepare pro forma financial statements to reveal the effects of this settlement.
    D. The financial statements would not reflect the settlement of the lawsuit, since it occurred after the date of the financial
    statements.

Answer 37

Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.

Question 38

32. The attorney letter is ordinarily requested directly from the attorney by auditors.
    True
    False

Answer 38

False

Question 39

33. Which of these persons generally does not participate in writing the management letter?
    A. Client’s accounting and production managers.
    B. Public accounting firm’s consulting and tax experts.
    C. Client’s outside attorneys.
    D. Public accounting firm’s audit team on the engagement.

Answer 39

Client’s outside attorneys.

Question 40

34. Which of these substantive procedures is not used to obtain evidence about contingencies?
    A. Examining terms of sale in sales contracts.
    B. Obtaining a letter from the client’s attorney.
    C. Scanning expense accounts for credit entries.
    D. Reading the minutes of the board of directors’ meetings.

Answer 40

Scanning expense accounts for credit entries.

Question 41

35. Subsequent events may provide additional information about a condition that existed at the date of the financial statements.
    True
    False

Answer 41

True

Question 42

36. Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall’s report and XYZ’s financial statements were released on March 28, year 2. The written representations normally would be dated
A. March 28, year 2.
B. February 13, year 2.
C. February 17, year 2.
D. March 24, year 2.

Answer 42

March 24, year 2.

Question 43

37. Which of the following parties provides a review of audit documentation for the primary purpose of ensuring that the quality of the work and
    reporting is consistent with the quality standards of the public accounting firm?
    A. Engagement quality reviewer.
    B. Audit manager.
    C. Audit supervisor.
    D. Engagement partner.

Answer 43

Engagement quality reviewer.

Question 44

38. If the attorney’s views differ from information provided in the attorney letter, the attorney is not expected to provide additional explanation to
    auditors.
    True
    False

Answer 44

False

Question 45

39. Auditors’ initial source of information about litigation, claims, and assessments is the client’s attorney.
    True
    False

Answer 45

False

Question 46

40. Subsequently discovered facts are matters identified by auditors after the date of the financial statements but prior to the date of the auditors’
    report.
    True
    False

Answer 46

False

Question 47

41. Navarre, CPA has just issued his report on Big Blue’s financial statements. Following the audit report release date, he learned of an event that
    occurred after the date of the auditors’ report. What is Navarre’s most appropriate response?
    A. Withdraw his report on Big Blue’s financial statements and reissue the report following his substantive procedures.
    B. Inform users who are currently known to be relying on the financial statements of the nature of the event.
    C. Because the event occurred after the date of the auditors’ report, Navarre has no responsibility for the event.
    D. Perform the appropriate substantive procedures related to the event and dual date the audit report.

Answer 47

Because the event occurred after the date of the auditors’ report, Navarre has no responsibility for the event.

Question 48

42. Auditors’ communications with the individuals charged with governance of the client can be provided either during the audit or at the conclusion
    of the audit.
    True
    False

Answer 48

True

Question 49

43. Which of the following is not a subject that appears in written representations in the audit of both public and nonpublic entities?
    A. Management’s assessment of the effectiveness of its internal control over financial reporting.
    B. Information concerning fraud involving management.
    C. Availability of all financial records and related data.
    D. Management’s responsibility for the fair presentation of the financial statements.

Answer 49

Management’s assessment of the effectiveness of its internal control over financial reporting.

Question 50

44. Auditors are not responsible for evaluating the accuracy of management’s estimates, but the reasonableness of those estimates.
    True
    False

Answer 50

True

Question 51

45. A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2014. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity’s financial statements. Which of the following is the proper form?
    A. January 30, 2015, except as to Note X, which is dated February 5, 2015.
    B. December 31, 2014, except as to Note X, which is dated February 5, 2015.
    C. December 31, 2014, except as to Note X, which is dated January 30, 2015.
    D. February 5, 2015, except for the date of the auditor’s report, for which the date is January 30, 2015.

Answer 51

January 30, 2015, except as to Note X, which is dated February 5, 2015.

Question 52

46. A major objective of written representations is to
    A. Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory.
    B. Shift responsibility for financial statements from the management to auditors.
    C. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform.
    D. Impress on management its ultimate responsibility for the financial statements and disclosures.

Answer 52

Impress on management its ultimate responsibility for the financial statements and disclosures.

Question 53

47. Which of the following would ordinarily not be performed in the auditors’ examination of litigation, claims, and assessments?
    A. Confirm litigation, claims, and assessments with parties bringing suit or action against the client.
    B. Inquire of client management with respect to litigation, claims, and assessment.
    C. Examine documentary evidence maintained by the client with respect to litigation, claims, and assessments.
    D. Read minutes of meetings of stockholders, directors, and appropriate committees.

Answer 53

Confirm litigation, claims, and assessments with parties bringing suit or action against the client.

Question 54

48. One purpose of obtaining written representations is for management to acknowledge their responsibility for the fairness of the financial
    statements.
    True
    False

Answer 54

True

Question 55

49. Which of the following best describes the role of analytical procedures near the end of the audit engagement?
    A. To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other
    substantive procedures.
    B. To gather evidence to support one or more assertion(s) related to the account balance or class of transactions.
    C. To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
    D. To identify possible deficiencies in the client’s internal control over financial reporting.

Answer 55

To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.

Question 56

50. Which of the following forms of communication serves as a critical part of auditors' examination of litigation, claims, and assessments?
A. Engagement letter.
B. Written representations.
C. Management letter.
D. Attorney letter.

Answer 56

Attorney letter.

Question 57

51. Ambrose is auditing the financial statements of Mays (dated December 31, 2014). The date of the auditor’s report is February 17, 2015, and the audit report release date is February 20, 2015. For which of the following matters would Ambrose have the least responsibility?
    A. A customer’s deteriorating financial condition that was identified on February 19, 2015.
    B. The obsolescence of inventory held on December 31, 2014, that was identified on January 20, 2015.
    C. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2015.
    D. A merger that was announced by Mays and known by Ambrose on February 12, 2015.

Answer 57

A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2015.