Ch 14 - Quiz Flashcards
If a nonissuer refuses to give permission to the auditor to communicate with its external legal counsel, then the auditor should modify which of the following?
A.) The opinion in the auditor’s report
B.) The audit plan
C.) The attorney’s letter of inquiry
D.) The management representation letter
A.) The opinion in the auditor’s report
Management’s refusal to cooperate with the auditor in obtaining a lawyer’s letter would be a scope limitation that would result in a modified opinion.
A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?
A.) The auditor and the client’s management.
B.) The lawyer and the auditor.
C.) The client’s management and the lawyer.
D.) The client’s audit committee and the lawyer.
A.) The auditor and the client’s management.
The client and the auditor should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.
Which of the following events that occurred after a client’s calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?
A.) New convertible bonds are issued to expand the company’s product line.
B.) A fixed asset used in operations is sold at a substantial profit.
C.) A loss is reported on uncollectible accounts of an acknowledged distressed customer.
D.) Negotiations have resulted in compensation adjustments for union employees retroactive to the fourth quarter.
A.) New convertible bonds are issued to expand the company’s product line.
GAAP requires that material changes in debt (or capital) structure during the subsequent events period be disclosed in the financial statements. Such changes would not require adjustment.
Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?
A.) Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible.
B.) The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.
C.) A reasonable estimate was determined for a liability incurred after the balance sheet date.
D.) The entity recorded the amount of an asset impaired as of the balance sheet date.
B.) The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.
Such a claim, where the material unfavorable outcome is probable and can be reasonably estimated, should be accrued.
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
A.) Report the matters to regulatory authorities.
B.) Consider the fraud a scope limitation and disclaim an opinion.
C.) Communicate the matter to those charged with governance.
D.) Immediately withdraw from the engagement.
C.) Communicate the matter to those charged with governance.
Any fraud involving senior management, whether material or not, should be reported to those charged with governance.
Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?
A.) Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements
B.) Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations
C.) Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified
D.) Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages
C.) Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified
AICPA Professional Standards indicate that the overall review might include reading the financial statements and considering whether the evidence gathered is adequate to address identified unusual or unexpected balances as well as unusual or unexpected balances or relationships that were not previously identified.
Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?
A.) The auditor should consider disclaiming an opinion due to a scope limitation.
B.) Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.
C.) The revision of materiality at the financial statement levels will not affect the planned nature and timing of audit procedures, only the extent of those procedures.
D.) The auditor is required to reperform audit procedures already completed on the audit using the revised materiality.
B.) Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.
AICPA Professional Standards (specifically, Materiality in Planning and Performing an Audit) state, “If the auditor concludes that a lower materiality than that initially determined for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, or disclosures) is appropriate, the auditor should determine whether it is necessary to revise performance materiality and whether the nature, timing, and extent of the further audit procedures remain appropriate” (AU-C 320.13). Accordingly, if the auditor revises the planned materiality level at the financial statement level, the auditor should consider whether the planned materiality level(s) for particular classes of transactions, account balances, or disclosures should be revised as well.
In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that
A.) Arises from a flaw in the accounting system.
B.) Arises from a routine calculation.
C.) Involves an estimate.
D.) Exists because of nonstatistical sampling performed by the auditor.
C.) Involves an estimate.
AICPA Professional Standards describe the term “judgmental misstatement” as follows: ”differences in estimates, such as a difference in a fair value estimate” (AU-C 450.A11).
Which of the following statements is correct about actions taken after the documentation completion date?
A.) The auditor must not make any deletions to audit documentation before the end of the specified retention period.
B.) An auditor must not make any amendments to audit documentation before the end of the specified retention period.
C.) An auditor must not make any changes to audit documentation before the end of the specified retention period.
D.) An auditor must not make any additions to audit documentation before the end of the specified retention period.
A.) The auditor must not make any deletions to audit documentation before the end of the specified retention period.
After the documentation completion date, the auditor is prohibited from deleting any of the existing audit documentation.
Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit?
A.) Management believes the company is the premier company in its industry regarding service to customers.
B.) Management plans to expand into international operations during the next few years.
C.) Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
D.) Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS).
C.) Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
A management representation letter routinely requires management to take responsibility for the design, implementation, and maintenance of programs and controls to detect fraud.
Which of the following statements is correct about an auditor’s required communication with an entity’s audit committee (or those charged with governance)?
A.) The auditor is required to inform the entity’s audit committee (or those charged with governance) about errors discovered by the auditor and subsequently corrected by management.
B.) Disagreements with management about the application of significant accounting principles are required to be communicated to the entity’s audit committee (or those charged with governance).
C.) All deficiencies or weaknesses in the internal control structure are required to be communicated to the audit committee.
D.) Any matters communicated to the entity’s audit committee (or those charged with governance) also are required to be communicated to the entity’s management.
B.) Disagreements with management about the application of significant accounting principles are required to be communicated to the entity’s audit committee (or those charged with governance).
The auditor is required to communicate disagreements with management to those charged with governance that arose during the audit about matters that are individually or in the aggregate significant to the financial statements or the auditor’s report.
Which of the following is an example of a subsequent event?
A.) A cybersecurity attack that occurred in the third quarter of the fiscal year.
B.) Legal action that was settled in the last month of the fiscal year.
C.) A major customer declaring bankruptcy two months before the client’s year-end.
D.) A bond issuance after the balance sheet date but prior to issuance of the financial statements.
D.) A bond issuance after the balance sheet date but prior to issuance of the financial statements.
All of the following are examples of qualitative characteristics of a misstatement except:
A.) changes a net loss to a net income for the period.
B.) exceeds the amount for performance materiality.
C.) affects compliance with debt covenants.
D.) affects management’s compensation for the period.
B.) exceeds the amount for performance materiality.
At the conclusion of the audit, the wrap-up process involves all of the following except:
A.) sending confirmations to financial institutions.
B.) review of proper and complete execution of planned audit procedures.
C.) revisiting assessments for materiality, control risk, and risk of fraud.
D.) determination that all necessary matters have been appropriately considered.
A.) sending confirmations to financial institutions.
The audit firm must retain the audit file of a public company client for:
A.) 6 years.
B.) 4 years.
C.) 7 years.
D.) 5 years.
C.) 7 years.
