Chapter 10 Exam

Question 1

If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should

a. honor the confidentiality of the lawyer-client relationship.
b. disclose this fact in a note to the financial statements.
c. consider the refusal to be tantamount to a scope limitation.
d. seek to obtain the corroborating information from management.

Answer 1

C

Question 2

Which of the following is not an audit procedure that is commonly used to search for contingent liabilities?

a. Review the minutes of directors’ and stockholders’ meetings.
b. Analyze legal expense for the period under audit.
c. Review the current year’s tax return.
d. Inquiries of management (orally and in writing).

Answer 2

D

Question 3

Management’s refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion.

T or F?

Answer 3

TRUE

Question 4

If an omission of an important audit procedure is discovered, the auditor should immediately issue a disclaimer of opinion for the audit.

T or F?

Answer 4

FALSE

Question 5

The engagement quality review is a risk-based review.

T or F?

Answer 5

TRUE

Question 6

Analytical procedures may indicate that new controls need to be designed before completing the audit.

T or F?

Answer 6

FALSE

Question 7

Which of the following procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?

a. Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation.
b. Confirming with third parties the details of arrangements to maintain financial support.
c. Comparing the entity’s depreciation and asset capitalization policies to those of other entities in the industry.
d. Inspecting title documents to verify whether any assets are pledged as collateral.

Answer 7

B

Question 8

During the final review of working papers and financial statements, it is common to have the analytical procedures done in a firm by a

a. senior staff.
b. partner.
c. manager.
d. staff member.

Answer 8

B

Question 9

Refusal by a client to prepare and sign the representation letter would require a(n)

a. qualified opinion or disclaimer.
b. adverse opinion or a disclaimer.
c. qualified or an adverse opinion.
d. unqualified opinion with an explanatory paragraph.

Answer 9

A

Question 10

If an attorney refuses to provide the auditor with information that is within the attorney’s jurisdiction and may directly affect the fair presentation of financial statements about material existing lawsuits (asserted claims) or unasserted claims, the audit report would have to be

a. an adverse opinion.
b. a modified to reflect the lack of available evidence.
c. an unqualified opinion with an explanatory paragraph.
d. a qualified opinion.

Answer 10

B

Question 11

As part of a quality audit, the audit firm must have policies and procedures in place for conducting an engagement quality review of each audit before issuing the audit opinion for public companies.

T or F?

Answer 11

TRUE

Question 12

An additional procedure related to subsequent events is the reading of the meeting minutes for the board of directors meeting.

T or F?

Answer 12

TRUE

Question 13

Auditors should obtain a management representation letter at the end of each audit.

T or F?

Answer 13

TRUE

Question 14

Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events.

T or F?

Answer 14

TRUE

Question 15

At the completion of the audit, management is asked to, make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the

a. letter of representation.
b. letter of inquiry.
c. letters testamentary.
d. management letter.

Answer 15

A

Question 16

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that sufficient evidence has not been obtained to draw a conclusion about fairness of the client’s representations, there are two choices:

a. (1) obtain additional evidence, or (2) issue a qualified opinion or a disclaimer.
b. (1) issue a disclaimer, or (2) withdraw from the engagement.
c. (1) obtain additional information, or (2) issue an adverse opinion.
d. (1) issue a qualified opinion, or (2) issue a disclaimer.

Answer 16

A

Question 17

If the auditor becomes aware after the audited financial statements have been issued that some information included in the statements is materially misleading, the auditor’s first and most desirable approach is to

a. inform the Securities and Exchange Commission and other regulatory agencies.
b. inform the users of the misleading statements.
c. request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision.
d. do all three of the above.

Answer 17

C

Question 18

The audit documentation when performing an engagement quality review should include such information such as how much the firm paid for the review.

T or F?

Answer 18

FALSE

Question 19

The client’s fiscal period ends 12/31/13 and the auditor’s field work will be completed on 3/15/14. If contingent liabilities are verified separately by the auditor, rather than as an integral part of the various segments of the engagement, these tests for contingencies would be performed

a. well before the last few days of completing the engagement, between 2/15/14 and 3/1/14.
b. as early as possible, perhaps even with the interim work performed on 9/30/13.
c. close to the end of the field work as possible, but no earlier than 3/14/14 or 3/15/14.
d. shortly before year-end, between 12/15/13 and 12/31/13.

Answer 19

A

Question 20

If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report due to subsequent events after issuance of the audit report, the auditor should not try to obtain client cooperation, but should immediately notify any regulatory agency having jurisdiction over the client, such as the SEC, that the audit report should no longer be associated with the client’s financial statements.

T or F?

Answer 20

FALSE

Question 21

A management letter is not required.

T or F?

Answer 21

TRUE

Question 22

Auditing standard requires the auditor to evaluate whether there is a substantial doubt about a client’s ability to continue as a going concern for at least one year beyond the statement of financial position date. One of the most important types of evidence to assess the going concern question is

a. statistical sampling procedures.
b. confirmations of creditors.
c. analytical procedures.
d. inquiries of client and their legal counsel.

Answer 22

C

Question 23

An auditor ordinarily examines invoices from lawyers primarily in order to

a. assess the legal ramifications of litigation in progress.
b. estimate the peso amount of contingent liabilities.
c. substantiate accruals.
d. identify possible unasserted litigation, claims, and assessments.

Answer 23

D

Question 24

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless

a. final determination or resolution was made on matters which had resulted in a qualification in the auditor’s report.
b. material adverse events occur after the date of the auditor’s report.
c. final determination or resolution was made of a contingency which had been disclosed in the financial statements.
d. new information comes to the auditor’s attention concerning an event which occurred prior to the date of the auditor’s report which may have affected the auditor’s report.

Answer 24

D

Question 25

Which of the following is a required condition for a contingent liability to exist?

a. The amount of the future payment is known.
b. There is a potential liability to an employee of the client.
c. The liability resulted from an existing condition.
d. The outcome has been resolved by a current event.

Answer 25

C

Question 26

After the auditor completes the current audit, an issue of importance for subsequent year audits is mandatory partner rotation.

T or F?

Answer 26

TRUE

Question 27

If the amount of a probable loss on a contingent liability cannot be reasonably estimated, the liability should be

a. accrued and indicated in the body of the financial statements.
b. disclosed in the auditor’s report but not disclosed on the financial statements.
c. neither accrued nor disclosed in footnotes.
d. disclosed in footnotes, but not accrued.

Answer 27

D

Question 28

The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures are in category 2?

a. Test the collectibility of accounts receivable by reviewing subsequent period cash receipts.
b. Correspond with attorneys.
c. Subsequent-period sales and purchases transactions are examined to determine whether the cutoff is accurate.
d. Compare the subsequent period purchase price of inventory with the recorded cost as a test of lower-of-costor-market valuation.

Answer 28

B

Question 29

The auditor generally reports things that management could do better in a management letter as a constructive part of the audit.

T or F?

Answer 29

TRUE

Question 30

If the auditor becomes aware after the audited financial statements have been released that some information included in the statements is materially misleading, he or she has

a. no obligation to disclose it since the he or she acted in good faith and without negligence in arriving at the
audit opinion.
b. an obligation to inform all users who are relying on the financial statements.
c. an obligation to inform the board of directors of the misleading statements.
d. an obligation to make certain that users who are relying on the financial statements are informed.

Answer 30

D

Question 31

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

a. A technological development that could affect the entity’s future ability to continue as a going concern.
b. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
c. The discovery of information regarding a contingency that existed before the financial statements were issued.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report.

Answer 31

C

Question 32

A client acquired 25 percent of its outstanding capital stock after year-end and prior to completion of the auditor’s field work. The auditor should

a. issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
b. advise management to adjust the statement of financial position to reflect the acquisition.
c. advise management to disclose the acquisition in the notes to the financial statements.
d. disclose the acquisition in the opinion paragraph of the auditor’s report.

Answer 32

C

Question 33

The auditor’s expectations in final analytical procedures must be more precise than those for substantive analytics.

T or F?

Answer 33

FALSE

Question 34

In addition to risk factors, an important consideration in client continuance decisions involves the audit firm’s growth strategy.

T or F?

Answer 34

TRUE

Question 35

Which of the following items would ordinarily not be included in the standard letter of confirmation from the client’s attorney?

a. A request that the attorney furnish an estimate of the amount or range of the potential loss.
b. A list, prepared by management, of pending threatened litigation of material amounts.
c. A request that the attorney confirm the amount of outstanding fees which client owes for legal services.
d. A request that the attorney furnish information or comment about the likelihood of an unfavorable outcome of litigation.

Answer 35

C

Question 36

The independent auditors for Lee, Inc., a publicly held company, concluded that their omission of an audit procedure considered necessary at the time of the examination impairs their present ability to support the previously expressed opinion. If they believe persons are currently relying on the report, they should promptly

a. undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the opinion.
b. notify the Securities and Exchange Commission that the previously expressed opinion is not to be relied on.
c. notify the stockholders currently relying on the report that the previously expressed opinion is not to be relied on.
d. notify the board of directors that the previously expressed opinion is not to be relied on.

Answer 36

A

Question 37

When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if this fact had been known at year-end.

T or F?

Answer 37

FALSE

Question 38

In a quality audit, the auditor will review management’s processes for certification to provide reasonable assurance that those processes are adequate and that they can be relied upon.

T or F?

Answer 38

TRUE

Question 39

If an audit firm accepts or continues to provide audits to a client firm with ineffective internal controls over financial reporting, the management representation letter will note that an adverse opinion will likely be issued.

T or F?

Answer 39

TRUE

Question 39

There are often a large number of immaterial errors discovered that do not require an adjustment at the time of they are found.

a. The auditor must combine the individually immaterial errors and evaluate whether the combined amount is material.
b. Since there are a large number of these, the auditor would recommend adjusting entries to client.
c. Since these items are individually immaterial, the auditor would not recommend adjusting entries to client.
d. The auditor would never combine these individually immaterial amounts because that would mix apples and
oranges.

Answer 39

A

Question 40

An auditor has concluded that an audit procedure considered necessary at the time of the examination was omitted. The auditor should assess the importance of the omitted procedure to his or her ability to support the previously expressed opinion. Which of the following would be least helpful in making that assessment?

a. A discussion of the circumstances with engagement personnel.
b. A reevaluation of the overall scope of the examination.
c. A review of the other audit procedures that were applied and that might compensate for the one omitted.
d. A discussion with the client about whether persons are relying on the auditor’s report.

Answer 40

D

Question 41

If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify the report, if necessary.

T or F?

Answer 41

TRUE

Question 42

If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify the report, if necessary.

T or F?

Answer 42

TRUE

Question 43

An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of field work but before the auditor’s report was issued. The auditor’s responsibility for events occurring subsequent to the completion of field work was

a. limited to include only events occurring before the date of the last subsequent event referenced.
b. extended to include all events occurring since the completion of field work.
c. limited to the specific event referenced.
d. extended to subsequent events occurring through the date of issuance of the report.

Answer 43

C

Question 44

If an experienced reviewer who was not a part of the audit team, but who has appropriate competence, independence, integrity, and objectivity, performs an independent quality review, this is referred to as a reoccurring partner review.

T or F?

Answer 44

FALSE

Question 45

Subsequent events that have no direct effect on the financial statements but for which disclosure is advisable requires consideration by management and evaluation by the auditor.

T or F?

Answer 45

TRUE

Question 46

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

a. final determination or resolutions are made of contingencies that had been disclosed in the financial statements.
b. information about an event that occurred after the end of field work comes to the auditor’s attention.
c. management of the entity requests the auditor to reissue the auditor’s report.
d. information that existed at the report date and may affect the report comes to the auditor’s attention.

Answer 46

D

Question 47

When management is unable to provide an explanation for a previously unrecognized risk identified through the analytical procedures, the auditor must issue an adverse opinion.

T or F?

Answer 47

FALSE

Question 48

Which of the following statements regarding the letter of representation is not correct?

a. It is addressed to the CPA firm.
b. It is signed by high-level corporate officials, usually the president and chief financial officer.
c. It is optional, not required, that the auditor obtain such a letter from management.
d. It is prepared on the client’s letterhead.

Answer 48

C

Question 49

A management letter is the same as a management representation letter.

T or F?

Answer 49

FALSE

Question 50

If a potential loss on a contingent liability is probable and the amount of the loss can be reasonably estimated, the liability should be

a. accrued and indicated in the body of the financial statements.
b. neither accrued nor disclosed in footnotes.
c. disclosed in footnotes, but not accrued.
d. disclosed in the auditor’s report but not disclosed on the financial statements.

Answer 50

A

Question 51

Typically, omissions may be discovered when audit documentation is reviewed as part of an external or internal review program.

T or F?

Answer 51

TRUE

Question 52

All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee.

T or F?

Answer 52

TRUE

Question 53

The audit committee is typically independent of the board of directors.

T or F?

Answer 53

FALSE

Question 54

It is important that the external auditor have a constructive and detailed dialogue with the audit committee on important aspects of the audit.

T or F?

Answer 54

TRUE

Question 55

The auditor’s responsibility for “reviewing the subsequent events” of a public company that is about to issue new securities is normally limited to the period of time

a. beginning with the start of the fiscal year under audit and ending with the date of the auditor’s report.
b. beginning with the start of the fiscal year under audit and ending with the statement of financial position date.
c. beginning with the statement of financial position date and ending with the date the registration statement becomes effective.
d. beginning with the statement of financial position date and ending with the date of the auditor’s report.

Answer 55

C

Question 56

Assume the following events occurred after the issuance of an auditor’s report. Which would be most likely to cause the auditor to make further inquiries about the previously issued financial statements?

a. The entity has resolved a contingency that was disclosed in its audited financial statements.
b. The entity has sold a subsidiary that accounted for 25 percent of its consolidated net income.
c. An uninsured natural disaster occurs, and it may affect the entity’s ability to continue as a going concern.
d. The auditor has learned new information concerning undisclosed lease transactions during the audited
period.

Answer 56

D

Question 57

Subsequent events that have a direct effect on the financial statements and require adjustment requires consideration by management and evaluation by the auditor.

T or F?

Answer 57

TRUE

Question 58

The following events all occurred after the statement of financial position date (6/30/13) but prior to the auditor’s report (9/10/13). Which one would require an adjustment to the account balances as of 6/30/13?

a. Inventory valued at P100,000 on 6/30/13 was destroyed in a fire on 8/1/13.
b. Client will market a new series of equity securities (P2 million of preferred stock) on 8/1/13.
c. Unused equipment on the books at 6/30/13 for P100,000 was disposed of 7/31/13 for P60,000.
d. Securities costing P30,000 held for temporary investment on 6/30/13 declined in value by one-third when the market took a plunge on 8/15/13.

Answer 58

C

Question 59

Which of the following is not one of the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit?

a. To evaluate the performance of inexperienced personnel.
b. To make sure that the audit meets the CPA firm’s standard of performance.
c. To evaluate the accuracy of the auditing firm’s time budget for this engagement.
d. To counteract the bias that frequently enters into the auditor’s judgment.

Answer 59

C