Chapter 10 [Salosagcol]

Question 1

Which of the following is not among the characteristics of the procedures performed in completing the audit?

a. They are optional since they have only an indirect impact on the opinion to be expressed
b. They involve many subjective judgments by the auditor
c. They are performed after the financial statement date
d. They are usually performed by audit managers or other senior members of the audit team who have extensive audit experience with the client

Answer 1

a

Question 2

An auditor has the responsibility to actively search for subsequent events that occur subsequent to

a. Financial statement date
b. Date of the auditor’s report
c. Financial statement date, but prior to the audit report
d. Date of the approval of the financial statements

Answer 2

c

Question 3

“Subsequent events” for reporting purposes are events which occur subsequent to the

a. Financial statement date
b. Date of the auditor’s report
c. Financial statement date, but prior to the auditor’s report
d. Date of the auditor’s report and concern contingencies which are not reflected in the financial statements

Answer 3

c

Question 4

When completing the audit, the auditor performs procedures designed to identify subsequent events that may require adjustment of, or disclosure in the financial statements. Accordingly,

a. Those that provide evidence about conditions that existed at period end; Will require adjustment; Those that are indicative of conditions that arose subsequent to the period end: Will require adjustment
b. Those that provide evidence about conditions that existed at period end; Will require adjustment; Those that are indicative of conditions that arose subsequent to the period end: Will require disclosure
c. Those that provide evidence about conditions that existed at period end; Will require disclosure; Those that are indicative of conditions that arose subsequent to the period end: Will require disclosure
d. Those that provide evidence about conditions that existed at period end; Will require disclosure; Those that are indicative of conditions that arose subsequent to the period end: Will require adjustment

Answer 4

b

Question 5

The auditor has completed his assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to

a. Adjust the financial statements for the year under audit
b. Disclose in the notes to financial statement the amount of the adjustment
c. Duly note in the audit workpapers the next year’s financial statements need to be adjusted
d. Make no adjustment of the financial statements for the year under audit

Answer 5

a

Question 6

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 audited
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 structure to the client’s audit committee
d. Review the cut-off bank statements for several months after the year-end

Answer 6

a

Question 7

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

a. Recomputing a sample of large-peso transactions occurring after year-end for arithmetic accuracy
b. Investigating changes in stockholder’s equity occurring after year-end
c. Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year-end
d. Confirming bank accounts established after year-end

Answer 7

c

Question 8

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?

a. Reconcile bank activity for the month after the financial statement date with cash activity reflected in the accounting records
b. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date
c. Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold
d. Reading minutes of directors and stockholders’ meetings

Answer 8

d

Question 9

Phil, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with financial reporting standards. Which one of the following procedures would be least appropriate for this purpose?

a. Confirm as of the completion of field work, accounts receivable which have increased significantly from the year-end date
b. Read the minutes of the BOD
c. Inquire of management concerning events which may have occurred
d. Obtain a lawyer’s letter as of the completion of the field work

Answer 9

a

Question 10

The procedures to identify events that may require adjustment of, or disclosure in, the financial statements would be performed as near as practicable to the date of the auditor’s report. These procedures would ordinarily include the following except

a. Reviewing procedures management has established to ensure that subsequent events are identified
b. Reading minutes of the meetings of shareholders, the board of directors, and audit and executive committee held after period end and inquiring about matters discussed at meetings for which minutes are not yet available
c. Testing the effectiveness of those internal control policies and procedures that may have significantly changed in the subsequent period
d. Inquiring or extending previous oral or written inquiries, of the entity’s lawyers concerning litigation and claims

Answer 10

c

Question 11

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?

a. Sale of a major subsidiary
b. Adoption of accelerated depreciation methods
c. Write-off of a substantial portion of inventory as obsolete
d. Collection of the accounts receivable existing at December 31

Answer 11

c

Question 12

Which of the following material events occurring subsequent to the financial statement date would require an adjustment to the financial statements before they are issued?

a. Sale of a long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, in excess of the recorded liability

Answer 12

d

Question 13

Which of the following events in the subsequent period will require disclosure in the notes to the financial statements?

a. Realization of recorded year-end receivables at a different amount than recorded
b. Settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded
c. Purchase of a machine
d. Purchase of a business

Answer 13

d

Question 14

A major customer of an audit client suffers a fire just prior to the completion of the year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should

a. Advise management to disclose the event in notes to the financial statements
b. Disclose the event in the auditor’s report
c. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known
d. Advise management to adjust the financial statements

Answer 14

a

Question 15

Which of the following events will be least likely to result in an adjustment to the financial statements?

a. Culmination of events affecting the realization of accounts receivable owned as of the financial statement date
b. Culmination of events affecting the realization of inventories owned as of the financial statement date
c. Material changes in the settlement of liabilities which were estimated as of the financial statement date
d. Material changes in the quotes market prices of listed investment securities since the financial statement date

Answer 15

d

Question 16

Whenever subsequent event are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the financial statements date and those that come into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation

a. Took place before year-end
b. Did not take place until after year-end
c. Occurred both before and after year-end
d. Are reimbursable through insurance policies

Answer 16

b

Question 17

An auditor completed field work on February 10 20x2 for a December 3, 20x1 year-end client. A significant subsequent event occurred on February 22, 20x2. In this case, which of the following report dates would not be appropriate?

a. February 10, 20x2
b. February 10, 20x2, except Note 1, February 22, 20x2
c. February 22, 20x2
d. December 31, 20x1

Answer 17

d

Question 18

The practice of dual dating is associated with

a. Subsequent events between the financial statement date and the report date
b. Subsequent events between the financial statement date and the issuance of the report
c. Subsequent events between the report date and the issuance of the report
d. The discovery of omitted procedures

Answer 18

c

Question 19

If an auditor dates the auditor’s report on financial statements for the year ended December 31, 20x1, as of February 10, 20x2, except for Note 5, as to which the date is March 3, 20x2, the auditor is taking responsibility for

a. All subsequent events occurring through March 3, 20x2
b. All subsequent events occurring through February 10, 20x2,
c. All subsequent events occurring through February 10, 20x2, and the specific subsequent event referred to in Note 5 through March 3, 20x2
d. Only the specific subsequent event referred to in Note 5 through March 3, 20x2

Answer 19

c

Question 20

The practice of dual dating applies to

a. All types of subsequent events
b. Subsequent events that require disclosure
c. Subsequent events that occur before the date of the auditor’s report
d. Subsequent events that occur after the financial statements are issued

Answer 20

b

Question 21

The auditor’s decision concerning whether or not to dual date an audit report is primarily based on the auditor’s decision to

a. Extend appropriate audit procedures
b. Assume responsibility for events after the date of the auditor’s report
c. Assume responsibility for event from fiscal year end to the date of the audit report
d. Roll the dice and hope for a successful outcome

Answer 21

a

Question 22

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

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

Answer 22

a

Question 23

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?

a. Reconcile bank activity for a month after the financial statement date with cash activity reflected in the accounting records
b. Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or loss contingencies
c. Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold
d. Examine on a test basis the purchase invoices, and receiving reports for several days after the inventory dateTh

Answer 23

b

Question 24

The primary source of information about litigation, claims, and assessments is obtained by auditors from the

a. Client’s lawyers
b. Client’s management
c. Client’s previous auditor
d. All of the above

Answer 24

b

The events or transactions that should be considered in financial accounting or the matters of litigations, claims, and assessments are considered as the matters which come within the direct knowledge and control of the management.

Question 25

When obtaining evidence regarding litigation against a client, the CPA would be least interested in determining

a. An estimate of when the matter will be resolved
b. The period in which the underlying cause of the litigation occurred
c. The probability of an unfavorable outcome
d. The estimate of the potential loss

Answer 25

a

Question 26

The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is

a. Letter of audit inquiry to the client’s lawyer
b. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation
c. Confirmation of claims and assessments from the other parties to the litigation
d. Confirmation of claims and assessments from an officer of the court presiding over the litigation

Answer 26

a

Question 27

An auditor should obtain evidential matter relevant to all of the following factors concerning the third-party litigation against a client, except the

a. Period in which the underlying cause for legal action occurred
b. Probability of an unfavorable outcome
c. Jurisdiction in which the matter will be resolved
d. Existence of a situation indicating an uncertainty as to possible loss

Answer 27

c

Question 28

If a potential loss on a contingent liability is remote, the liability usually is

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

Answer 28

b

Question 29

An auditor will ordinarily examine invoices from lawyers primarily in order to

a. Substantiate accruals
b. Assess the legal ramifications of the litigation in progress
c. Estimate the peso amount of contingent liabilities
d. Identify possible litigations, claims, and assessments

Answer 29

d

Question 30

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

a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements

Answer 30

b

Question 31

The primary reason an auditor requests letters of inquiry to be sent to a client’s attorney is to provide the auditor with

a. A description and evaluation of litigations, claims, and assessments that existed at the date of the balance sheet
b. An expert opinion as to whether a loss is possible, probable or remote
c. The opportunity to examine the documentation concerning litigations, claims, and assessments
d. Corroboration of the information furnished by management concerning litigations, claims, and assessments

Answer 31

d

Question 32

The refusal of a client’s attorney to provide a representation on the legality of a particular act committed by the client is generally

a. Sufficient reason to issue a “subject to” qualified opinion
b. Considered to be a scope limitation
c. Insufficient reason to modify the auditor’s report because of the attorney’s obligation of confidentiality
d. Proper grounds to withdraw from the engagement without further consideration

Answer 32

b

Question 33

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. Management letter
b. Letter of inquiry
c. Letters testamentary
d. Written management representation

Answer 33

d

Question 34

Which of the following statements about a written representation is not correct?

a. It is optional
b. It is addressed to the auditor
c. It confirms oral representations made by the management
d. It’s date normally coincides with the date of the auditor’s report

Answer 34

a

Question 35

Which of the following is not a reason why the auditor requests that the client provide a written representation?

a. Professional auditing standards require the auditor to obtain written representation
b. It stresses upon management its responsibility for the preparation and fair presentation of the financial statements
c. It provides written documentation of the oral responses already received to inquiries of management
d. It provides written documentation, which is a higher quality of evidence than management’s oral responses to inquiries

Answer 35

d

Question 36

Written representation is used by the auditor to

a. Reduce the scope of the auditor’s physical inventory work but not the other inventory audit work that is normally performed
b. Confirm in writing the valuation basis used by the client to value the inventory at the lower of cost or market
c. Lessen the auditor’s responsibility for the fair presentation of balance sheet inventories
d. Remind management that the primary responsibility for the overall fairness of the financial statements rests with management and not with the auditor

Answer 36

d

Question 37

When considering the use of the management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representations

a. Complement, but do not replace, substantive tests designed to support the assertions
b. Constitute sufficient evidence to support the assertion when considered in combination with a sufficiently low assessed level of control risk
c. Are not part of the evidence considered to support the assertion
d. Replace a low assessed level of control risk as evidence to support the assertion

Answer 37

a

Question 38

Which of the following would the auditor expect to find in the client’s management representation letter?

a. Management’s recommendations for internal control effectiveness improvements
b. Management’s plans for improving product quality
c. Management’s compliance with contractual arrangements that impact the financial statements
d. Management’s goals for improving earnings per share

Answer 38

c

Question 39

A purpose of a management representation letter is to reduce

a. Audit risk to an aggregate level of misstatement that could be considered material
b. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on
c. The possibility of misunderstanding concerning the management’s responsibility for the financial statements
d. The scope of an auditor’s procedures concerning related party transactions and subsequent events

Answer 39

c

Question 40

A representation letter issued by a client

a. Is essential for the preparation of the audit program
b. Is a substitute for testing
c. Does not reduce the auditor’s responsibility
d. Reduces the auditor’s responsibility only to the extend that it is relied upon

Answer 40

c

Question 41

An auditor must obtain written management representation that normally should by signed by

a. The president and the chairperson of the board
b. The treasurer and the internal auditor
c. The chief executive officer and the chief financial officer
d. The corporate counsel and the audit committee chairperson

Answer 41

c

Question 42

An auditor must obtain written client representations that might be signed by all but which of the following?

a. Treasurer
b. Chief financial officer
c. Vice president of operations
d. Chief executive officer

Answer 42

c

Question 43

The date of the management representation letter should coincide with the date of the

a. Financial statements
b. Latest interim financial statements
c. Auditor’s report
d. Latest related party transaction

Answer 43

c

Question 44

A client representation letter is

a. Prepared on the CPA’s letterhead
b. Addressed to the client
c. Signed by high-level officials
d. Dated as of the client’s year end

Answer 44

c

Question 45

Which of the following would the auditor find most useful in relation to its previous audit procedures from the client representation letter?

a. To impress upon the audit firm its responsibility for the audit
b. To impress upon management its responsibility for the financial statements
c. To remind management of potential misstatements or omissions in the financial statements
d. To document the responses from management to inquiries about various aspects of the audit

Answer 45

b

Question 46

Management’s refusal to furnish a written representation letter on a matter which the auditor considers essential constitutes

a. Prima facie evidence that the financial statements are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unmodified opinion
d. A scope limitation sufficient to preclude an unmodified opinion

Answer 46

d

Question 47

If management refuses to furnish certain written representations that the auditor believes are essential, which of the following is appropriate?

a. The auditor can rely on oral evidence relating to the matter as a basis for an unmodified opinion
b. The client’s refusal does not constitute a scope limitation that may lead to a modification of the opinion
c. The client’s refusal may have an effect on the auditor’s ability to rely on other representations of management
d. The auditor should express an adverse opinion because of management’s refusal

Answer 47

c

Question 48

Which of the following auditing procedures is ordinarily performed last?

a. Reading minutes of the board of directors’ meetings
b. Confirming accounts receivable
c. Obtaining a client representation letter
d. Testing the purchasing function

Answer 48

c

Question 49

When an audit is made in accordance with the Philippine Standards on Auditing, the auditor should always

a. Document the understanding of the client’s internal control and the basis for all conclusions
b. About the assessed level of control risk for financial statement assertions
c. Employ analytical procedures as substantive tests to obtain evidence about specific assertions related to account balances
d. Obtain written representations from management
e. Observe the taking of physical inventory on the financial statement date

Answer 49

d

Question 50

PSA 570 requires the auditor to evaluate whether there is substantial doubt about a client’s ability to continue as a going concern for at least

a. One quarter from the financial statement date
b. One quarter from the date of the auditor’s report
c. One year from the financial statement date
d. One year from the date of the auditor’s report date

Answer 50

c

Question 51

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

a. Review compliance with the terms of debt agreeements
b. Confirmation of accounts receivable from principal customers
c. Reconciliation of interest expense with debt outstanding
d. Confirmation of bank balances

Answer 51

a

Question 52

Which of the following conditions or events most likely would cause an auditor to have significant doubt about an entity’s ability to continue as a going concern?

a. Cash flow from operating activities are negative
b. Research and development projects are postponed
c. Significant related party transactions are pervasive
d. Stock dividends replace annual cash dividends

Answer 52

a

Question 53

If, on the basis of additional procedures carried out and the information obtained, including the effect of mitigating circumstances, the auditor’s judgment is that the entity will not be able to continue as a going concern, the financial statements should be prepared using an appropriate basis; otherwise the auditor will issue

a. Disclaimer of opinion
b. Qualified opinion
c. Adverse opinion
d. Unmodified opinion with a separate going concern section

Answer 53

c

Question 54

Which of the following may not cast significant doubt about the going concern assumption of an entity?

a. The entity heavily used long-term capital in financing its investment in permanent assets
b. The entity fails to meet capital and other statutory requirements
c. There is pending legal or regulatory proceeding against the entity that may, if successful, result in claims that are unlikely to be satisfied
d. There was a change in legislation or government policy expected to adversely affect the entity

Answer 54

a

Question 55

Which of the following statements is not correct concerning the auditor’s responsibility about management’s use of the going concern assumption?

a. The auditor should evaluate management’s assertion of the entity’s ability to continue as a going concern
b. The auditor should inquire of management as to its knowledge of events or conditions beyond the period of assessment used by management that may cast significant doubt on the entity’s ability to continue as a going concern
c. The auditor does not have a responsibility to design procedures other than inquiry of management to tests for indication of events or conditions which cast significant doubt on the entity’s ability to continue as a going concern beyond the period assessed by management
d. The absence of any reference to going concern uncertainty in the auditor’s report can be viewed as a guarantee as to the entity’s ability to continue as a going concern

Answer 55

d

Question 56

When conditions and events have been identified which may cast significant doubt on the entity’s ability to continue as a going concern, the auditor should consider performing the following procedures except

a. Review management’s plans for future actions based on going concern assessment
b. Gather sufficient appropriate evidence to confirm or dispel whether or not a material uncertainty such as considering the effect of management plans and other mitigating factors
c. Seek written representations from management regarding its plans for future actions
d. Issue a report that contains a disclaimer of opinion

Answer 56

d

Question 57

When a question arises about an entity’s continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity’s means for maintaining adequate cash flows. An example of such factor is the

a. Possibility of purchasing certain assets rather than leasing them
b. Capability of extending the due dates of existing debt
c. Appropriateness of changing depreciation methods from double declining to straight-line
d. Marketability of property and equipment that management plans to keep

Answer 57

b

Question 58

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity’s ability to continue as a going concern would most likely be mitigated by evidence relating to the

a. Ability to expand operations into new product lines in the future
b. Feasibility of plans to purchase leased equipment at less than market value
c. Marketability of assets that management plans to sell
d. Committed arrangements to convert preferred stock to long-term debt

Answer 58

c

Question 59

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

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

Answer 59

b

Question 60

Which of the following conditions or events most likely would cause an auditor to have substantial doubts about an entity’s ability to continue as a going concern?

a. Significant related party transactions are pervasive
b. Usual trade credit from suppliers is denied
c. Arrearages in preferred stock dividends are paid
d. Restrictions on the disposal of principal assets are present

Answer 60

b

Question 61

The purpose of analytical procedures at the completion of the audit includes all of the following except

a. Revising the auditplan
b. Considering the overall reasonableness of the financial statements
c. Reviewing adequacy of evidence gathered to investigate unusual fluctuations
d. Recalculating some of the ratios examined during audit planning

Answer 61

a

Question 62

Analytical procedures in the overall review are usually

a. Applied to every item on the financial statements
b. Performed by the partner or manager on the engagement
c. Based on the financial statement data before all audit adjustments and reclassifications have been recognized
d. Performed only when material fraud is expected

Answer 62

b

Question 63

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

a. Internal control activities are not operating effectively
b. Additional tests of details are required
c. Irregularities exist among the relevant account balances
d. Communication with the audit committee should be revised

Answer 63

b

Question 64

Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In this case, the auditor must

a. Issue either a qualified or an adverse opinion
b. Issue a disclaimer
c. Issue either a qualified opinion or disclaimer of opinion
d. Design other appropriate audit procedures to determine if such errors do exist

Answer 64

d

Question 65

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 test 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 65

a

Question 66

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

a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be tantamount to a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements

Answer 66

b

Question 67

If the results of the audit procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material and the management refuses to adjust the financial statements, the auditor’s report should be modified to include

a. An unmodified opinion with emphasis of matter paragraph
b. A disclaimer of opinion
c. Either qualified or disclaimer of opinion
d. Either qualified or adverse opinion

Answer 67

d

Question 68

When the auditor determines that detection risk regarding a financial statement assertion for a material account balance or a class of transactions cannot be reduced to an acceptable level, the auditor’s report should express

a. Either qualified or adverse opinion
b. Either qualified or disclaimer of opinion
c. An unmodified opinion with emphasis of a matter paragraph
d. A negative assurance

Answer 68

b

Question 69

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

a. Information, which existed at the report date and may affect the report, comes to the auditor’s attention
b. Management of the entity requests the auditor to reissue the auditor’s report
c. Information about an event that occurred after the end of the fieldwork comes to the auditor’s attention
d. Final determination or resolutions are made of contingencies that had been disclosed in the financial statements

Answer 69

a

Question 70

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 discovery of information regarding the contingency that existed before the financial statements were issued
c. The entity’s sale of subsidiary that accounts for 30% of the entity’s consolidated sales
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report

Answer 70

b

Question 71

When an investigation of the discovery of facts existing at the report date confirms the existence of the fact and the auditor believes the information is important to those relying or likely to rely on the financial statements, the auditor should immediately

a. Take steps to prevent future reliance on the audit report
b. Notify the SEC or other regulatory agency
c. Resign from the engagement
d. Take no action since the auditor is not responsible for such matters

Answer 71

a

Question 72

Soon after Kyles’ audit report was issued, Kyle learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statements. Kyle should

a. Plan to audit the transactions during the next engagement
b. Recall all copies of the audited financial statements
c. Determine whether the lack of disclosure would affect the auditor’s report
d. Ask the client to disclose the transactions in a subsequent interim statements

Answer 72

c

Question 73

Subsequent to the issuance of the auditor’s 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 next

a. Notify the board of directors that the auditor’s report must no longer be associated with the financial statements
b. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information
c. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements
d. Issue revised pro forma financial statements taking into consideration the newly discovered information

Answer 73

b

Question 74

When a CPA has concluded that action should be taken to prevent future reliance on his report, he should

a. Advise his client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements to persons who are known to be currently relying or who are likely to rely on the financial statements and the related auditor’s report
b. Recall the financial statements and issue revised statements and include an appropriate opinion
c. Advise the client and others not to rely on the financial statements and make appropriate disclosures of the corrections in the statements of a subsequent period
d. Recall the financial statements and issue a disclaimer of opinion which should generally be followed by revised statements and a qualified opinion

Answer 74

a

Question 75

After an audit report containing an unmodified opinion on a non-public client’s financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of the revenue and 25% of its net income. The auditor should

a. Determine whether the information is reliable and determined to be reliable request that revised financial statements be issued
b. Notify the entity that the auditor’s report may no longer be associated with the financial statements
c. Describe the effect of this subsequently discovered information in a communication with persons known to be relying on the financial statements
d. Take no action because the auditor has no obligation to make any further inquiries

Answer 75

d

Question 76

On February 25, a CPA issued an auditor’s report expressing an unmodified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible receivable as a result of the ongoing deterioration of the financial condition of the entity’s principal customer, which finally led to the customer’s bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA’s next course of action most likely would be to

a. Notify the entity’s creditors that the financial statements and the related auditor’s report should no longer be relied upon
b. Notify each member of the entity’s board of directors about management’s refusal to adjust the financial statements
c. Issue the revised financial statements and distribute them to each creditor known to be relying on the financial statements
d. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the financial statements

Answer 76

a

Question 77

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

a. Discovery of the inclusion of material nonexistent sales
b. Discovery of the failure to write off material obsolete inventory
c. Discovery of the omission of material footnote
d. Decrease in the value of investments

Answer 77

d

Question 78

When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should

a. Insist that the client issue revised financial statements
b. Inform the audit committee that the report cannot be relied upon
c. Take no action regarding the event
d. Inform the appropriate authorities that the report cannot be relied upon

Answer 78

c

Question 79

After issuing a report an auditor concludes that an auditing procedure considered necessary at the time of the examination was omitted from the examination. The auditor should first

a. Undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the auditor’s opinion
b. Assess the importance of omitted procedure to the auditor’s ability to support the opinion expressed on the financial statements
c. Notify the audit committee or the board of director’s that the auditor’s opinion can no longer be relied upon
d. Review the results of the other procedures that were applied to compensate for the one omitted or to make its omission less important

Answer 79

b

Question 80

An auditor concludes that the omission of a substantive procedure considered necessary at the time of the examination may impair the auditor’s present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if

a. The risk of adverse publicity or litigation is low
b. The results of other procedures that were applied tend to compensate for the procedure omitted
c. The auditor’s opinion was qualified because of a departure from PFRS
d. The results of the subsequent period’s test of controls make the omitted procedure less important

Answer 80

b

Question 81

An auditor concludes that a substantive auditing procedure considered necessary during the prior period’s audit was omitted. Which of the following factors would most likely cause the auditor to promptly apply the omitted procedure?

a. There are no alternative procedures available to provide the same evidence as the omitted procedure
b. The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion
c. The source documents needed to perform the omitted procedure are still available
d. The auditor’s opinion on the prior period’s financial statements was unmodified

Answer 81

b

Question 82

An auditor concludes that an audit procedure considered necessary at the time of the examination had been omitted. The auditor should assess the importance of the omitted procedure to the ability to support the previously expressed opinion. Which of the following would be least helpful in making that assessment?

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

Answer 82

a

Question 83

On March 15, 20x2, Clark, CPA, issued an unmodified opinion on a client’s audited financial statements for the year ended December 31, 20x1. On May 4, 20x2, Clark’s internal inspection program disclosed that engagement personnel failed to observe the client’s physical inventory. Omission of this procedure impairs Clark’s present ability to support the unmodified opinion. If the stockholders are currently relying on the opinion, Clark should first

a. Advise management to disclose to the stockholders that Clark’s unmodified opinion should not be relied upon
b. Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion
c. Reissue the auditor’s report and add an explanation paragraph describing the departure from PSA
d. Compensate for the omitted procedure by performing tests of control to reduce audit risk to a sufficiently low level

Answer 83

b

Question 84

The auditor is most likely to discover omitted audit procedures during

a. Preparation of the management letter
b. Follow-up procedures performed in compliance with generally accepted auditing standards
c. The conference held with the client prior to issuing the audit report
d. A post engagement review performed as part of the firm’s quality control inspection program

Answer 84

d