Chapter 24: Completing the Audit Flashcards
The auditor’s primary concern relative to presentation and disclosure-related objectives is
A) accuracy.
B) existence.
C) completeness.
D) occurrence.
C) completeness.
An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?
A) accuracy and valuation
B) occurrence and rights and obligations
C) completeness
D) classification and understandability
A) accuracy and valuation
Which of the following is an accurate statement regarding presentation and disclosure?
A) Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes.
B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events.
C) Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum.
D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
When an auditor reviews the financial statements to determine if assets are properly classified between current and noncurrent, he is satisfying the audit objective of occurrence and rights and obligations.
TRUE OR FALSE
FALSE
If a potential loss on a contingent liability is remote, the liability usually is
A) disclosed in footnotes, but not accrued.
B) neither accrued nor disclosed in footnotes.
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.
B) neither accrued nor disclosed in footnotes.
A commitment is best described as
A) an agreement to commit the firm to a set of fixed conditions in the future.
B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
D) a potential future obligation to an outside party for an as yet to be determined amount.
A) an agreement to commit the firm to a set of fixed conditions in the future.
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
A) auditors
B) legal counsel
C) management
D) management and the auditors
C) management
You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
A) accrue a $4 million liability.
B) disclose a liability and provide a range of outcomes.
C) since there is less than a 50% chance of occurrence, ignore.
D) since there is greater that a remote chance of occurrence, accrue the $10 million.
B) disclose a liability and provide a range of outcomes.
Audit procedures related to contingent liabilities are initially focused on
A) accuracy.
B) completeness.
C) existence.
D) occurrence.
D) occurrence.
With which of the following client personnel would it generally notbe appropriate to inquire about commitments or contingent liabilities?
A) controller
B) president
C) accounts receivable clerk
D) vice president of sales
C) accounts receivable clerk
Which of the following is notconsidered a commitment?
A) agreements to purchase raw materials
B) pension plans
C) agreements to lease facilities at set prices
D) Each of the above is a commitment.
D) Each of the above is a commitment.
One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold.
A) monetary
B) materiality
C) probability
D) analytical
C) probability
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is nottrue?
A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability.
B) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management’s attorneys.
D) The client’s attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
D) The client’s attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as
A) not likely, likely, or highly likely.
B) remote, reasonably possible, or probable.
C) slight, moderate, great.
D) remote, likely, possible.
B) remote, reasonably possible, or probable.
When dealing with contingencies,
A) all contingencies must be disclosed or footnoted.
B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment.
C) it is easy for the auditor to uncover contingencies without management’s cooperation.
D) the review for contingent liabilities is only performed at the beginning and the end of the audit.
B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment.
Which of the following is nota common audit procedure used to search for contingent liabilities?
A) examine letters of credit
B) examine payroll reports
C) review internal revenue agent reports
D) analyze legal expense
B) examine payroll reports
Contingent liability disclosure in the footnotes of the financial statements would normally be made when
A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
B) a reasonable estimation of the loss can be made, but the outcome is not probable.
C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made.
D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.
A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
Three conditions are required for a contingent liability to exist. Which of the following is notone of those conditions?
A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
B) The outcome must be resolved by a third-party.
C) There is uncertainty about the amount of the future payment or impairment.
D) The outcome will be resolved by some future event or events.
B) The outcome must be resolved by a third-party.
A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the potential loss would generally be required.
TRUE OR FALSE
TRUE
Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.
TRUE OR FALSE
TRUE
Many of the audit procedures for finding contingencies are usually performed as an integral part of various segments of the audit rather than as a separate activity near the end of the audit.
TRUE OR FALSE
TRUE
The probability threshold for dealing with uncertainty in loss contingencies uses the terms likely and unlikely.
TRUE OR FALSE
FALSE
The first stop in the audit of contingencies is to determine the amount of the contingency.
TRUE OR FALSE
FALSE
Auditors will generally send a standard inquiry to the client’s attorney letter to
A) only those attorneys who have devoted substantial time to client matters during the year.
B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
C) every attorney whose legal fees for the year exceed a materiality threshold.
D) only the attorney who represents the client in proceeding where the client is defendant.
B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client’s attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to
A) determine the range of probable loss for asserted claims.
B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
C) obtain an outside opinion of the probability of losses in determining accruals for contingencies.
D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.
B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
The standard inquiry to the client’s attorney should be prepared on
A) plain paper (no letterhead) and be unsigned.
B) lawyer’s stationery and signed by the lawyer.
C) auditor’s stationery and signed by an audit partner.
D) client’s letterhead and signed by a company official.
D) client’s letterhead and signed by a company official.
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n)
A) commitment.
B) unasserted claim.
C) pending litigation.
D) subsequent event.
B) unasserted claim.
Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of initiating action to corroborate such information?
A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
B) Request that client management send a standard inquiry to the client’s attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments.
C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
B) Request that client management send a standard inquiry to the client’s attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments.
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,
A) the attorney may face sanctions from the American Bar Association.
B) the auditors must modify their audit report to reflect the lack of available evidence.
C) the attorney can no longer represent the client.
D) the auditor must withdraw from the engagement.
B) the auditors must modify their audit report to reflect the lack of available evidence.
As directed by the Sarbanes-Oxley Act,
A) an attorney must report material violations of federal securities law to the public company’s chief legal counsel or chief executive officer.
B) attorneys cannot breach confidentiality rules even if a client is committing a crime or a fraud.
C) if the audit committee fails to remedy any material violations of the federal securities law, the attorney must report the violation to the SEC.
D) All of the above are required by Sarbanes-Oxley.
A) an attorney must report material violations of federal securities law to the public company’s chief legal counsel or chief executive officer.
When preparing a standard inquiry to the client’s attorney letter, the client’s letterhead should be used, and the letter should be signed by the client company’s officials.
TRUE OR FALSE
TRUE
In a standard inquiry to the client’s attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date.
TRUE OR FALSE
FALSE
If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation.
TRUE OR FALSE
TRUE
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for
A) contingent liabilities.
B) subsequent year’s transactions.
C) late unusual occurrences.
D) subsequent events.
D) subsequent events.
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should notbe incorporated directly into the statements if the conditions causing the change in valuation
A) took place before the balance sheet date.
B) did not take place until after the balance sheet date.
C) occurred both before and after the balance sheet date.
D) are reimbursable through insurance policies.
B) did not take place until after the balance sheet date.
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the
A) balance sheet date.
B) date of the auditor’s report.
C) balance sheet date, but prior to the audit report.
D) date of the management representation letter.
C) balance sheet date, but prior to the audit report.
Which of the following subsequent events is most likely to result in an adjustment to a company’s financial statements?
A) merger or acquisition activities
B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
C) issuance of common stock
D) an uninsured loss of inventories due to a fire
B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should
A) adjust the financial statements for the year under audit.
B) add a paragraph to the audit report.
C) advise the client to disclose the event in the notes to the financial statements.
D) advise the client to delay issuing the financial statements until the economic loss can be determined.
C) advise the client to disclose the event in the notes to the financial statements.
The auditor has completed her 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 that next year’s financial statements need to be adjusted.
D) make no adjustment of the financial statements for the year under audit.
A) adjust the financial statements for the year under audit.
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures 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 is in the first category?
A) Inquire of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1.
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
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 is in the second category?
A) Correspond with attorneys.
B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
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 cost or market valuation.
A) Correspond with attorneys.
