Chapter 24: Completing the Audit

Question 1

The auditor’s primary concern relative to presentation and disclosure-related objectives is

A) accuracy.

B) existence.

C) completeness.

D) occurrence.

Answer 1

C) completeness.

Question 2

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

Answer 2

A) accuracy and valuation

Question 3

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.

Answer 3

D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.

Question 4

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

Answer 4

FALSE

Question 5

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.

Answer 5

B) neither accrued nor disclosed in footnotes.

Question 6

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.

Answer 6

A) an agreement to commit the firm to a set of fixed conditions in the future.

Question 7

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

Answer 7

C) management

Question 8

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.

Answer 8

B) disclose a liability and provide a range of outcomes.

Question 9

Audit procedures related to contingent liabilities are initially focused on

A) accuracy.

B) completeness.

C) existence.

D) occurrence.

Answer 9

D) occurrence.

Question 10

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

Answer 10

C) accounts receivable clerk

Question 11

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.

Answer 11

D) Each of the above is a commitment.

Question 12

One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold.

A) monetary

B) materiality

C) probability

D) analytical

Answer 12

C) probability

Question 13

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.

Answer 13

D) The client’s attorneys must remain independent when evaluating the likelihood of losing the lawsuit.

Question 14

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.

Answer 14

B) remote, reasonably possible, or probable.

Question 15

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.

Answer 15

B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment.

Question 16

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

Answer 16

B) examine payroll reports

Question 17

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.

Answer 17

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.

Question 18

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.

Answer 18

B) The outcome must be resolved by a third-party.

Question 19

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

Answer 19

TRUE

Question 20

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

Answer 20

TRUE

Question 21

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

Answer 21

TRUE

Question 22

The probability threshold for dealing with uncertainty in loss contingencies uses the terms likely and unlikely.

TRUE OR FALSE

Answer 22

FALSE

Question 23

The first stop in the audit of contingencies is to determine the amount of the contingency.

TRUE OR FALSE

Answer 23

FALSE

Question 24

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.

Answer 24

B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.

Question 25

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.

Answer 25

B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.

Question 26

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.

Answer 26

D) client's letterhead and signed by a company official.

Question 27

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.

Answer 27

B) unasserted claim.

Question 28

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.

Answer 28

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.

Question 29

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.

Answer 29

B) the auditors must modify their audit report to reflect the lack of available evidence.

Question 30

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.

Answer 30

A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer.

Question 31

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

Answer 31

TRUE

Question 32

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

Answer 32

FALSE

Question 33

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

Answer 33

TRUE

Question 34

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.

Answer 34

D) subsequent events.

Question 35

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.

Answer 35

B) did not take place until after the balance sheet date.

Question 36

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.

Answer 36

C) balance sheet date, but prior to the audit report.

Question 37

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

Answer 37

B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance

Question 38

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.

Answer 38

C) advise the client to disclose the event in the notes to the financial statements.

Question 39

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.

Answer 39

A) adjust the financial statements for the year under audit.

Question 40

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.

Answer 40

C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.

Question 41

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.

Answer 41

A) Correspond with attorneys.

Question 42

Which of the following would be a subsequent discovery of facts which would notrequire 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 a material footnote D) discovery of management's intent to increase selling prices in the future

Answer 42

D) discovery of management's intent to increase selling prices in the future

Question 43

In connection with the annual audit, which of the following is nota "subsequent events" procedure? A) Prepare any necessary closing journal entries. B) Examine the minutes of stockholders and directors meetings subsequent to the balance sheet date. C) Review journals and ledgers. D) Obtain a letter of representation.

Answer 43

A) Prepare any necessary closing journal entries.

Question 44

An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered.

Answer 44

A) the auditor's report.

Question 45

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would notrequire disclosure in the financial statements? A) sale of a bond or capital stock issue B) loss of plant or inventories as a result of fire or flood C) a significant decline in the market price of the corporation's stock D) a merger or acquisition

Answer 45

C) a significant decline in the market price of the corporation's stock

Question 46

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) loss of a plant as a result of a flood B) sale of long-term debt or capital stock C) settlement of litigation in excess of the recorded liability D) major purchase of a business that is expected to double the sales volume

Answer 46

C) settlement of litigation in excess of the recorded liability

Question 47

An 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 47

A) extend appropriate audit procedures.

Question 48

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 balance sheet date 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 balance sheet date. C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.

Answer 48

D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.

Question 49

Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent A) the culmination of conditions that existed at the balance sheet date. B) additional new information related to events that were in existence on the balance sheet date. C) final estimates of losses relating to casualties occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Answer 49

B) additional new information related to events that were in existence on the balance sheet date.

Question 50

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A) extend auditing procedures and assume responsibility for a greater period of time. B) accept responsibility for subsequent events. C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D) assume responsibility for events subsequent to the issuance of the auditor's report.

Answer 50

A) extend auditing procedures and assume responsibility for a greater period of time.

Question 51

Auditors of accelerated filer public companies A) are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date. B) must always dual-date their audit reports. C) must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting. D) must perform all of the above procedures.

Answer 51

C) must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting.

Question 52

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 90% of the accounts receivable existing at December 31

Answer 52

C) write-off of a substantial portion of inventory as obsolete

Question 53

The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements? A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. C) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. D) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.

Answer 53

B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Question 54

The issuance of bonds by the client subsequent to the balance sheet date would require a footnote disclosure in, but no adjustment to, the financial statements under audit. TRUE OR FALSE

Answer 54

TRUE

Question 55

Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did notexist at the balance sheet date. TRUE OR FALSE

Answer 55

FALSE

Question 56

When subsequent events are used to evaluate the amounts included in the year-end financial statements, auditors must distinguish between conditions that existed at the balance sheet date and those that came into being after the balance sheet date. TRUE OR FALSE

Answer 56

TRUE

Question 57

The auditor's responsibility for reviewing subsequent events is normally limited to thirty days after the balance sheet date. TRUE OR FALSE

Answer 57

FALSE

Question 58

The date of the management representation letter received from the client should A) be the date of latest subsequent event disclosed in the notes to the financial statements. B) be dated no earlier than the date of the audit report. C) have the same date as the date of the balance sheet. D) have the same date as the date of the engagement letter.

Answer 58

B) be dated no earlier than the date of the audit report.

Question 59

The letter of representation obtained from an audit client should be A) dated as of the end of the period under audit. B) dated as of the audit report date. C) dated as of any date decided upon by the client and auditor. D) dated as of the issuance of the financial statement.

Answer 59

B) dated as of the audit report date.

Question 60

When should auditors generally assess a client's ability to continue as a going concern? A) upon completion of the audit B) during the planning stages of the audit C) throughout the entire audit process D) during testing and completion phases of the audit

Answer 60

C) throughout the entire audit process

Question 61

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 61

C) management's compliance with contractual arrangements that impact the financial statements

Question 62

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report.

Answer 62

C) one year beyond the balance sheet date.

Question 63

Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is A) analytical procedures. B) confirmations from creditors. C) statistical sampling procedures. D) tests of internal controls.

Answer 63

A) analytical procedures.

Question 64

Which of the following statements regarding the letter of representation is notcorrect? A) It is prepared on the client's letterhead. B) It is addressed to the CPA firm. C) It is signed by high-level corporate officials, usually the president and chief financial officer. D) It is optional, not required, that the auditor obtain such a letter from management.

Answer 64

D) It is optional, not required, that the auditor obtain such a letter from management.

Question 65

Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n) A) qualified opinion or a disclaimer of opinion. B) adverse opinion or a disclaimer of opinion. C) qualified or an adverse opinion. D) unqualified opinion with an explanatory paragraph.

Answer 65

A) qualified opinion or a disclaimer of opinion.

Question 66

A management representation letter is A) prepared on the CPA's letterhead. B) addressed to the client. C) signed by high-level corporate officials. D) dated as of the balance sheet date.

Answer 66

C) signed by high-level corporate officials.

Question 67

Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.

Answer 67

D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.

Question 68

Which of the following is notone of the categories of items included in the letter of representation? A) subsequent events B) completeness of information C) recognition, measurement, and disclosure D) materiality

Answer 68

D) materiality

Question 69

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 agreements B) confirmation of accounts receivable from principal customers C) reconciliation of interest expense with debt outstanding D) confirmation of bank balances

Answer 69

A) review compliance with the terms of debt agreements

Question 70

Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.

Answer 70

C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source.

Question 71

Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements. A) audit B) express an opinion on C) read D) analyze

Answer 71

C) read

Question 72

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 72

C) vice president of operations

Question 73

Which of the following is nota reason why the auditor requests that the client provide a letter of representation? A) Professional auditing standards require the auditor to obtain a letter of representation. B) It impresses upon management its responsibility for the accuracy of the information in the financial statements. C) It provides written documentation of the oral responses already received to inquiries of management. D) It determines the type of opinion the auditor will issue on the financial statements.

Answer 73

D) It determines the type of opinion the auditor will issue on the financial statements.

Question 74

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) management letter of representation.

Answer 74

D) management letter of representation.

Question 75

Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit. TRUE OR FALSE

Answer 75

TRUE

Question 76

Current professional auditing standards mandate the use of analytical procedures during the testing phase of the audit. TRUE OR FALSE

Answer 76

FALSE

Question 77

Auditing standards require the auditor's assessment of going concern issues. TRUE OR FALSE

Answer 77

TRUE

Question 78

Results from the final analytical procedures may indicate that additional audit evidence is necessary. TRUE OR FALSE

Answer 78

TRUE

Question 79

Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter. TRUE OR FALSE

Answer 79

TRUE

Question 80

Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting. TRUE OR FALSE

Answer 80

TRUE

Question 81

At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities. TRUE OR FALSE

Answer 81

FALSE

Question 82

Auditors are required to obtain a letter of representation that describes management's planned solutions to all internal control weaknesses identified during an audit. TRUE OR FALSE

Answer 82

FALSE

Question 83

The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner. TRUE OR FALSE

Answer 83

FALSE

Question 84

If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion. TRUE OR FALSE

Answer 84

TRUE

Question 85

Because a management representation letter is a written statement from a nonindependent source, it cannotbe regarded as reliable evidence. TRUE OR FALSE

Answer 85

TRUE

Question 86

To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except A) review the audit documentation for the entire audit to determine whether all material classes of transactions have been adequately tested. B) make sure that all parts of the audit program have been accurately completed and documented. C) obtain the management representation letter. D) decide whether the audit program is adequate.

Answer 86

C) obtain the management representation letter.

Question 87

When reviewing the summary of misstatements found in the audit A) an adjusting journal entry must be made by the auditor for all material misstatements. B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. C) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected. D) auditors only need to consider the misstatements that impact the income statement.

Answer 87

B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.

Question 88

Which of the following is an accurate statement regarding audit documentation review? A) The audit partner must review the work of the least experienced auditor in more detail than the work of the audit supervisor. B) The audit senior must review all audit documentation. C) For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit. D) Checklists can never be used to verify that all financial statement disclosures have been made.

Answer 88

C) For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit.

Question 89

There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including 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 counteract the bias that often enters into the auditor's judgment. D) all of the above.

Answer 89

D) all of the above.

Question 90

An independent review must be performed of all audits. TRUE OR FALSE

Answer 90

FALSE

Question 91

If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion. TRUE OR FALSE

Answer 91

FALSE

Question 92

After performing all audit procedures in each area, the auditor must integrate the results into an overall conclusion about the financial statements. TRUE OR FALSE

Answer 92

TRUE

Question 93

The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication A) may be oral or written. B) must be oral. C) must be written. D) must be oral via direct communication.

Answer 93

C) must be written.

Question 94

Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management. B) Any significant matter reported to those charged with governance must also be communicated to management. C) Communication is required before the audit report is issued. D) The auditor does not have any requirement to communicate with anyone other than the company's senior management.

Answer 94

A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.

Question 95

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. C) the client with the CPA's recommendations for improving any part of the client's business. D) a summary of the auditor's observations that resulted from the auditor's special study of internal control.

Answer 95

C) the client with the CPA's recommendations for improving any part of the client's business.

Question 96

When communicating with the audit committee and management, A) only material fraud and illegal acts are required by auditing standards to be communicated. B) all internal control deficiencies are required by auditing standards to be communicated. C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions. D) all communications with the audit committee and management must be in writing.

Answer 96

C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions.

Question 97

Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee A) only if the act is immaterial. B) only if the act is material. C) only if the act is highly material. D) regardless of materiality.

Answer 97

D) regardless of materiality.

Question 98

Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses. TRUE OR FALSE

Answer 98

FALSE

Question 99

The Sarbanes-Oxley Act includes additional communication requirements for auditors of public companies. TRUE OR FALSE

Answer 99

TRUE

Question 100

Client representation letters are required by professional auditing standards, whereas management letters are optional. TRUE OR FALSE

Answer 100

TRUE

Question 101

The audit firm issues an audit report for its client. The auditors have noobligation to make further inquiries with respect to the client's audited financial statements unless A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

Answer 101

C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.

Question 102

If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision. TRUE OR FALSE

Answer 102

TRUE

Question 103

Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report. TRUE OR FALSE

Answer 103

FALSE