Chapter 4 Deck 5 Flashcards
If a client will not permit inquiry of outside legal counsel, the auditor’s report ordinarily will contain a(an):
Disclaimer of Opinion because this is a significant scope limitation
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
The lawyer’s comment that the plaintiff “will have problems establishing any liability” is vague…it does not provide an evaluation of the likelihood of an unfavorable outcome. Does “will have problems” mean a loss is probable, reasonably possible, or remote? The auditor would likely want to request clarification to ensure that the situation has been properly accounted for and disclosed.
Which of the following events most likely would indicate the existence of related parties?
Transactions based on terms that are significantly different from those that would be expected in an arm’s length transaction, such as selling real estate at a price significantly different from appraised value, may be indicative of related party involvement.
Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
In identifying litigation, claims, and assessments, the auditor should review correspondence from taxing authorities, which may indicate an existing tax liability.
Which of the following procedures would an auditor most likely perform regarding litigation?
The auditor should discuss with management the controls adopted to identify, evaluate, and account for litigation.
Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
during the final review stage of an audit, the auditor focuses on the overall presentation of the financial statements. Total debt/total assets indicates the portion of assets financed by creditors, which is a meaningful ratio to calculate during the final audit review.
According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement?
the dollar amount of the error is a quantitative standard, not a qualitative standard.
According to PCAOB standards, which of the following does not represent an example of management bias?
This is not an example of management bias because at the end of the period the financial statements are fairly presented. Unexpired insurance should be reported as prepaid insurance. This is a correct application of the matching principle.
