Chapter 5 Set 3

Question 1

How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a nonissuer compare to those for obtaining an understanding of internal control and assessing control risk as part of a financial statement audit of a nonissuer?

Answer 1

In an engagement to express a separate opinion on an entity’s internal control, the scope and procedures are more extensive, and the purpose is directed primarily toward the internal control report. In an audit, the scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing procedures. Audit procedures (testing) is more extensive when rendering an opinion on internal controls because the auditor should obtain evidence on selected controls over all relevant assertions, whereas in a financial statement audit the auditor is not required to test controls over all relevant assertions.

Question 2

Which of the following statements correctly describes the “top-down approach” used during an audit of internal control over financial reporting?

Answer 2

The “top-down approach” used during an audit of internal control over financial reporting begins by understanding the overall risks to internal control over financial reporting at the financial statement level.

Question 3

In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units?

Answer 3

An auditor that is testing controls at a company with multiple business units should test controls over specific risks at business units that are material to the company’s consolidated financial statements.

Question 4

Which of the following matters would an auditor most likely communicate to those charged with governance?

Answer 4

The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance.

Question 5

Which of the following statements is correct about an auditor’s required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity.

Answer 5

If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management’s attention as a result of the audit.

Question 6

Which of the following statements is correct concerning an auditor’s required communication with those charged with governance?

Answer 6

The auditor should determine that those charged with governance are informed about the initial selection of and changes in significant accounting policies or their application.

Question 7

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Answer 7

Disagreements based upon preliminary information need not be communicated by the auditor to those charged with governance.

Question 8

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?

Answer 8

Communication regarding independence must be made in writing prior to accepting the engagement.

Question 9

Which of the following should be included as a written representation from management?

Answer 9

The representation letter should include management’s belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Question 10

“We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage is most likely from a:

Answer 10

The statement concerning disclosure of non-compliance with laws and regulations would appear in the management representation letter.

Question 11

Which of the following matters would an auditor most likely include in a management representation letter?

Answer 11

Specific written representations obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable.

Question 12

To which of the following matters would materiality limits not apply in obtaining written management representations?

Answer 12

Management’s representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management’s acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.

Question 13

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

Answer 13

Auditor’s report

Question 14

Which of the following expressions most likely would be included in a management representation letter?

Answer 14

It is appropriate for the representation letter to contain a statement regarding subsequent events.

Question 15

What does the management representation letter normally include?

Answer 15

The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.
ALSO NOTE IT SHOULD INCLUDE ANY KNOWLEDGE OF FRAUD

Question 16

Which of the following management roles would typically be acknowledged in a management representation letter?

Answer 16

Management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter.

Question 17

A written client representation letter most likely would be an auditor’s best source of corroborative information of a client’s plans to:

Answer 17

A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management’s plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as “held for sale” would be reported separately in the income statement under “discontinued operations.”

Question 18

A purpose of a management representation letter is to reduce:

Answer 18

A primary purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management’s responsibility for the financial statements. The first representation made in the letter states “we have fulfilled our responsibilities, as set out by the audit engagement dated [xxx], for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP.”