Chapter 17 – Audit – Flashcards
61 test answers
Unlock all answers in this set
Unlock answers 61question
An auditor will ordinarily examine invoices from lawyers primarily in order to
answer
D. Identify possible unasserted litigation, claims, and assessments
Unlock the answer
question
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should
answer
B. Consider the refusal to be a scope limitation
Unlock the answer
question
The refusal of an entity's attorney to provide a representation on the legality of a particular act committed by the entity is generally
answer
B. Considered to be a scope limitation.
Unlock the answer
question
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?
answer
Settlement of litigation, in excess of the previously recorded liability
Unlock the answer
question
Which of the following situations would require adjustment to or disclosure in the financial statements?
answer
The bankruptcy of a customer who regularly purchased 30 percent of the company's
Unlock the answer
question
An example of a Type I subsequent event is
answer
B. An event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year) that a large portion of the entity's inventory is obsolete.
Unlock the answer
question
An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was
answer
A. Limited to the specific event referenced.
Unlock the answer
question
Which of the following procedures should an auditor generally perform regarding subsequent events?
answer
A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
Unlock the answer
question
The purpose of analytical procedures at the completion of the audit includes all of the following except:
answer
A. Revising the audit plan.
Unlock the answer
question
Which of the following auditing procedures is ordinarily performed last?
answer
D. Obtaining a management representation letter.
Unlock the answer
question
The date of the management representation letter should coincide with the
answer
C. Date of the auditor's report
Unlock the answer
question
Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?
answer
A. Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters
Unlock the answer
question
The management letter is used
answer
to make recommendations to the entity based on observations made during the audit
Unlock the answer
question
Ajax, Inc., is an affiliate of Borax, Inc. and is audited by another audit firm. Which of the following is most likely to be used by the auditor of Borax to obtain assurance that all guarantees by Borax of Ajax's indebtedness have been detected?
answer
B. Review Borax board minutes and obtain a representation letter.
Unlock the answer
question
Generally, loss contingencies that are judged to be remote
answer
C. Should not be disclosed in the footnotes.
Unlock the answer
question
Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?
answer
B. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, and loss contingencies
Unlock the answer
question
Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
answer
C. An inquiry of the entity's legal counsel concerning litigation.
Unlock the answer
question
Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments
answer
D. Confirm directly with the entity's lawyer that all claims have been recorded in the financial
Unlock the answer
question
An attorney is responding to an independent auditor as a result of the entity's letter of inquiry. The attorney may appropriately limit the response to
answer
Matters to which the attorney has given substantive attention in the form of legal consulation or representation
Unlock the answer
question
Which of the following is generally requested in a legal letter?
answer
A. A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
Unlock the answer
question
Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?
answer
D. Material changes in the quoted market prices of listed investment securities since the balance sheet date.
Unlock the answer
question
Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the
answer
C. Balance sheet date but prior to the date of the auditor's report.
Unlock the answer
question
An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the
answer
D. Delivery of the auditor's report to the entity.
Unlock the answer
question
A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork.The entity believes that this event could have a significant direct effect on the financial statements. The auditor should
answer
advise management to disclose the event in the notes to the FS
Unlock the answer
question
If an auditor dates the auditor's report on financial statements for the year ended December 31, 2013,as of February 10, 2014, except for Note J, as to which the date is March 3, 2014, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of
answer
C. All subsequent events occurring through February 10, 2014 and the specific subsequent event referred to in Note J through March 3, 2014.
Unlock the answer
question
Harvey, 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 generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?
answer
obtain a lawyer's letter as of the completion of fieldwork
Unlock the answer
question
A Type II subsequent event usually requires
answer
disclosure in the footnotes
Unlock the answer
question
After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the working papers. This second review usually focuses on
answer
A. The audit report, financial statements, and footnotes for consistency.
Unlock the answer
question
In the course of the examination of financial statements for the purpose of expressing an opinion, the auditor normally prepares a schedule of unadjusted differences for which the auditor did not propose adjustments when they were discovered. What is the primary purpose of this schedule?
answer
C. To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered.
Unlock the answer
question
Which of the following ratios is least likely to assist the auditor in determining whether the entity is experiencing financial difficulties?
answer
cash/total assets
Unlock the answer
question
As part of an audit, a CPA often requests a representation letter from the entity. Which one of the following is not a valid purpose of such a letter?
answer
C.To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed
Unlock the answer
question
Which of the following expressions is least likely to be included in a management representation letter?
answer
C. Management acknowledges responsibility for illegal actions committed by its employees
Unlock the answer
question
"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(an
answer
C. Management representation letter
Unlock the answer
question
Which of the following matters is an auditor required to communicate to those charged with governance?
answer
The process used by management in formulating sensitive accounting estimates.
Unlock the answer
question
"There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a
answer
management representation letter
Unlock the answer
question
When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations
answer
complement, but do not replace substantive procedures designed to support the assertion
Unlock the answer
question
A written representation from an entity's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the
answer
A. Chief executive officer and the chief financial officer.
Unlock the answer
question
Communications between the auditor and those charged with governance should include all of the following except:
answer
A. A summary of specific audit procedures used.
Unlock the answer
question
Which of the following events occurring after the issuance of an entity's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
answer
C. New information is discovered concerning undisclosed lease transactions in the audited
Unlock the answer
question
On February 25, a CPA issued an auditor's report expressing an unqualified 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 trade 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
answer
B. Notify each member of the entity's board of directors about management's refusal to adjust the financial statements.
Unlock the answer
question
After an audit report containing an unqualified opinion on a nonpublic entity's financial statements is issued, the auditor learns that the entity has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should
answer
Take no action because the auditor has no obligation to make any further inquiries
Unlock the answer
question
An entity has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The entity refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must
answer
C. Disclose the situation in the auditor's report
Unlock the answer
question
Auditors often request that the entity send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, and/or assessments. The primary reason for this request is to provide the auditor with
answer
D. Corroborative inquiries made of the entity by the auditor
Unlock the answer
question
The primary reason an auditor requests letters of inquiry be sent to an entity's attorneys is to provide the auditor with
answer
Corroboration of the information furnished by management concerning litigation, claims, and assessments.
Unlock the answer
question
Which of the following statements extracted from an entity's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
answer
B. "I believe that the action can be settled for less than the damages claimed."
Unlock the answer
question
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
answer
extend auditing procedures
Unlock the answer
question
A Type I subsequent event usually requires
answer
A. An adjustment to the financial statements
Unlock the answer
question
A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when
answer
C.The outcome of the event is judged to be reasonably possible but the loss cannot be reasonably estimated.
Unlock the answer
question
Which of the following statements ordinarily is included among the written management representations obtained by the auditor?
answer
A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed
Unlock the answer
question
Which of the following statements is correct about an auditor's required communication with management and those charged with governance?
answer
B.The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.
Unlock the answer
question
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
answer
B.This communication should include management changes in the application of significant accounting policies.
Unlock the answer
question
For which of the following matters should an auditor obtain written management representations?
answer
C. Management's compliance with contractual agreements that may affect the financial stat
Unlock the answer
question
Key Co. plans to present comparative financial statements for the years ended December 31, 2012 and 2013, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, 2014. Key's current management team was not present until January 1, 2013. What period of time should be covered by Key's management representation letter?
answer
jan 1, 2012 through may 1, 2014
Unlock the answer
question
After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless
answer
D. Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered
Unlock the answer
question
After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless
answer
A. New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
Unlock the answer
question
After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless
answer
New information is discovered concerning undisclosed related party transactions of the previously audited period.
Unlock the answer
question
Who generally signs the legal letter?
answer
The CEO of the entity being audited.
Unlock the answer
