Question 1

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
A)Confirmation of related lawsuits with the claimants.
B)Qualification of the audit report.
C)An assessment that loss of the litigation is probable.
D)An adverse opinion.

Accepted Answer

A lawyer's refusal to provide information related to litigation can lead to a lack of sufficient evidence or support for the amounts and disclosures provided in the financial statements. As a result, the auditor may need to issue a qualified opinion on the audit report.

Question 2

If,after issuing an audit report,the auditors find that they have failed to perform certain significant audit procedures they should first:
A)Attempt to determine whether their report is still being relied upon by third parties.
B)Notify regulatory agencies.
C)Notify legal counsel.
D)Wait until the beginning of the next year's audit to determine whether misstatements have occurred.

Accepted Answer

The auditors should first attempt to determine whether their report is still being relied upon by third parties. If the report is still being relied upon, the auditors should assess the potential impact of the omitted procedures and consider whether to amend the report or issue a separate communication to the third parties. The auditors should also determine the cause of the omitted procedures and take steps to prevent a recurrence in future audits. Notification of regulatory agencies and legal counsel may be necessary depending on the circumstances, but these actions should be taken after the initial assessment of the impact on the report and the third parties who have relied upon it. Waiting until the beginning of the next year's audit is not appropriate as it could allow misstatements to go undetected and potentially harm the users of the financial statements.

Question 3

An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements)is referred to as the:
A)Evaluation materiality approach.
B)Iron curtain approach.
C)Projected misstatement approach.
D)Rollover approach.

Accepted Answer

The rollover approach focuses on the quantification of misstatements affecting the current year's income statement, without adjusting for misstatements from previous years that were carried forward. It emphasizes the impact of misstatements on the current period's financial results.

Question 4

Which of the following types of matters do not generally require disclosure in the financial statements? A)General risk contingencies. B)Commitments. C)Loss contingencies. D)Liabilities to related parties.

Accepted Answer

General risk contingencies typically do not require disclosure in financial statements because they represent potential risks that are not certain to occur and are often speculative in nature.

Question 5

An example of an internal control weakness is to assign the human resource department responsibility for:
A)Maintaining time cards.
B)Hiring personnel.
C)Authorizing deductions from pay.
D)Interviewing employees for jobs.

Accepted Answer

Assigning the human resource department responsibility for maintaining time cards is a weakness in internal control because it creates a lack of segregation of duties. It allows human resource personnel to control both the hiring process and the records of hours worked, which makes it easier to commit fraud or errors without being detected. It would be better to assign the responsibility for maintaining time cards to a separate department or employee to ensure the accuracy and completeness of records.

Question 6

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated.For a public company these considerations will affect the audit report as follows:
A)If a loss meets these criteria,the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
B)If a loss meets these criteria and is disclosed in the financial statement notes,the auditor may issue an unqualified opinion,but is required to point out the contingency in an explanatory paragraph of the report.
C)If a loss meets these criteria and is disclosed in the financial statement notes,the auditor may issue an unqualified opinion,but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
D)If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements,the auditor may issue an unqualified opinion.

Accepted Answer

The answer of Material loss contingencies should be recorded in...

Question 7

The review of audit working papers by the audit partner is normally completed:
A)Prior to year-end.
B)Immediately as each working paper is completed.
C)Near the completion of the audit.
D)After issuance of the audit report,but prior to required subsequent event review procedures.

Accepted Answer

The review of audit working papers by the audit partner is normally completed near the completion of the audit to ensure that all audit procedures have been followed and to evaluate the overall quality of the audit work performed. Reviewing the working papers at this stage allows the audit partner to make any necessary adjustments and finalize the audit report.

Question 8

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date? A)Review minutes of board of directors' meeting. B)Review the latest available interim financial statements. C)Inquire about any unusual adjustments made subsequent to the balance sheet date. D)Perform analytical procedures in the period subsequent to the balance sheet date.

Accepted Answer

Analytical procedures are typically performed as part of the planning and final review stages of an audit, rather than specifically to search for significant events in the period after year-end but prior to the audit report date. The other options (A, B, C) are direct methods to search for such events.

Question 9

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? A)Obtaining a lawyers' letter. B)Confirming accounts payable. C)Reviewing the minutes of board of directors' meetings. D)Review correspondence with banks.

Accepted Answer

Confirming accounts payable is a procedure designed to identify and confirm the amounts owed by the company to its suppliers and vendors. It is not a procedure specifically designed to provide evidence about the existence of loss contingencies. The other choices, obtaining a lawyer's letter, reviewing board of directors' minutes, and reviewing correspondence with banks, are procedures that can provide evidence about the existence of loss contingencies.

Question 10

Management estimates the company's allowance for doubtful accounts as $200,000,and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000,with all points in that interval equally likely.The judgmental misstatement in this situation is:
A)$0.
B)$30,000.
C)$40,000.
D)$50,000.

Accepted Answer

The judgmental misstatement is the difference between the management estimate and the auditors' estimate. In this case, the difference is the range between $230,000 and $250,000, which is $20,000. Since all points in the interval are equally likely, the midpoint of the range can be used as the best estimate of the misstatement, which is ($230,000 + $250,000) / 2 = $240,000. Therefore, the best estimate of the misstatement is $240,000 - $200,000 = $40,000, which corresponds to choice C.

Question 11

Management estimates the company's allowance for doubtful accounts as $200,000,and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000.The factual misstatement in this situation is:
A)$0.
B)$30,000.
C)$40,000.
D)$50,000.

Accepted Answer

A factual misstatement refers to an error that is clearly incorrect based on objective evidence. In this case, the management's estimate of $200,000 is within the range suggested by the auditors ($230,000 to $250,000), but since the auditors' estimate is not definitive and is a range, there is no factual misstatement.

Question 12

For clients that distribute checks or cash payments and have significant payroll control weakness,which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?
A)A surprised observation of a paycheck distribution,while establishing the identity of each employee receiving payment.
B)A test of payroll extensions.
C)Analytical comparisons of budgeted to actual payroll expense.
D)Comparison of payee names on canceled payroll checks with the payroll register.

Accepted Answer

A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment, directly addresses the concern of verifying the existence of employees and ensuring that payroll disbursements are made to actual, bona fide employees. This method helps in identifying any fictitious employees that might have been added to the payroll as part of a fraudulent scheme.

Question 13

Which of the following is not a procedure normally performed while completing the audit of a public company? A)Obtain a lawyer's letter. B)Obtain a representations letter. C)Perform an overall review using analytical procedures. D)Update internal control questionnaire.

Accepted Answer

Updating the internal control questionnaire is not a procedure typically performed during the completion of an audit of a public company. However, it can be a procedure performed during the planning or interim stages of the audit. A lawyer's letter and representations letter are typically obtained during the completion of the audit, and an overall review using analytical procedures is a common procedure performed during the completion stage as well.

Question 14

Auditors must communicate internal control "significant deficiencies" to:
A)The audit committee.
B)The shareholders.
C)The SEC.
D)The Federal Trade Commission.

Accepted Answer

Auditors are required to communicate significant deficiencies in internal control to the audit committee, which is responsible for overseeing the financial reporting process. Shareholders and regulatory bodies may receive information about internal control deficiencies through various reports or filings, but the audit committee is the primary recipient of this information. The Federal Trade Commission is not typically involved in financial reporting and would not be relevant to this communication.

Question 15

Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures?
A)FASB-required supplementary information.
B)Other information in documents containing audited financial statements.
C)Supplementary information in relation to the financial statements as a whole.
D)GASB-required supplementary information.

Accepted Answer

The auditors' report for a nonpublic company does not need to include a section on other information in documents containing audited financial statements if it is considered to be properly stated after performing appropriate procedures. This is because the primary focus of the auditors' report is on the financial statements themselves and any required supplementary information, rather than on other information included in the documents.

Question 16

Which of the following subsequent events might require an adjustment to the client's financial statements?
A)A business combination with another company.
B)A major customer declares bankruptcy causing a material receivable to be uncollectible.
C)Loss of plant and equipment due to a fire.The loss in insured.
D)Plant employees could possibly go on strike.

Accepted Answer

The bankruptcy of a major customer causing a material receivable to be uncollectible would result in a significant impact on the financial statements and would require adjustment. A, C, and D may also have an impact on the financial statements, but they do not necessarily require adjustments depending on the circumstances.

Question 17

Which of the following procedures is not a procedure that is completed near the end of the engagement? A)Review cash transactions. B)Review to identify subsequent events. C)Obtain the lawyer's letter. D)Obtain the letter of representations.

Accepted Answer

Reviewing cash transactions is typically an ongoing procedure throughout the audit rather than one specifically completed near the end of the engagement. Procedures like reviewing for subsequent events, obtaining the lawyer's letter, and obtaining the letter of representations are typically performed closer to the end of the audit process.

Question 18

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements,the auditors accumulate:
A)Factual misstatements in the financial statements.
B)Judgmental misstatements in the financial statements.
C)Factual and judgmental misstatements in the financial statements.
D)Factual,judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.

Accepted Answer

In evaluating the probability of material misstatement in the financial statements, the auditors accumulate factual and judgmental misstatements as well as projected misstatements and an allowance for undetected misstatements. This approach is consistent with the auditing standards set forth by the PCAOB and provides a comprehensive assessment of the risk of material misstatement.

Question 19

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors? A)Dividends. B)New debt issuance. C)New bank accounts. D)Write-off of trade accounts receivable.

Accepted Answer

The write-off of trade accounts receivable is typically authorized by management or the credit department, not the board of directors. It is therefore the least likely to be found during a review of the minutes of the board of directors. Dividends, new debt issuance, and new bank accounts are all decisions that can be made by the board of directors and are therefore more likely to appear in the minutes.

Question 20

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A)Extrapolation difference.
B)Factual misstatement.
C)Redundancy effect misstatement.
D)Projected misstatement.

Accepted Answer

A factual misstatement is a specific misstatement in an account balance or transaction. It is a misstatement that is not projected or extrapolated from the sample, but rather a direct error that was identified.

Quiz 16: Auditing Operations and Completing the Audit

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:

If,after issuing an audit report,the auditors find that they have failed to perform certain significant audit procedures they should first:

An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:

Which of the following types of matters do not generally require disclosure in the financial statements?

An example of an internal control weakness is to assign the human resource department responsibility for:

The review of audit working papers by the audit partner is normally completed:

Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?

Management estimates the company's allowance for doubtful accounts as $200,000,and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000,with all points in that interval equally likely.The judgmental misstatement in this situation is:

Management estimates the company's allowance for doubtful accounts as $200,000,and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000.The factual misstatement in this situation is:

For clients that distribute checks or cash payments and have significant payroll control weakness,which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?

Which of the following is not a procedure normally performed while completing the audit of a public company?

Auditors must communicate internal control "significant deficiencies" to:

Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures?

Which of the following subsequent events might require an adjustment to the client's financial statements?

Which of the following procedures is not a procedure that is completed near the end of the engagement?

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements,the auditors accumulate:

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n) :