Deck 17: Completing the Audit

Question 1

Often, procedures for presentation- and disclosure- related objectives are integrated with the auditor's tests for:

A) transaction- related objectives.
B) balance- related objectives.
C) both A and B above
D) none of the above

Answer 1

C

Question 2

An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to:

A) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.
B) extend auditing procedures.
C) accept responsibility for subsequent events.
D) assume responsibility for events subsequent to the issuance of the auditor's report.

Answer 2

B

Question 3

Which event that occurred after the end of the financial year under audit but prior to issuance of the auditor's report would NOT require disclosure in the financial statements?

A) Loss of plant or inventories as a result of fire or flood
B) Sale of a bond or share issue
C) A major drop in the quoted market price of the shares of the corporation
D) Settlement of litigation when the event giving rise to the claim took place after the balance sheet date

Answer 3

C

Question 4

To ensure that the audit meets the public accounting firm's standard of performance:

A) the working papers are reviewed by another member of the audit firm.
B) a financial disclosure checklist is used for every engagement.
C) an audit engagement checklist is completed.
D) it is common to gather more evidence than is actually necessary.

Question 5

An important part of evaluating whether the financial statements are fairly stated is summarising the misstatements uncovered in the audit. Whenever the auditor uncovers misstatements that are in themselves material:

A) it is necessary to combine individually immaterial misstatements with the material misstatements and make full disclosure in the footnotes.
B) no entries need be made, but footnote disclosure is required.
C) it is necessary to combine individually immaterial misstatements with the material misstatements and make entries to correct the statements.
D) the trial balance should be adjusted to correct the statements.

Question 6

ASA 240 requires the auditor to communicate all irregularities, including fraud and illegal acts to the audit committee:

A) regardless of materiality.
B) only if the act is immaterial.
C) only if the act is highly material.
D) only if the act is material.

Question 7

Which one of the following items would NOT be of concern to the auditor as a potential contingent liability? In each case, the event could generate a loss of $20 000.

A) Loans receivable discounted
B) Unused balances of outstanding letters of credit
C) Income tax disputes
D) Obsolete inventory

Question 8

If the response from the client's legal representative contains a disagreement with management, the auditor should:

A) issue a qualified audit report.
B) seek resolution through discussion with management and the lawyer.
C) confirm the information using alternative audit procedures.
D) seek resolution with management.

Question 9

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 NOT true?

A) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
B) The potential liability is sufficiently well- known in some instances to be included in the financial statements as an actual liability.
C) The auditor should primarily rely on management's judgement about potential liabilities.
D) Frequently, the audit firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or the client's legal counsel.

Question 10

The auditor's responsibility for 'reviewing the subsequent events' of a client 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 financial year under audit and ending with the balance sheet date.
C) beginning with the balance sheet date and ending with the date of the annual general meeting.
D) beginning with the start of the financial year under audit and ending with the date of the auditor's report.

Question 11

Which type of subsequent event requires consideration by management and evaluation by the auditor?

A) Subsequent events that have no direct effect on the financial statements but for which disclosure is advisable
B) Subsequent events that have a direct effect on the financial statements and require adjustment
C) Both A and B
D) Neither A nor B

Question 12

ASA 570 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern. One of the most important types of evidence to assess the going concern question is:

A) statistical sampling procedures.
B) confirmations of creditors.
C) analytical procedures.
D) inquiries of client and its legal counsel.

Question 13

Which one 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) Sale of long- term debt or capital stock
B) Major purchase of a business that is expected to double the sales volume
C) Settlement of litigation in excess of the recorded liability
D) Loss of a plant as a result of a flood

Question 14

How many presentation and disclosure objectives are there?

A) Four
B) Two
C) Three
D) One

Question 15

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 valuation or disclosure of the statements being audited. The auditing procedures required to verify these transactions are commonly referred to as the review for:

A) contingent liabilities.
B) subsequent years' transactions.
C) subsequent events.
D) late unusual occurrences.

Question 16

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 management engage outside legal counsel to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims and assessments.
B) Request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning litigation, claims and assessments.
C) Request that client lawyers undertake a reconsideration of matters of litigation, claims and assessments with which they were consulted during the period under examination.
D) 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.

Question 17

A management representation letter is a written statement from a non- independent source and therefore:

A) can be regarded as sufficient evidence only if the auditor finds a strong internal control system.
B) needs to be confirmed by an outside independent source such as a financial institution or law firm.
C) can be regarded as sufficient evidence if the high- level corporate officials who sign it are trustworthy.
D) cannot be regarded as sufficient evidence.

Question 18

Often, there is a large number of immaterial errors discovered that do not require an adjustment at the time they are found.

A) The auditor must combine the individually immaterial errors and evaluate whether the combined amount is material.
B) Since these items are individually immaterial, the auditor would not recommend adjusting entries to client.
C) Since there are a large number of these, the auditor would recommend adjusting entries to client.
D) The auditor would never combine these individually immaterial amounts because that would mix apples and oranges.

Question 19

When the proper disclosure in the financial statements of material contingencies is through footnotes, the footnote should describe the nature of the contingency to the extent it is known and:

A) the auditor's opinion as to the expected outcome.
B) the steps client has taken to ensure that it doesn't recur.
C) the opinion of legal advisers or management as to the expected outcome.
D) the opinion of an outside independent party, such as an appraiser, as to the expected outcome.

Question 20

When auditing contingent liabilities, the primary objective at the initial stage of the tests is to determine:

A) the likelihood of the liability.
B) the materiality of any liability.
C) the existence of the liability.
D) what constitutes adequate disclosure of the liability.

Question 21

'A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place contingent on a future event' is the definition of:

A) a long- term liability.
B) contingent liability
C) an accrued liability.
D) a current liability.

Question 22

If the auditor concludes that it is highly improbable that the client will continue as a going concern, the auditor should, in accordance with ASA 700:

A) issue a disclaimer of opinion.
B) include an emphasis of matter section in the audit report.
C) issue an unqualified report but explain the concerns in the opinion paragraph.
D) express an adverse opinion.

Question 23

Footnote disclosure in the financial statement is necessary if the contingent liability is:

A) Remote.
B) Probable.
C) Reasonably possible.
D) Has occurred.

Question 24

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that there is sufficient evidence but it does not support a conclusion of fairly presented financial statements, the auditor has two choices:

A) (1) the statements must be revised to the auditor's satisfaction or (2) a disclaimer of opinion must be issued.
B) (1) either a qualified opinion must be issued or (2) an adverse opinion must be issued.
C) (1) either a disclaimer of opinion must be issued or (2) an adverse opinion must be issued.
D) (1) the statements must be revised to the auditor's satisfaction or (2) either a qualified or an adverse opinion must be issued.

Question 25

Which one of the following is NOT one of the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit?

A) To evaluate the accuracy of the auditing firm's time budget for the engagement
B) To counteract the bias that frequently enters into the auditor's judgement
C) To make sure that the audit meets the firm's standard of performance
D) To evaluate the performance of inexperienced personnel

Question 26

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that:

A) 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.
B) the auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
C) 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.
D) 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.

Question 27

Adjustment of the financial statement may be necessary if the contingent liability is:

A) Remote.
B) Probable.
C) Reasonably possible.
D) None of the above

Question 28

The subsequent discovery of facts requiring the recall or reissuance of financial statements from developments occurring after the date of the auditor's report.

A) will not arise
B) will certainly arise
C) will probably arise
D) will probably not arise

Question 29

An agreement which commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a:

A) contingent liability.
B) commitment.
C) conditional contract.
D) potentially hazardous agreement.

Question 30

Which one of the following is NOT an audit procedure that is commonly used to search for contingent liabilities?

A) Analyse legal expense for the period under audit.
B) Review the minutes of directors' and shareholders' meetings.
C) Inquiries of management (orally and in writing).
D) Review the current year's tax return.

Question 31

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 end of the year. The subsequent information should NOT be incorporated directly into the statements if the conditions causing the change in valuation:

A) did not take place until after year- end.
B) took place before year- end.
C) occurred both before and after year- end.
D) are reimbursable through insurance policies.

Question 32

Which of the following is NOT required to be communicated to the audit committee or similarly designed body under ASA 260?

A) All material irregularities and illegal acts of a material nature
B) Disagreements with management about the scope of the audit, applicability of accounting principles or wording of the audit report
C) Difficulties encountered in performing the audit such as lack of availability of client personnel and failure to provide necessary information
D) Auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal control and the concept of reasonable rather than absolute assurance

Question 33

After the financial statements have been issued, if a subsequent discovery of facts occurs, that is, the auditor becomes aware that some information in the statements is materially misleading, the auditor should ask the client to issue an immediate revision. This is only required if:

A) the discovery of facts relates to developments that occurred after the date of the auditor's report.
B) management makes the discovery and informs the auditor.
C) the auditor makes the subsequent discovery of facts him or herself.
D) the facts discovered already existed at the audit report date.

Question 34

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012. Which one would require an adjustment to the account balances as at 30 June 2012?

A) The auditee will market $2 million of preference shares on 31 July, 2012.
B) Unused equipment recorded at $100 000 at 30 June, 2012 was disposed of on 3 July, 2012 for $60 000.
C) The client disposed of a major subsidiary on 30 July 2012.
D) Inventory valued at $100 000 on 30 June, 2012 was destroyed by a fire on 1 August, 2012.

Question 35

A client has a calendar year- end. Listed below are four events that occurred after 31 December. Which one of these subsequent events might result in adjustment of the 31 December financial statements?

A) Settlement of a litigation for a different amount from that recorded in the accounts
B) Collection of 90% of the accounts receivable existing at 31 December
C) Adoption of accelerated depreciation methods
D) Sale of a major subsidiary

Question 36

Which one of the following is a required condition for a contingent liability to exist?

A) The amount of the future payment is known.
B) The outcome has been resolved by a current event.
C) The liability resulted from an existing condition.
D) There is a potential liability to an employee of the client.

Question 37

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:

A) included in the financial statements as an actual liability.
B) disclosed in the auditor's report but not disclosed on the financial statements.
C) disclosed in footnotes but not accrued.
D) neither reported nor disclosed in footnotes.

Question 38

The auditor needs to perform procedures to satisfy the three categories of audit objectives: transaction- related objectives, balance- related objectives, and - related objectives

A) presentation and disclosure
B) sufficient appropriate
C) financial statement
D) balance day

Question 39

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 applicable accounting standards. Which one of the following procedures would be LEAST appropriate for this purpose?

A) Confirm as of the completion of fieldwork accounts receivable that have increased significantly from the year- end date.
B) Read the minutes of the board of directors' meetings.
C) Inquire of management concerning events that may have occurred.
D) Obtain a legal counsel's letter as of the completion of fieldwork.

Question 40

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 postdated footnote.
C) the next scheduled interim visit.
D) the final billing for audit services rendered.

Question 41

The management letter:

A) spells out to the audit committee the auditor's responsibilities under generally accepted auditing standards.
B) must follow the format prescribed by the ASIC.
C) is optional and is intended to help the client operate its business more effectively.
D) is required by ASA 580 whenever there are 'reportable conditions'.

Question 42

One of the auditor's primary concerns related to presentation- and disclosure- related objectives is the assertion.

A) cutoff
B) classification
C) completeness
D) both B and C

Question 43

The process of 'final evidence accumulation' is always done late in the engagement. Which one of the following would be done the earliest in the engagement?

A) Search for contingent liabilities.
B) Final analytical procedures.
C) Acquire the management representation letter.
D) Evaluate the going concern assumption.

Question 44

ASA 720 requires the auditor to read other information in documents containing audited financial reports that pertains directly to the financial report and to compare that information to make sure that it corresponds. If there is a material inconsistency, the client should be requested to change the information. If the client refuses, the auditor should:

A) include an explanatory paragraph in the audit report or withdraw from the engagement.
B) include an emphasis of matter section in the audit report.
C) issue a qualified opinion or withdraw from the engagement.
D) issue an adverse opinion.

Question 45

A specific letter of inquiry to the client's external legal counsel would include:

A) a list of litigation and claims.
B) a request from the client's external legal counsel confirming the reasonableness of management's assessment of the outcome of each identified litigation.
C) management's assessment of the outcome of each identified litigation.
D) all of the above

Question 46

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that sufficient evidence has NOT been obtained to draw a conclusion about fairness of the client's representations, there are two choices:

A) (1) obtain additional evidence or (2) issue a qualified opinion or a disclaimer of opinion.
B) (1) obtain additional information or (2) issue an adverse opinion.
C) (1) issue a qualified opinion or (2) issue a disclaimer of opinion.
D) (1) issue a disclaimer of opinion or (2) withdraw from the engagement.

Question 47

ASA 570 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at LEAST:

A) one year beyond the date of the auditor's report.
B) one year beyond the reporting date.
C) one quarter beyond the date of the auditor's report.
D) one quarter beyond the balance sheet date.

Question 48

Which of the following is NOT an example of a contingent liability?

A) Income tax disputes
B) Writing off a bad debt
C) Product warranties
D) Pending legal action for patent infringement, product liability or other actions

Question 49

The following five categories of specific matters that might be included in a management representation letter are consistent with ASA 580:

A) financial reports; completeness of information; recognition, measurement and disclosure; significant risks and uncertainties; and subsequent events.
B) financial reports; completeness of information; recognition, measurement and disclosure; going concern; and subsequent events.
C) financial reports; accuracy of information; recognition, measurement and disclosure; significant risks and uncertainties; and subsequent events.
D) financial reports; completeness of information; internal control; significant risks and uncertainties; and subsequent events.

Question 50

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012. Which one would NOT require an adjustment to the account balances as at 30 June 2012?

A) Investments recorded at cost ($100 000) were sold on 2 July 2012 for $60 000.
B) A customer declared bankruptcy on 31 July 2012.
C) A contingent liability disclosed in the notes at an estimated amount of $100 000 was settled out of court on 15 July 2012 for $125 000.
D) Uninsured inventory valued at $100 000 on 30 June 2012 was destroyed in a fire on 5 July 2012.

Question 51

During the final review of working papers and financial statements, it is common to have the analytical procedures done by a:

A) junior staff member.
B) senior.
C) manager.
D) partner.

Question 52

Which one of the following is NOT a presentation and disclosure objective?

A) Classification
B) Completeness
C) Rights and obligations
D) Cutoff

Question 53

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 category 1?

A) Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1.
B) Obtain a management representation letter written by client.
C) Inquire of client regarding contingent liabilities.
D) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.

Question 54

Completing the audit is which phase of the audit?

A) One
B) Two
C) Three
D) Four

Question 55

Inquiries of management (orally and in writing) regarding the possibility of unrecorded contingencies will NOT be useful in uncovering:

A) a particular type of contingency which management has overlooked.
B) a contingency where management does not comprehend account disclosure requirements.
C) management's intentional failure to disclose existing contingencies.
D) all of the above

Question 56

A letter from the client's external legal counsel requesting information about any litigations or claims of which the lawyer is aware appears in the:

A) letter of inquiry.
B) letters testamentary.
C) lawyer's representation letter.
D) management representation letter.

Question 57

Although there is no professional requirement to do so on audit engagements, auditors normally issue a formal 'management' letter to their clients. This letter serves the following purpose/s:

A) to provide a written record of the auditor's observations and suggestions for improvement.
B) to encourage a better relationship between the audit firm and management and to suggest additional services that the firm can provide.
C) to demonstrate to management that the audit firm adds value beyond the audit service.
D) all of the above

Question 58

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 category 2?

A) Correspond with legal counsel.
B) Compare the subsequent- period purchase price of inventory with the recorded cost as a test of lower- of- cost- or- market valuation.
C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.
D) Test the collectibility of accounts receivable by reviewing subsequent period cash receipts.

Question 59

Which one of the following auditing procedures is ordinarily performed last?

A) Testing of the purchasing function
B) Reading of the minutes of the directors' meetings
C) Confirming accounts payable
D) Obtaining a management representation letter

Question 60

No disclosure in the financial statement is necessary if the contingent liability is:

A) Remote.
B) Probable.
C) Reasonably possible.
D) Has occurred.

Question 61

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

Question 62

Your client's balance sheet date is 30/6/2012, the audit report date is 31/8/2012 and the financial statements are issued 15/9/2012. A customer with a material outstanding accounts receivable balance declared bankruptcy on 5/7/2012 due to a warehouse fire that occurred 27/6/2012. State whether this situation warrants an adjustment to the financial statements, disclosure in footnotes but no adjustment or no action is required. Justify your answer.

Question 63

State the three conditions required for a contingent liability to exist.

Question 64

The management representation letter is prepared on the client's letterhead, addressed to the audit firm and signed by the chief executive officer and chief financial officer.

Question 65

The audit standards set out a standard format for management letters.

Question 66

Why are the working papers reviewed by another member of the audit firm at the completion of the audit?

Question 67

Discuss the purposes of performing analytical procedures during the audit completion phase.

Question 68

The management representation letter is prepared on the client's letterhead, addressed to the audit firm and signed by the chief executive officer and chief financial officer.

Question 69

An engagement checklist is prepared to assist the auditor in drawing final conclusions about the adequacy of the audit evidence.

Question 70

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.

Question 71

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 is required.

Question 72

Current auditing standards require the performance of analytical procedures during the completion phase of the audit.

Question 73

Identify and describe the four presentation and disclosure objectives.

Question 74

ASA 240 requires the auditor to communicate all errors, fraud and illegal acts discovered during the audit to the client's audit committee.

Question 75

What is the purpose of a management letter?

Question 76

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: either additional evidence must be obtained or a disclaimer of opinion must be issued.

Question 77

Management representation letters are required by professional auditing standards, whereas management letters are optional.

Question 78

The entire working papers are reviewed by a staff member who has no experience of the engagement.

Question 79

The issuance of debentures by the client subsequent to year- end would require a footnote disclosure in, but no adjustments to, the financial statements under audit.

Question 80

What is the purpose of a management representation letter?