Deck 15: Ensuring Audit Quality in Completing the Audit

Question 1

The subsequent events period usually extends to the date that the management representation letter is signed.

Answer 1

True

Question 2

One of the primary drivers of the Financial Reporting Council Audit Quality Framework is audit firm culture.

Answer 2

True

Question 3

The final review stage of the audit is used for the consideration of unusual or unexpected balances or relationships that appear after proposed adjustments to the financial statements have been made.

Answer 3

True

Question 4

The use of common-size percentages is a useful analytical tool in the final review stages of the audit.

Question 5

A quality audit provides reasonable assurance that the audited financial statements are free from all errors and that every possible disclosure is made.

Question 6

ASC 450 (previously SFAS No.5,"Accounting for Contingencies")requires the accrual and disclosure of remote contingent losses that can be reasonably estimated.

Question 7

A response from the client's attorney concerning litigation,claims,and assessments represents material that is protected under the attorney-CPA privilege.

Question 8

When making a client continuance decision the auditor should evaluate a client based upon its relative risk and audit fee profile.

Question 9

The Financial Reporting Council Audit Quality Framework states that there are three primary drivers of audit quality.

Question 10

A letter is sent to the client's attorneys soliciting a response directly to the auditor in order to corroborate management's accounting and disclosure for contingent liabilities.

Question 11

The subsequent events period extends to the date of the auditor's report.

Question 12

The audit partner must make a client continuance decision after the client submits an engagement letter for consideration.

Question 13

Threatened litigation is an example of a contingent liability that must be considered in the concluding stages of the audit.

Question 14

A quality audit guarantees that the audited financial statements are not materially misstated.

Question 15

Settlement of a lawsuit in January for a different amount than was accrued at December 31 always requires a footnote.

Question 16

The GAO defines a high quality audit as one that is performed in accordance with generally accepted accounting principles.

Question 17

A quality audit is one performed in accordance with generally accepted auditing standards (GAAS)to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP)and are not materially misstated.

Question 18

The primary source of information about contingencies is the client's attorney.

Question 19

ASC 450 (previously SFAS No.5,"Accounting for Contingencies")requires the accrual and disclosure of probable contingent losses that can be reasonably estimated.

Question 20

The culture of an audit firm is likely to provide a positive contribution to audit quality where the leadership of an audit firm creates an environment where achieving high quality is valued,invested in and rewarded.

Question 21

If a client's major customer goes bankrupt in the period subsequent to cutoff and the allowance for doubtful accounts does not cover the loss,the client should adjust the allowance prior to the completion of the audit.

Question 22

The auditor may discover an event after the last date of field work,but prior to the issuance of the report.If this event is disclosed,the auditor has no other option but to dual date the report.

Question 23

A stock split takes place March 30,three days after the audit report is delivered to the client.The auditor is not required to do anything.

Question 24

The auditor may decide to communicate certain issues to the audit committee of the board of directors at the conclusion of an audit to provide client service but is not required to do so.

Question 25

Settlement of a lawsuit in January for a materially different amount than was accrued at December 31 calls for an adjustment to the financial statements.

Question 26

Subsequent events may indicate conditions that did not exist at the balance sheet date,and should be considered for footnote disclosure.

Question 27

Pending litigation can often be discovered by the audit team in its review of the minutes of the board of directors meetings.

Question 28

The primary source of corroborative evidence concerning litigation,claims,and assessments is the client.

Question 29

When the client is filing a registration statement with the SEC subsequent to fieldwork,the auditor is required to perform a subsequent events review up to the effective date of the registration statement.

Question 30

In auditing for subsequent events the auditor should read the minutes of meetings of the board of directors and stockholder meetings from year end through the last date of field work.

Question 31

Significant changes in working capital during the subsequent events period should be investigated by the auditor.

Question 32

The auditor must demand that management make all adjustments,no matter how large or small,prior to signing off on the financial statements.

Question 33

The auditor may discover an event after the last date of field work,but prior to the issuance of the report.If this event is disclosed,the auditor has no other option but to extend the review for subsequent events.

Question 34

If the auditor concludes that the client may have a going-concern problem then the auditor should identify and assess management's plans to overcome this problem.

Question 35

For the client to be considered a going concern,the auditor must satisfy himself or herself that the entity will continue in existence for a reasonable period of time,usually one year from the last day of the fiscal year.

Question 36

One purpose of the management representation letter is to further acknowledge management's responsibility for the financial statements in writing.

Question 37

The failure of management to provide a management representation letter is considered a scope limitation on the audit.

Question 38

The management representation letter should be typed on the client's letterhead,addressed to the auditor and signed by the audit partner.

Question 39

Because contingencies may have particular reporting implications,auditors assess client contingencies for possible disclosure and adjustment.

Question 40

A stock split takes place March 30,three days after the audit report is delivered to the client.The auditor should ask the client to recall the audit report.

Question 41

During the audit of Brooklyn Oil Company,the engagement team discovers that Brooklyn has illegally buried 40,000 gallons of sludge in the field behind its factory.The auditors will assess Brooklyn's treatment of the illegality in the financial statements and related disclosures and possibly draw attention to it in the audit report.

Question 42

An example of a Type II Subsequent Event includes an earthquake that happens after balance sheet date and destroys a major warehouse of the client.

Question 43

An example of a Type II Subsequent Event includes the settlement two months after year-end of a liability for an amount well in excess of the amount that was accrued at year-end.

Question 44

The letter of audit inquiry to the client's lawyer is the primary source of corroborative evidence of management's description of litigation,claims and assessments against them.

Question 45

A quality audit

A)is performed in accordance with generally accepted accounting principles (GAAP).
B)provides reasonable assurance that the audited financial statements are presented in accordance with generally accepted auditing standards (GAAS)
C)provides absolute assurance that the audited financial statements not materially misstated.
D)none of the above.

Question 46

Contingencies are considered by the auditor in relation to the ASC 450 (SFAS No.5)criteria to determine whether material contingencies exist with the client and,if so,that they are properly accrued or disclosed.

Question 47

The Sarbanes-Oxley Act requires the CEO and the CFO to certify that the financial statements are fairly presented in accordance with GAAP.

Question 48

The primary drivers of the Financial Reporting Council's Audit Quality Framework include which of the following?

A)client culture.
B)The skills and personal qualities of Chief Financial Officer and client accounting.
C)Factors outside of the control of the auditors that affect audit quality.
D)all of the above.

Question 49

If subsequent to the issuance of an audit report and financial statements facts comes to the auditor's attention that would have affected the audit report and financial statements had they been known at the time then the auditor can wait and update the audit report the next time that it is issued.

Question 50

A management representation letter is a letter to the auditors that is required to be signed by the client's chief executive and chief financial officer in order to remind management of its responsibility for the financial statements and confirm oral responses given to the auditor during the audit.

Question 51

If subsequent to the issuance of an audit report and financial statements facts comes to the auditor's attention that would have materially affected the audit report and the financial statements had those facts been known at the time,then the auditor should ask the client to inform regulatory agencies and users not to rely on the financial statements and to reissue those financial statements.

Question 52

A quality audit is one that

A)guarantees that the audited financial statements are not materially misstated.
B)provides reasonable assurance that the audited financial statements are free from all errors and every possible disclosure is made.
C)provides reasonable assurance that the audited financial statements not materially misstated.
D)none of the above.

Question 53

Contingencies include purchase and sale commitments and obligations to banks under standby letters of credit.

Question 54

The driver of audit quality under the Financial Reporting Council's Audit Quality Framework that relates to audit methodology and tools applied to the audit is which of the following?

A)audit firm culture.
B)reliability and usefulness of audit reporting.
C)effectiveness of the audit process.
D)factors outside the control of auditors.

Question 55

Analytical procedures do not need to be performed at the end of the audit as these procedures should have been already performed in the beginning of the audit and as a substantive test during the audit.

Question 56

The auditor's responsibility for accounting estimates made by management that are incorporated in the financial statements is to evaluate their reasonableness.

Question 57

The attorney's inability to assess the outcome of a material lawsuit is deemed a scope limitation that will adversely affect the opinion rendered by the auditor.

Question 58

Guarantees by the client of the liabilities of others are included as contingencies that are assessed by auditors during their concluding procedures.

Question 59

The skills and qualities of the engagement team is likely to provide a positive contribution to audit quality where

A)partners and staff understand their clients' business and adhere to the principles underlying auditing and ethical standards.
B)partners and staff exhibit professional skepticism in their work and are robust in dealing with issues identified during the audit.
C)sufficient training is given to audit personnel in audit,accounting and industry specialist issues.
D)all of the above.

Question 60

A concurring partner review (engagement quality review)is required at the end of every audit of public companies.

Question 61

Which one of the following would be the most effective procedure for discovering material Type II subsequent events?

A)Updating the search for unrecorded liabilities.
B)Resending all bank confirmations returned.
C)Reading of the minutes of board of directors' meetings
D)Surprise cash count at random locations.

Question 62

Which one of the following items would be most likely considered a contingent liability for Cannonbar,a grocery store chain?

A)A patron slipped on a grape and broke her neck during the period under audit,no claim has been made against Cannonbar.
B)The IRS has disagreed with deductions claimed on Cannonbar's previous period return.
C)Management believes that a lawsuit that was filed during the period under audit against Cannonbar will be settled.
D)Cannonbar has a note payable with a bank that was collateralized by all of the company's receivables in the period under audit.

Question 63

An auditor passes on several errors discovered during the audit.Which of the following represents the best reason for the auditor not requesting that the adjustments be made by management?

A)management has properly disclosed the extent of the errors in the footnotes to the consolidated financial statements of the year under audit.
B)the attorney's response to audit inquiry includes the statement that counsel is unaware of any errors and can make no such estimates.
C)the auditor is not required to discover all material errors in the financial statements under the concept of reasonable assurance.
D)the errors are not material in aggregate after considering the reversing effects of passed entries from previous periods.

Question 64

When making a client continuance decision the auditor should view an individual client as

A)an individual stock in an investment portfolio from a risk and return perspective.
B)a stand alone investment with a fixed level of risk and return.
C)since risk is unknown it is not a factor in the decision and the auditor should seek the highest fee possible.
D)an auditor must charge a standard fee based on the size of the client to maintain independence.

Question 65

Which of the following is the best example of a Type I subsequent event?

A)A related-party transaction occurs during fieldwork.
B)The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion.
C)Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for an amount materially in excess of estimates.
D)The company initiates an initial public offering subsequent to year-end.

Question 66

If the auditor concludes that there may be a going concern problem,the auditor should do which of the following?

A)withdraw from the engagement.
B)issue a qualified or adverse opinion.
C)identify and assess management's plan to overcome the problem.
D)communicate this fact with management one level above the controller.

Question 67

When a subsequent event provides evidence about conditions that did not exist at the balance sheet date,the auditor should do which of the following?

A)ensure that any necessary footnote disclosures be included with the statements.
B)ensure that the financial statements are adjusted to reflect the information,including any necessary footnote disclosures.
C)give an inappropriate opinion.
D)provide management with a new engagement letter to document the terms of the revised arrangement.

Question 68

When requiring a letter of audit inquiry from the client's attorney,which of the following information will be requested?

A)A statement regarding conflicts of interest that the attorney may have with the client.
B)The attorney's expert opinion of proper GAAP treatment related to client contingencies.
C)An evaluation of the likelihood of unfavorable outcome of,and estimated losses from contingencies.
D)Possible auditor defenses for third-party litigation related to ordinary negligence claims.

Question 69

Which one of the following is not an example of additional procedures that relate to the discovery of subsequent events?

A)Partner review of all workpapers.
B)Reading interim financial statements and comparing them to the audited statements to note significant changes.
C)Reading the board of directors' minutes for all meetings during the year and after year- end through the end of field work.
D)Management inquiry.

Question 70

Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures?

A)Management representation letter.
B)GAAS.
C)Inquiry of the CFO.
D)Checklists.

Question 71

The responsibility for designing and maintaining policies and procedures to identify,evaluate,and account for contingencies rests with whom?

A)management.
B)auditor.
C)audit committee.
D)client's attorney.

Question 72

Management of Megadile,Inc.refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy.Such actions will be considered by the auditors to be

A)a violation of full and fair disclosure.
B)securities law violation.
C)a scope limitation.
D)a breakdown in internal controls.

Question 73

Which one of the following subsequent events will least likely result in an adjustment to the financial statements?

A)Material change in the amount of settlement of a lawsuit which had been estimated at year end.
B)Bankruptcy of a customer who owes your client a material amount on open account at year end for which there is an inadequate allowance estimate.
C)Sale of a large block of inventory at a price materially below carrying value.
D)Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.

Question 74

After an audit report is issued,the auditor discovers through a peer review that an important audit procedure has been omitted.The auditor should do which of the following?

A)notify all parties known to be relying on the report.
B)immediately request the client recall the report.
C)contact his or her professional liability insurance carrier.
D)determine whether the report can still be supported in light of the omitted procedure.

Question 75

The refusal of an attorney who provided significant litigation counsel to a client to furnish information requested in an audit is considered by the auditor to be which of the following?

A)departure from GAAP.
B)scope limitation.
C)a violation of the attorney-client privilege.
D)contingent liability.

Question 76

When a subsequent event provides evidence about conditions that existed at the balance sheet date,the auditor should do which of the following?

A)assign a specialist.
B)ensure that the financial statements are adjusted to reflect the information,including any necessary footnote disclosures.
C)shop for an opinion that fits the desired type of event.
D)provide management with a new engagement letter to document the terms of the revised arrangement.

Question 77

Before releasing the audit report,the auditor should do which of the following?

A)issue a management letter.
B)perform an analytical review.
C)give subsequent contingency disclosure.
D)estimate the subsequent client fee for services.

Question 78

When making a client continuance decision the auditor should evaluate a client based upon which of the following?

A)client entity characteristics.
B)independence risk factors.
C)financial reporting risks.
D)all of the above.

Question 79

Analytical review procedures are required by GAAS for which of the following?

A)the planning stages of the audit.
B)the final phase of the audit.
C)both the planning and final phases of the audit.
D)performance of tests of controls.

Question 80

Where would the auditor make mention of issues noted during audit procedures that are not of audit significance?

A)Engagement letter.
B)Management letter.
C)Representation letter.
D)Attorney letter.