Question 1

The auditor should consider the historical experience of the client in making past estimates.

Accepted Answer

The auditor should consider the historical experience of the client in making past estimates as it can help in evaluating the reasonableness of the estimates made by the client for the current period.

Question 2

When obtaining reasonable assurance that the financial statements are free from material misstatements,auditors should consider the applicable legal and regulatory frameworks that apply to the entity.

Accepted Answer

Auditors have a responsibility to consider the legal and regulatory frameworks that apply to the entity they are auditing, as these can impact the financial statements and affect the audit approach. Failure to consider such frameworks could result in the audit failing to detect material misstatements.

Question 3

If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations,then the auditor should withdraw from the engagement.

Accepted Answer

The auditor's decision to withdraw from an engagement due to management's lack of commitment to internal controls over compliance with laws and regulations depends on the severity of the issues and the applicable auditing standards. Withdrawal is an extreme step and other actions, such as discussing the matter with governance, may be appropriate first.

Question 4

A policy providing a reserve for returned products at the original sales price rather than at replacement cost violates GAAP.

Accepted Answer

According to GAAP, reserves for returned products should be based on the company's best estimate of the costs involved in processing returns and reducing the inventory to its recoverable value. This would typically include costs such as shipping, handling, restocking, and any potential damage or obsolescence of the product. Simply providing a reserve at the original sales price does not take into account these costs and therefore would violate GAAP.

Question 5

If the auditor determines that informative disclosures are not reasonably adequate,the auditor must identify that fact in the auditor's report.

Accepted Answer

According to auditing standards, if the auditor determines that informative disclosures are not reasonably adequate, they must identify that fact in the auditor's report. This is done to provide transparency to users of the financial statements regarding any deficiencies or limitations in the disclosures.

Question 6

A deviation from historical patterns is one of the factors that an auditor focuses on when evaluating the reasonableness of an estimate.

Accepted Answer

An auditor considers a deviation from historical patterns as a significant factor when assessing the reasonableness of an estimate because it may indicate a change in the underlying assumptions or circumstances.

Question 7

Noncompliancewith laws and regulations includes only acts of omission by the entity that are considered to be unintentional and contrary to the prevailing laws or regulations.

Accepted Answer

Noncompliance with laws and regulations can include both intentional and unintentional acts of omission or commission by the entity.

Question 8

Disclosures can be made either on the face of the financial statements in the form of classifications or in parenthetical notations and/or in the notes to the statements.

Accepted Answer

Disclosures can be made in various forms such as classifications, parenthetical notations, and notes to the financial statements.

Question 9

Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period into the foreseeable future.

Accepted Answer

This is a requirement for auditors under Generally Accepted Auditing Standards (GAAS) and the International Standards on Auditing (ISA). Auditors must assess whether there is significant doubt about a client's ability to continue operating as a going concern and include this evaluation in their audit report.

Question 10

Events or transactions occurring after the balance sheet date and before the audit report date,can be useful in identifying and evaluating the reasonableness of estimates.

Accepted Answer

Events or transactions occurring after the balance sheet date and before the audit report date can provide additional information that may impact the estimates made by management. This information may be useful for auditors in evaluating the reasonableness of estimates and assessing the appropriate disclosure in the financial statements.

Question 11

Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying footnotes.

Accepted Answer

This statement is true. Auditors are responsible for reviewing the MD&A to ensure that it is consistent with the audited financial statements and footnotes.

Question 12

The auditor should consider matters for disclosure only while gathering evidence during the course of the audit.

Accepted Answer

The auditor should consider matters for disclosure throughout the audit process, not just while gathering evidence. They should also consider any potential disclosure requirements based on regulatory or accounting standards.

Question 13

According to the Foreign Corrupt Practices Act of 1977 (FCPA),companies that have securities listed on U.S.markets must make and keep financial records that accurately and fairly reflect the transactions of the company and design and maintain an adequate system of internal accounting controls.

Accepted Answer

This statement is true according to the FCPA.

Question 14

If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA),the auditor should notify the CFO about the violations,their circumstance,and the effect on the financial statements.

Accepted Answer

The answer of If an auditor becomes aware of violations...

Question 15

A disclosure checklist is a convenient documentation format for evidence that the auditor adequately evaluated the client's disclosures.

Accepted Answer

A disclosure checklist is a commonly used tool to document that the auditor has adequately reviewed and evaluated the client's disclosures in the financial statements, notes, and other supplementary information. The checklist typically includes a list of required disclosures, with columns to indicate whether the disclosure has been made, whether it is accurate and complete, and whether it complies with relevant accounting standards or reporting frameworks. Using a disclosure checklist can help the auditor ensure that nothing important has been overlooked or omitted in the financial statements and can also provide evidence of the auditor's work for future reference.

Question 16

If the auditor continues to have substantial doubt about the client continuing as a going concern,the auditor should evaluate the adequacy of the client's related disclosures.

Accepted Answer

If the auditor has substantial doubt about the client continuing as a going concern, the auditor must evaluate the adequacy of the client's related disclosures in the financial statements. This is because the disclosure of any uncertainties about the client's ability to continue as a going concern is essential to provide users of the financial statements with the necessary information. Therefore, the answer is true.

Question 17

If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials,this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA).

Accepted Answer

This would be considered a violation of the FCPA, as it involves paying government officials to obtain a benefit (tax refunds).

Question 18

Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatements,including material misstatements related to noncompliance with laws and regulations.

Accepted Answer

This statement accurately describes the key responsibility of auditors in relation to financial statements.

Question 19

The auditor's report specifically covers the statements and disclosures made by management in the "Management Discussion and Analysis" (MD&A)section of the annual report.

Accepted Answer

The auditor's report covers the financial statements and footnotes included in the annual report, but it does not specifically cover the MD&A section.

Question 20

Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to the entity's compliance with laws and regulations.

Accepted Answer

Auditing standards acknowledge that an auditor may not be able to detect all material misstatements related to an entity's compliance with laws and regulations because such misstatements may arise from illegal acts, which are often concealed by those who perpetrate them. Additionally, changes in laws and regulations may occur after the audit's completion, which could impact the entity's compliance status.

Quiz 14: Activities Required in Completing a Quality Audit