Question 1

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'.

Accepted Answer

The management letter is optional and is used by auditors to provide recommendations to the client for improving business operations, rather than being a requirement or following a prescribed format.

Question 2

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

Accepted Answer

The auditor's primary concerns related to presentation- and disclosure-related objectives are to ensure that the financial statements are classified and disclosed appropriately (classification) and that all information that should be included is included (completeness). Therefore, the best choice is D - both B (classification) and C (completeness).

Question 3

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.

Accepted Answer

The search for contingent liabilities is typically done early in the engagement, as it is important to identify any potential liabilities that could affect the financial statements.

Question 4

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.

Accepted Answer

The answer of ASA 720 requires the auditor to read...

Question 5

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

Accepted Answer

A specific letter of inquiry to the client's external legal counsel should include all of the above - a list of litigation and claims, a request from the client's external legal counsel confirming the reasonableness of management's assessment of the outcome of each identified litigation, and management's assessment of the outcome of each identified litigation. This will provide a comprehensive understanding of the legal matters affecting the client's financial statements.

Question 6

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.

Accepted Answer

If sufficient evidence has not been obtained to draw a conclusion about the fairness of the client's representations, the auditor has two choices. The first choice is to obtain additional evidence, which may involve performing additional procedures or seeking clarification from the client. The second choice is to issue a qualified opinion or a disclaimer of opinion. The choice will depend on the materiality of the issue and the impact on users of the financial statements. In most cases, the auditor should attempt to obtain additional evidence before issuing a modified opinion. Therefore, choice A is the best option.

Question 7

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.

Accepted Answer

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 one year beyond the reporting date, which is the date of the auditor's report. Therefore, option B is the correct answer.

Question 8

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

Accepted Answer

Writing off a bad debt is not a contingent liability because it represents an actual loss that has already occurred and has been recognized on the financial statements. A contingent liability is a potential liability that depends on the outcome of future events, such as income tax disputes or legal actions. Product warranties are also a good example of contingent liabilities because they represent a potential future cost that depends on how many customers make warranty claims.

Question 9

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.

Accepted Answer

The five categories of specific matters that might be included in a management representation letter are consistent with ASA 580 are:- Financial reports- Completeness of information- Recognition, measurement, and disclosure- Significant risks and uncertainties- Subsequent events

Question 10

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.

Accepted Answer

The destruction of inventory by fire after the balance sheet date is a non-adjusting event as it does not provide evidence of conditions that existed at the balance sheet date.

Question 11

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.

Accepted Answer

Analytical procedures during the final review are typically performed by a partner, as they have the experience and authority to make final judgments on the financial statements.

Question 12

Which one of the following is NOT a presentation and disclosure objective?
A) Classification
B) Completeness
C) Rights and obligations
D) Cutoff

Accepted Answer

Classification, completeness, and rights and obligations are all presentation and disclosure objectives. Cutoff is a generally accepted accounting principle related to recognizing revenue and expenses in the appropriate period.

Question 13

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.

Accepted Answer

Examining subsequent sales and purchases transactions to determine whether the cutoff is accurate is a procedure normally integrated as a part of the verification of year-end account balances, particularly for the verification of revenue and expense accounts. The other choices (A, B, and C) are procedures performed specifically for the purpose of discovering subsequent events.

Question 14

Completing the audit is which phase of the audit?
A) One
B) Two
C) Three
D) Four

Accepted Answer

Completing the audit is the final phase of the audit, also known as phase four. This involves finalizing the audit report and issuing an opinion on the financial statements.

Question 15

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

Accepted Answer

Inquiries of management, whether oral or written, are generally not effective in uncovering situations where management is intentionally failing to disclose existing contingencies. This is because if management is intentionally withholding information, they are unlikely to reveal such information simply in response to an inquiry.

Question 16

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.

Accepted Answer

The answer of A letter from the client's external legal...

Question 17

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

Accepted Answer

All of the above are purposes of issuing a formal management letter. The letter provides a written record of the auditor's observations and suggestions for improvement, encourages a better relationship and promotes additional services, and demonstrates the added value that the audit firm provides beyond the audit service.

Question 18

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.

Accepted Answer

Corresponding with legal counsel is performed specifically for the purpose of discovering subsequent events, and is therefore in category 2. The other options are procedures normally integrated as part of year-end balance verification.

Question 19

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

Accepted Answer

Obtaining a management representation letter is typically the last auditing procedure as it involves obtaining a final statement from management that all information provided to the auditor is accurate and complete. This provides a final confirmation of the audit findings and conclusions.

Question 20

No disclosure in the financial statement is necessary if the contingent liability is:
A) Remote.
B) Probable.
C) Reasonably possible.
D) Has occurred.

Accepted Answer

No disclosure is necessary if the contingent liability is remote, as it is unlikely to occur and will not have a significant impact on the financial statements. The other options (probable, reasonably possible, has occurred) would require disclosure or recognition in the financial statements.

Quiz 17: Completing the Audit

The management letter:

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

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

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:

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:

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

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

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?

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

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

Completing the audit is which phase of the audit?

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

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:

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:

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

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