Question 1

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.

Accepted Answer

If legal counsel believes that the likelihood of the client losing the lawsuit is remote, then no financial statement accrual or disclosure is required. This is in line with the accounting principle of materiality, where only significant or material losses need to be disclosed or accrued.

Question 2

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.

Accepted Answer

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

Question 3

As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation- and disclosure-related objectives.

Accepted Answer

During phase IV of the audit, auditors evaluate the evidence obtained during the previous phases of the audit to determine the need for additional procedures related to presentation and disclosure objectives.

Question 4

When testing for contingent liabilities, the primary objective at the initial stage of the tests is to determine the existence of contingencies.

Accepted Answer

The primary objective in the initial stage of testing for contingent liabilities is to determine the existence of contingencies, so it is true.

Question 5

A letter of representation written by the client's management to the auditor formalises resolutions of disagreements about different matters throughout the audit.

Accepted Answer

A letter of representation (or management representation letter) is written by the client's management to the auditor at the end of an audit process to confirm certain information and representations explicitly or implicitly given to the auditor. It does not formalize resolutions of disagreements about different matters; rather, it is a part of the audit evidence the auditor gathers. Disagreements are resolved through discussions and adjustments in the audit findings, not through the letter of representation.

Question 6

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

Accepted Answer

An engagement checklist is a tool used by auditors to ensure they have obtained sufficient and appropriate audit evidence and have completed all required procedures. It is used to assist in drawing final conclusions about the adequacy of the evidence obtained. Thus, the given statement is true.

Question 7

If a contingency will probably occur and can be reasonably estimated, the financial statement amounts would need to be adjusted.

Accepted Answer

If a contingency is likely to occur and can be estimated, the financial statements should be adjusted to reflect the potential impact on the company's financial position and performance. This is in accordance with generally accepted accounting principles (GAAP). Failure to properly account for contingencies could result in misstatement of financial statements and potential legal or regulatory consequences.

Question 8

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.

Accepted Answer

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

Question 9

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

Accepted Answer

According to current auditing standards, analytical procedures should be performed during the completion phase of the audit to evaluate the overall reasonableness of the financial statements and assess whether the financial statements are consistent with the auditor's overall understanding of the entity.

Question 10

Auditors approach obtaining evidence for presentation- and disclosure-related objectives differently than they approach obtaining evidence for transaction-related and balance-related objectives.

Accepted Answer

The answer of Auditors approach obtaining evidence for presentation- and...

Question 11

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

Accepted Answer

Management representation letters are a required communication from management to the auditor, whereas management letters are not required but may be included as an optional communication from the auditor to management.

Question 12

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.

Accepted Answer

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

Question 13

Your client's balance sheet date is 30 June 2012, the audit report date is 15 September 2012, and the financial statements and audit report are issued 30 September 2012.Your client suffers a material loss due to an uninsured loss of inventory as a result of fire that occurred 5 July 2012.This event warrants footnote disclosure in, but not an adjustment to, the 30 June 2012 financial statements.

Accepted Answer

The event occurred after the balance sheet date, but before the audit report date and the financial statements issuance date. Therefore, it only requires footnote disclosure in the financial statements, but not an adjustment to the 30 June 2012 financial statements.

Question 14

Because a management representation letter is a written statement from a non-independent source, it cannot be regarded as sufficient evidence of any assertions.

Accepted Answer

A management representation letter is a statement provided by the management of a company and therefore cannot be considered as independent evidence as it may be biased or may not cover all aspects of a particular assertion. It is important to gather corroborating evidence from other sources to support any assertions made in the management representation letter.

Question 15

An agreement by a client to purchase an asset, irrespective of future trading conditions, is known as a contingency.

Accepted Answer

An agreement by a client to purchase an asset, irrespective of future trading conditions, is known as a firm commitment, not a contingency.

Question 16

If the client's balance sheet date is 30 June 2012, the audit report date is 11 September 2012, and the date the financial statements and audit report are issued is 10 October 2012, then the auditor is responsible for reviewing subsequent events occurring between 30 June 2012 and 10 October 2012.

Accepted Answer

The auditor's responsibility for reviewing subsequent events extends up to the date of the audit report, which in this case is 11 September 2012, not the date the financial statements and audit report are issued (10 October 2012).

Question 17

Auditors do not need to design and perform procedures in every audit to review for contingent liabilities and subsequent events as part of their phase IV testing.

Accepted Answer

Auditors are required to design and perform procedures to review for contingent liabilities and subsequent events as part of their phase IV testing. This is necessary to ensure that the financial statements are fairly presented and free from material misstatements. Therefore, option B is the correct answer.

Question 18

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

Accepted Answer

Typically, the review of working papers is conducted by a more experienced staff member or supervisor who has a comprehensive understanding of the engagement to ensure accuracy and completeness.

Question 19

Subsequent events which require adjustment to the financial statements provide additional information about significant conditions or events which did not exist at the balance sheet date.

Accepted Answer

Subsequent events that require adjustment to the financial statements are those that provide additional evidence about conditions that existed at the balance sheet date, not those that did not exist at the balance sheet date.

Question 20

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.

Accepted Answer

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.

Quiz 17: Completing the audit

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.

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.

As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation- and disclosure-related objectives.

When testing for contingent liabilities, the primary objective at the initial stage of the tests is to determine the existence of contingencies.

A letter of representation written by the client's management to the auditor formalises resolutions of disagreements about different matters throughout the audit.

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

If a contingency will probably occur and can be reasonably estimated, the financial statement amounts would need to be adjusted.

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.

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

Auditors approach obtaining evidence for presentation- and disclosure-related objectives differently than they approach obtaining evidence for transaction-related and balance-related objectives.

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

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.

Because a management representation letter is a written statement from a non-independent source, it cannot be regarded as sufficient evidence of any assertions.

An agreement by a client to purchase an asset, irrespective of future trading conditions, is known as a contingency.

If the client's balance sheet date is 30 June 2012, the audit report date is 11 September 2012, and the date the financial statements and audit report are issued is 10 October 2012, then the auditor is responsible for reviewing subsequent events occurring between 30 June 2012 and 10 October 2012.

Auditors do not need to design and perform procedures in every audit to review for contingent liabilities and subsequent events as part of their phase IV testing.

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

Subsequent events which require adjustment to the financial statements provide additional information about significant conditions or events which did not exist at the balance sheet date.

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.