Question 1

An auditor will ordinarily examine invoices from solicitors primarily in order to:

Accepted Answer

Auditors examine invoices from solicitors to identify possible unasserted litigation, claims, and assessments that may not have been disclosed or recorded by the client.

Question 2

Which of the following provisions is not a basic characteristic of a letter of support?

Accepted Answer

A letter of support typically involves a commitment to provide financial assistance or ensure the subsidiary's financial obligations are met, rather than an agreement not to demand repayment of debts.

Question 3

An auditor has received a solicitor's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted.The resignation of the client's solicitor shortly after receipt of the letter should alert the auditor that:

Accepted Answer

The resignation of the solicitor may indicate that undisclosed unasserted claims have arisen, which could impact the assessment of contingent liabilities. As a result, the auditor should investigate further to ensure that all potential liabilities are properly disclosed and accounted for in the financial statements. Option B is incorrect because the solicitor's letter implies that they were able to form a conclusion on the client's contingent liabilities. Option C is incorrect because there is no indication that a new examination is necessary at this point. Option D is incorrect because the auditor would not necessarily need to issue an adverse opinion based solely on the solicitor's resignation.

Question 4

Which of the following statements is not correct?

Accepted Answer

Engagement quality control reviews are required for all audits, not just public companies.

Question 5

A written representation from a client's management which, among other matters, acknowledges responsibility for the fair presentation of the financial report, should be signed by the:

Accepted Answer

The responsibility statement acknowledging the fair presentation of the financial report is typically signed by the chief executive officer and the chief financial officer. These individuals are typically the highest-ranking officials responsible for the financial affairs of the company and are therefore best positioned to make such a statement. The chairman of the board of directors may also sign the statement, but their signature is not required for the statement to be effective. The audit committee chairman and the client's solicitor are not typically involved in signing this type of statement.

Question 6

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30 per cent in the preceding year to 20 per cent in the current year.The auditor should:

Accepted Answer

A decline in gross profit percentage could be an indication of a misstatement in the financial statements, whether intentional or accidental. Therefore, the auditor should consider the possibility of an error and investigate further to determine the cause of the decline. It is not necessary to express an opinion that is modified due to the inability of the client company to continue as a going concern or evaluate management's performance without more information. While footnote disclosure may be required depending on the materiality of the decline, it is not the first action the auditor should take.

Question 7

A representation letter issued by a client:

Accepted Answer

A representation letter from a client does not reduce the auditor's responsibility. It is used to confirm certain matters or to support other audit evidence, but the auditor must still perform their own independent verification and assessment of the financial statements.

Question 8

Which set of assertions are tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's financial report?

Accepted Answer

The final review of the format of the entity's financial report primarily pertains to assertions about presentation and disclosure, as it involves ensuring that the financial statements are presented in accordance with the applicable accounting standards and that all necessary disclosures have been made. Assertions about classes of transactions and events and assertions about account balances at the period end are typically tested through substantive testing procedures performed throughout the audit, rather than through a final review of the financial report format.

Question 9

Auditors often request that the audit client send a letter of inquiry to those solicitors who have been consulted with respect to litigation, claims or assessments.The primary reason for this request is to provide the auditor with:

Accepted Answer

The primary reason auditors request a letter of inquiry to solicitors is to obtain corroborating evidence regarding litigation, claims, or assessments. This helps auditors verify the information provided by management and assess the financial implications for the audit.

Question 10

Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Accepted Answer

Reviewing compliance with the terms of debt agreements can provide insight into whether the entity may have difficulty meeting its financial obligations and may indicate substantial doubt about its ability to continue as a going concern. Confirming accounts receivable, reconciling interest expense with outstanding debt and confirming bank balances are important audit procedures, but may not be as effective in identifying going concern issues.

Quiz 11: Completion and Review