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34 Cards in this Set

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27. If a potential loss on a contingent liability is remote, the liability usually is:
a. disclosed in footnotes, but not accrued.
b. neither accrued nor disclosed in footnotes.
c. accrued and indicated in the body of the financial statements.
d. disclosed in the auditor’s report but not disclosed on the financial statements.
b. neither accrued nor disclosed in footnotes.
28. 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.
a. True
b. False
True
29. The responsibility for identifying and deciding the appropriate accounting treatment for contingent liabilities rests with a company’s _____.
a. auditors.
b. legal counsel.
c. management.
d. management and the auditors
management
30. When preparing a standard inquiry of client’s attorney letter, the client’s letterhead should be used, and the letter should be signed by the client company’s officials.
a. True
b. False
a. True
31. Which of the following is not a correct combination of the “likelihood of occurrence” and financial statement treatment?
a. Remote: no disclosure.
b. Probable (amount is estimable): financial statements are adjusted.
c. Reasonably possible: financial statements are adjusted.
d. Probable (amount is not estimable): footnote disclosure is required.
c. Reasonably possible: financial statements are adjusted.
32. Client representation letters are required by professional auditing standards, whereas management letters are optional.
a. True
b. False
a. True
33. At what stages of the audit must analytical procedures be used?
a. Planning and testing.
b. Testing and completion.
c. Planning and completion.
d. Planning, testing, and completion.
c. Planning and completion.
34. The letter of representation obtained from an audit client should be:
a. dated as of the end of the period under audit.
b. dated as of the audit report date.
c. dated as of any date decided upon by the client and auditor.
d. dated as of the issuance of the financial statement
b. dated as of the audit report date.
35. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n):
a. a qualified opinion or disclaimer.
b. qualified opinion.
c. standard unqualified opinion.
d. unqualified opinion with a separate explanatory paragraph.
a. a qualified opinion or disclaimer.
36. Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?
a. Discovery of the inclusion of material nonexistent sales.
b. Discovery of the failure to write off material obsolete inventory.
c. Discovery of the omission of a material footnote.
d. Decrease in the value of investments.
d. Decrease in the value of investments.
37. Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did not exist at the balance sheet date.
a. True
b. False
b. False
38. Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities at the balance sheet date?
a. Obtain an attorney’s letter from the client’s attorney.
b. Confirm large accounts payable balances at the balance sheet date.
c. Examine purchase orders issued for several days prior to the close of the year.
d. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.
d. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.
39. As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter?
a. To provide audit evidence.
b. To emphasize to the client the client’s responsibility for the correctness of the financial statements.
c. To satisfy the CPA by means of other auditing procedures when certain customary auditing procedures are not performed.
d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts
d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts
40. A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that:
a. an adverse opinion will be necessary.
b. undisclosed unasserted claims may have arisen.
c. the auditor must begin a completely new examination of contingent liabilities.
d. the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.
b. undisclosed unasserted claims may have arisen.
Which of the following is a contingent liability that auditors would be concerned about?

Guarantees of obligations for others
Product warranties
Income tax disputes
Pending litigation
All of the above
All of the above
A contingent liability is recorded on the financial statements if it can be reasonably estimated and:

The likelihood of the occurrence of the event is probable
The likelihood of the occurrence of the event is remote
The likelihood of the occurrence of the event is reasonably possible
None of the above
he likelihood of the occurrence of the event is probable
Which type of opinion should an auditor issue if a client's attorney will not provide the auditor with information about existing lawsuits?

Adverse
Qualified
Disclaimer
B and C only
B and C only
Which of the following events would be a subsequent period event which would require adjustments to current year's financial statements?

Sale of goods
Change in depreciation estimate
Collection of accounts receivable
Sale of investments at a price below record cost
A merger or acquisition
Which of the following events would be a subsequent period event which may require disclosure in the notes of the financial statements?

Bankruptcy of a accounts receivable customer
A merger or acquisition
Settlement of litigation at a different amount than recorded on the books
Sale of investment at a price below recorded cost
Sale of investments at a price below record cost
A client's letter of representation serves what purpose?

To impress upon auditors its responsibility for the assertions in the financial statements
To remind the auditor of the potential misstatements or omission in the financial statements
To document the responses from management to inquiries above various aspects
All of the above
To document the responses from management to inquiries above various aspects
Auditing standard ___________ requires an auditor to record other information included in the client's annual report.

AU 610
AU 108
AU 550
AU 216
AU 550
Why should an experienced member of the audit firm review the audit documentation?

To make sure that the audit meets the CPA firm's standard of performance
To evaluate the performance of inexperienced personnel
To counteract the bias that often enters into the auditor's judgment
All of the above
All of the above
An auditor should communicate its initial findings with:

Creditors
Audit committee
Government
None of the above
Audit committee
When subsequent discovery of facts occur and the client refuses to disclose the misstated statements, the auditor should inform:

Each person that relied on the financial statements
The Board of Directors
The appropriate regulatory agencies
All of the above
All of the above
Experienced and knowledgeable auditors should review the findings of an audit.
True
False
True
An example of contingent liability is a lawsuit that has been filed but not resolved.
True
False
True
Confirmations from the client's attorney are a major procedure auditors rely on for evaluating known litigation or other claims against the client and identifying additional ones.
True
False
False
Unasserted claims are known claims that attorney's and auditor's are aware of that may expose the client to a lawsuit.
True
False
False
Subsequent period events may require an adjustment of current year's financial statements.
True
False
True
A dual-dated audit report is an audit report that includes two dates.
True
False
True
A letter of representation is a document produced by the auditors and given to the client which communicates all of the most important oral representations made during the audit.
True
False
False
An audit checklist is a good tool for the auditor in that it serves as a reminder of items that may have been overlooked.
True
False
True
The only required communication required of an auditor to a client is the final audit report.
True
False
False
An auditor does not have an obligation to make users of financial statements aware of subsequent discoveries of fact.
True
False
True