Audit Ch. 24

Front 1

Ch. 24

Back 1

Completing the Audit

Front 2

LO-1

Back 2

LO-1

Front 3

1) Auditors often integrate procedures for presentation and disclosure objectives with:
A)
Tests for planning objectives Tests for balance-related objectives
Yes Yes

B)
Tests for planning objectives Tests for balance-related objectives
No No

C)
Tests for planning objectives Tests for balance-related objectives
Yes No

D)
Tests for planning objectives Tests for balance-related objectives
No Yes

Back 3

D) No Yes

Front 4

2) The auditor's primary concerns relative to presentation and disclosure-related objectives is:
A) accuracy.
B) existence.
C) completeness.
D) occurrence.

Back 4

B) existence.

Front 5

LO-2

Back 5

LO-2

Front 6

1) 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.

Back 6

B) neither accrued nor disclosed in footnotes.

Front 7

2) A commitment is best described as:
A) an agreement to commit the firm to a set of fixed conditions in the future.
B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
D) a potential future obligation to an outside party for an as yet to be determined amount.

Back 7

A) an agreement to commit the firm to a set of fixed conditions in the future.

Front 8

3) At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the:
A) management letter.
B) letter of inquiry.
C) letters testamentary.
D) management letter of representation.

Back 8

D) management letter of representation.

Front 9

4) Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
A) auditors
B) legal counsel
C) management
D) management and the auditors

Back 9

C) management

Front 10

5) You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to:
A) accrue a $4 million liability.
B) disclose a liability and provide a range of outcomes.
C) since there is less than a 50% chance of occurrence, ignore.
D) since there is greater that a remote chance of occurrence, accrue the $10 million.

Back 10

B) disclose a liability and provide a range of outcomes.

Front 11

6) Which of the following is not a contingent liability with which an auditor is particularly concerned?
A)
Notes receivable discounted Product warranties
Yes Yes

B)
Notes receivable discounted Product warranties
No No

C)
Notes receivable discounted Product warranties
Yes No

D)
Notes receivable discounted Product warranties
No Yes

Back 11

A) Yes Yes

Front 12

7) Audit procedures related to contingent liabilities are initially focused on:
A) accuracy.
B) completeness.
C) existence.
D) occurrence.

Back 12

D) occurrence.

Front 13

8) With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?
A) Controller
B) President
C) Accounts receivable clerk
D) Vice president of sales

Back 13

C) Accounts receivable clerk

Front 14

9) Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering:
A)
Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements.
Yes Yes

B)
Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements.
No No

C)
Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements.
Yes No

D)
Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements.
No Yes

Back 14

D) No Yes

Front 15

10) Commitments include all but which of the following?
A) agreements to purchase raw materials
B) pension plans
C) agreements to lease facilities at set prices
D) Each of the above is a commitment.

Back 15

D) Each of the above is a commitment.

Front 16

11) If an auditor concludes there are contingent liabilities, then he or she must evaluate the:
A)
Materiality of the potential liability. Nature of the disclosure to be included in
the financial statements.
Yes Yes

B)
Materiality of the potential liability. Nature of the disclosure to be included in
the financial statements.
No No

C)
Materiality of the potential liability. Nature of the disclosure to be included in
the financial statements.
Yes No

D)
Materiality of the potential liability. Nature of the disclosure to be included in
the financial statements.
No Yes

Back 16

A) Yes Yes

Front 17

12) 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

Back 17

D) compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end

Front 18

13) If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?
A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability.
B) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
C) Frequently, the CPA firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys.
D) Answers B and C are correct, but answer A is not.

Back 18

D) Answers B and C are correct, but answer A is not.

Front 19

14) 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) final analytical procedures
B) search for contingent liabilities
C) evaluate the going concern assumption
D) acquire the client's letter of representation

Back 19

B) search for contingent liabilities

Front 20

15) A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?
A) Review minutes and resolutions of the board of directors.
B) Review prior year's audit files with respect to such guarantees.
C) Review the possibility of such guarantees with the chief accountant.
D) Review the legal letter returned by the company's outside legal counsel.

Back 20

A) Review minutes and resolutions of the board of directors.

Front 21

16) Elise-Greer, LLP is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate's indebtedness have been detected?
A) Send the standard bank confirmation request to all of the client's lender banks.
B) Review client minutes and obtain a representation letter.
C) Examine supporting documents for all entries in intercompany accounts.
D) Obtain written confirmation of indebtedness from the auditor of the affiliate.

Back 21

B) Review client minutes and obtain a representation letter.

Front 22

24) 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 would generally be required.
A) True
B) False

Back 22

True

Front 23

25) Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.
A) True
B) False

Back 23

True

Front 24

26) When testing for contingent liabilities, the primary objective at the initial stage of the tests is to determine the existence of contingencies.
A) True
B) False

Back 24

True

Front 25

LO-3

Back 25

LO-3

Front 26

1) Auditors will generally send a standard inquiry letter to:
A) only those attorneys who have devoted substantial time to client matters during the year.
B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
C) those attorneys whom the client relies on for advice related to substantial legal matters.
D) only the attorney who represents the client in proceeding where the client is defendant.

Back 26

B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.

Front 27

2) Who may identify matters to be included in a letter of inquiry sent to a client's legal counsel?
A)
Auditors Company management
Yes Yes

B)
Auditors Company management
No No

C)
Auditors Company management
Yes No

D)
Auditors Company management
No Yes

Back 27

A) Yes Yes

Front 28

3) Auditors, as part of completing the audit, will request the client to send a letter of inquiry to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to:
A) determine the range of probable loss for asserted claims.
B) corroborate of information supplied by management concerning litigation, claims, and assessments.
C) outside opinion of probability of losses in determining accruals for contingencies.
D) outside opinion of probability of losses in determining the proper footnote disclosure.

Back 28

B) corroborate of information supplied by management concerning litigation, claims, and assessments.

Front 29

4) The standard letter of inquiry to the client's legal counsel should be prepared on:
A) plain paper (no letterhead) and be unsigned.
B) lawyer's stationery and signed by the lawyer.
C) auditor's stationery and signed by an audit partner.
D) client's stationery and signed by a company official.

Back 29

D) client's stationery and signed by a company official.

Front 30

5) When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n):
A) disclaimer of opinion.
B) qualified opinion.
C) standard unqualified opinion.
D) unqualified opinion with a separate explanatory paragraph.

Back 30

A) disclaimer of opinion.

Front 31

6) 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.

Back 31

B) undisclosed unasserted claims may have arisen.

Front 32

7) Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?
A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
B) Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Back 32

B) Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

Front 33

8) An attorney is responding to an independent auditor as a result of the client's letter of inquiry. The attorney may appropriately limit the response to:
A) asserted claims and litigation.
B) asserted, overtly threatened, or pending claims and litigation.
C) items which have an extremely high probability of being resolved to the client's detriment.
D) matters to which the attorney has given substantive attention in the form of legal consultation or representation.

Back 33

D) matters to which the attorney has given substantive attention in the form of legal consultation or representation.

Front 34

9) Contingent liability disclosure in the footnotes of the financial statements would normally be made when:
A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
B) a reasonable estimation of the loss can be made, but the outcome is not probable.
C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made.
D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.

Back 34

A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.

Front 35

12) 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

Back 35

True

Front 36

13) In a standard inquiry of client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date.
A) True
B) False

Back 36

False

Front 37

14) If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation.
A) True
B) False

Back 37

True

Front 38

LO-4

Back 38

LO-4

Front 39

1) The auditor has a responsibility to review transactions and activities occurring after the year-end to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for:
A) contingent liabilities.
B) subsequent year's transactions.
C) late unusual occurrences.
D) subsequent events.

Back 39

D) subsequent events.

Front 40

2) Which type of subsequent event requires consideration by management and evaluation by the auditor?
A)
Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered.
Yes Yes

B)
Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered.
No No

C)
Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered.
Yes No

D)
Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered.
No Yes

Back 40

A) Yes Yes

Front 41

3) Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation:
A) took place before year-end.
B) did not take place until after year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.

Back 41

B) did not take place until after year-end.

Front 42

4) An auditor has the responsibility to actively search for subsequent events that occur subsequent to the:
A) balance sheet date.
B) date of the auditor's report.
C) balance sheet date, but prior to the audit report.
D) date of the management representation letter.

Back 42

C) balance sheet date, but prior to the audit report.

Front 43

5) Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
A) merger or acquisition activities
B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
C) issuance of common stock
D) an uninsured loss of inventories due to a fire

Back 43

B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance

Front 44

6) A significant customer of the firm suffers a large economic loss after year end, but prior to completion of field work. The audit client believes this event will have material effect on the financial statements. The auditor should:
A) adjust the financial statements for the year under audit.
B) add a paragraph to the audit report.
C) advise the client to disclose the event in the notes to the financial statements.
D) advise the client to delay issuing the financial statements until the economic loss can be determined.

Back 44

C) advise the client to disclose the event in the notes to the financial statements.

Front 45

7) The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to:
A) adjust the financial statements for the year under audit.
B) disclose in the notes to financial statement the amount of the adjustment.
C) duly note in the audit workpapers that next year's financial statements need to be adjusted.
D) make no adjustment of the financial statements for the year under audit.

Back 45

A) adjust the financial statements for the year under audit.

Front 46

8) The audit procedures for the subsequent events review can be divided into two categories: (1) procedures 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) Inquiries of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
D) Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1.

Back 46

C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.

Front 47

9) 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 attorneys.
B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.

Back 47

A) Correspond with attorneys.

Front 48

10) 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

Back 48

D) decrease in the value of investments

Front 49

11) In connection with the annual audit, which of the following is not a "subsequent events" procedure?
A) Review available interim financial statements.
B) Read available minutes of meetings of stockholders, directors, and committees and, for meetings where minutes are not available, inquire about matters dealt with at such meetings.
C) Make inquiries with respect to the financial statements covered by the auditor's previously issued report if new information has become available during the current examination that might affect that report.
D) Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.

Back 49

A) Review available interim financial statements.

Front 50

12) An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of:
A) the auditor's report.
B) a post-dated footnote.
C) the next scheduled interim visit.
D) the final billing for audit services rendered.

Back 50

A) the auditor's report.

Front 51

13) Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements?
A) sale of a bond or capital stock issue
B) loss of plant or inventories as a result of fire or flood
C) a significant decline in the market price of the corporation's stock
D) settlement of litigation when the event giving rise to the claim took place after the balance sheet date

Back 51

C) a significant decline in the market price of the corporation's stock

Front 52

14) Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
A) loss of a plant as a result of a flood
B) sale of long-term debt or capital stock
C) settlement of litigation in excess of the recorded liability
D) major purchase of a business that is expected to double the sales volume

Back 52

C) settlement of litigation in excess of the recorded liability

Front 53

15) If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?
A)
The date of the
original last day of
fieldwork only. The date of the
subsequent
event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event.
Yes Yes No

B) Yes No Yes

C) No Yes No

D) No No Yes

Back 53

B) Yes No Yes

Front 54

16) An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to:
A) extend appropriate audit procedures.
B) assume responsibility for events after the date of the auditor's report.
C) assume responsibility for event from fiscal year end to the date of the audit report.
D) roll the dice and hope for a successful outcome.

Back 54

A) extend appropriate audit procedures.

Front 55

17) The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time:
A) beginning with the balance sheet date and ending with the date of the auditor's report.
B) beginning with the start of the fiscal year under audit and ending with the balance sheet date.
C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report.
D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.

Back 55

D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.

Front 56

18) Which of the following is not a reason why the auditor requests that the client provide a letter of representation?
A) Professional auditing standards require the auditor to obtain a letter of representation.
B) It impresses upon management its responsibility for the accuracy of the information in the financial statements.
C) It provides written documentation of the oral responses already received to inquiries of management.
D) It provides written documentation, which is a higher quality of evidence than management's oral responses to inquiries.

Back 56

D) It provides written documentation, which is a higher quality of evidence than management's oral responses to inquiries.

Front 57

19) Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent the:
A) culmination of conditions that existed at the balance sheet date.
B) discovery of new conditions occurring in the subsequent events period.
C) final estimates of losses relating to casualties occurring in the subsequent events period.
D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Back 57

B) discovery of new conditions occurring in the subsequent events period.

Front 58

20) An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:
A) extend auditing procedures and assume responsibility for a greater period of time.
B) accept responsibility for subsequent events.
C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.
D) assume responsibility for events subsequent to the issuance of the auditor's report.

Back 58

A) extend auditing procedures and assume responsibility for a greater period of time.

Front 59

21) After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:
A) material adverse events occur after the date of the auditor's report.
B) final determination or resolution was made of a contingency which had been disclosed in the financial statements.
C) final determination or resolution was made on matters which had resulted in a qualification in the auditor's report.
D) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.

Back 59

D) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.

Front 60

22) A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?
A) sale of a major subsidiary
B) adoption of accelerated depreciation methods
C) write-off of a substantial portion of inventory as obsolete
D) collection of 90% of the accounts receivable existing at December 31

Back 60

C) write-off of a substantial portion of inventory as obsolete

Front 61

23) The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements?
A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
C) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
D) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.

Back 61

B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Front 62

26) The issuance of bonds by the client subsequent to year-end would require a footnote disclosure in, but no adjustment to, the financial statements under audit.
A) True
B) False

Back 62

True

Front 63

27) 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

Back 63

False

Front 64

28) Subsequent events for which disclosure, but no adjustment, is required provide information about significant events/conditions which existed at the balance sheet date.
A) True
B) False

Back 64

False

Front 65

LO-5

Back 65

LO-5

Front 66

1) The date of the management representation letter received from the client should coincide with which of the following?
A) date of latest subsequent event disclosed in the notes to the financial statements
B) date of the auditor's report
C) balance sheet date
D) engagement agreement

Back 66

B) date of the auditor's report

Front 67

2) Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern?
A)
Discussions with management regarding future plans related to sales activities,
cost controls, and marketing efforts. Reviewing quarter on the internal control questionnaire specifically asking the
client to evaluate the ability to continue.
Yes Yes

B) No Yes

C) Yes No

D) No No

Back 67

C) Yes No

Front 68

3) 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.

Back 68

B) dated as of the audit report date.

Front 69

4) When should auditors generally assess a client's ability to continue as a going concern?
A) upon completion of the audit
B) during the planning stages of the audit
C) throughout the entire audit process
D) during testing and completion phases of the audit

Back 69

C) throughout the entire audit process

Front 70

5) Which of the following would the auditor expect to find in the client's management representation letter?
A) management's recommendations for internal control effectiveness improvements
B) management's plans for improving product quality
C) management's compliance with contractual arrangements that impact the financial statements
D) management's goals for improving earnings per share

Back 70

C) management's compliance with contractual arrangements that impact the financial statements

Front 71

6) Auditing standards (SAS No. 59) 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 quarter beyond the balance sheet date.
B) one quarter beyond the date of the auditor's report.
C) one year beyond the balance sheet date.
D) one year beyond the date of the auditor's report.

Back 71

C) one year beyond the balance sheet date.

Front 72

7) Auditing Standards (SAS No. 59) requires auditors to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is:
A) analytical procedures.
B) confirmations of creditors.
C) statistical sampling procedures.
D) inquiries of client and its legal counsel.

Back 72

A) analytical procedures.

Front 73

8) Which of the following statements regarding the letter of representation is not correct?
A) It is prepared on the client's letterhead.
B) It is addressed to the CPA firm.
C) It is signed by high-level corporate officials, usually the president and chief financial officer.
D) It is optional, not required, that the auditor obtain such a letter from management.

Back 73

D) It is optional, not required, that the auditor obtain such a letter from management.

Front 74

9) Refusal by a client to prepare and sign the representation letter would require the auditor to issue a:
A) qualified opinion or a disclaimer.
B) adverse opinion or a disclaimer.
C) qualified or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.

Back 74

A) qualified opinion or a disclaimer.

Front 75

10) A client representation letter is:
A) prepared on the CPA's letterhead.
B) addressed to the client.
C) signed by high-level officials (e.g., the president and chief financial officer).
D) dated as of the client's year-end.

Back 75

C) signed by high-level officials (e.g., the president and chief financial officer).

Front 76

11) Which of the following would the auditor find most useful in relation to its previous audit procedures from the client representation letter?
A) to impress upon the audit firm its responsibility for the audit
B) to impress upon management its responsibility for the financial statement assertions
C) to remind management of potential misstatements or omissions in the financial statements
D) to document the responses from management to inquiries about various aspects of the audit

Back 76

D) to document the responses from management to inquiries about various aspects of the audit

Front 77

12) Which of the following is not one of the categories of items included in the client letter of representation?
A) subsequent events
B) Completeness of information
C) recognition, measurement, and disclosure
D) materiality

Back 77

D) materiality

Front 78

13) Auditing standards (SAS No. 99 and SAS No. 54) require the auditor to communicate all management frauds and illegal acts to the audit committee:
A) only if the act is immaterial.
B) only if the act is material.
C) only if the act is highly material.
D) regardless of materiality.

Back 78

D) regardless of materiality.

Front 79

14) Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
A) review compliance with the terms of debt agreements
B) confirmation of accounts receivable from principal customers
C) reconciliation of interest expense with debt outstanding
D) confirmation of bank balances

Back 79

A) review compliance with the terms of debt agreements

Front 80

15) Which of the following statements is correct?
A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence.
B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management.
C) A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers.
D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.

Back 80

C) A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers.

Front 81

16) Which of the following auditing procedures is ordinarily performed last?
A) reading minutes of the board of directors' meetings
B) confirming accounts payable
C) obtaining a client representation letter
D) testing the purchasing function

Back 81

C) obtaining a client representation letter

Front 82

17) An auditor must obtain written client representations that might be signed by all but which of the following?
A) Treasurer
B) Chief financial officer
C) Vice president of operations
D) Chief executive officer

Back 82

C) Vice president of operations

Front 83

22) Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit.
A) True
B) False

Back 83

True

Front 84

23) Current professional auditing standards mandate the use of analytical procedures during the testing phase of the audit.
A) True
B) False

Back 84

False

Front 85

24) Auditing standards require the auditor's assessment of going-concern issues.
A) True
B) False

Back 85

True

Front 86

25) Auditors are required to evaluate the going concern assumption as part of each audit.
A) True
B) False

Back 86

True

Front 87

26) Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter.
A) True
B) False

Back 87

True

Front 88

27) Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting.
A) True
B) False

Back 88

True

Front 89

28) At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities.
A) True
B) False

Back 89

False

Front 90

29) Auditors are required to obtain a letter of representation that describes management's planned solutions to all internal control weaknesses identified during an audit.
A) True
B) False

Back 90

False

Front 91

30) The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner.
A) True
B) False

Back 91

False

Front 92

31) If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion.
A) True
B) False

Back 92

True

Front 93

32) Because a client representation letter is a written statement from a non-independent source, it cannot be regarded as reliable evidence.
A) True
B) False

Back 93

True

Front 94

LO-6

Back 94

LO-6

Front 95

2) An independent review must be performed of all audits.
A) True
B) False

Back 95

False

Front 96

3) If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion.
A) True
B) False

Back 96

False

Front 97

LO-7

Back 97

LO-7

Front 98

1) The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication:
A) may be oral or written.
B) must be oral.
C) must be written.
D) must be oral via direct communication.

Back 98

C) must be written.

Front 99

2) Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?
A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
B) Any significant matter reported to those charged with governance must also be communicated to management.
C) Communication is required before the audit report is issued.
D) Auditor does not have any requirement to communicate with anyone other than the company's senior management.

Back 99

A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.

Front 100

3) While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide:
A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.
B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.
C) a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements.
D) a summary of the auditor's observations that resulted from the auditor's special study of internal control.

Back 100

C) a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements.

Front 101

4) Which of the following is not required to be communicated to the audit committee or similarly designated body under auditing standards?
A) Disagreements with the company over two acceptable accounting treatments for a significant transaction.
B) Disagreements with management about the scope of the audit, applicability of accounting principles, or wording of the audit report.
C) Difficulties encountered in performing the audit, such as lack of availability of client personnel and failure to provide necessary information.
D) Auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal control and the concept of reasonable rather than absolute assurance.

Back 101

A) Disagreements with the company over two acceptable accounting treatments for a significant transaction.

Front 102

6) Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.
A) True
B) False

Back 102

False

Front 103

7) Auditors must communicate in writing about internal control weaknesses to the audit committee or those charged with governance.
A) True
B) False

Back 103

True

Front 104

8) Client representation letters are required by professional auditing standards, whereas management letters are optional.
A) True
B) False

Back 104

True

Front 105

LO-8

Back 105

LO-8

Front 106

1) The audit firm issues an audit report for its client. The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless:
A) a development occurs that may affect the company's long term viability as a company.
B) final resolution was made on disclosed contingency for which no liability needed to be accrued.
C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

Back 106

C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.

Front 107

2) If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision.
A) True
B) False

Back 107

True

Front 108

3) Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report.
A) True
B) False

Back 108

False