Deck 14: Activities Required in Completing a Quality Audit

Question 1

Property and casualty insurance premiums are examples of estimates found on financial statements.

Answer 1

False

Question 2

The primary source of evidence concerning contingencies is the client's external attorney.

Answer 2

False

Question 3

PCAOB AS 14 provides important insight that auditors must consider as they decide whether management's refusal to correct a detected misstatement is indicative of intentional bias.

Answer 3

True

Question 4

Auditors should have heightened skepticism regarding period-end adjusting journal entries that relate to accounts with significant estimates.

Question 5

Estimates are based on both subjective and objective factors.

Question 6

At the end of an audit, adjustments that are "waived" will remain uncorrected.

Question 7

Regarding loss contingencies, legal counsel should be instructed by the client to respond directly to the auditors.

Question 8

Auditors are responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies.

Question 9

Misstatements that are detected, but individually are not material, should be ignored when determining the appropriate audit report.

Question 10

Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements.

Question 11

FASB has set forth four categories of potential losses that can be reasonably estimated.

Question 12

In an integrated audit, if one or more material weaknesses exist, the auditor will need to issue a qualified opinion on internal control over financial reporting.

Question 13

If a lawyer refuses to furnish the requested information about the client's contingencies to the auditor, the auditor should issue an unqualified audit opinion.

Question 14

The total likely misstatements found during the audit are equal to the sum of known and projected misstatements.

Question 15

The auditor compares the total likely misstatements to each significant segment of the financial statements, such as total current assets, total noncurrent assets, total current liabilities, total noncurrent liabilities, owners' equity, and pretax income, to determine if they are, in aggregate, material to the financial statements.

Question 16

Review activities that are completed towards the end of the audit are quite varied.

Question 17

A culture that encourages auditors to seek consultation with other members of the audit firm will be more likely to result in auditors who will acquiesce to inappropriate or aggressive client preferences.

Question 18

The materiality of a misstatement is based on only the quantitative amount of the misstatement.

Question 19

Multiple internal control deficiencies in the same cycle may actually decrease the likelihood of misstatement in that cycle.

Question 20

An audit firm culture that emphasizes "doing the right thing," encourages auditors to deal with difficult issues in a short period of time.

Question 21

A deviation from historical patterns is one of the factors that an auditor focuses on when evaluating the reasonableness of an estimate.

Question 22

If the auditor determines that informative disclosures are not reasonably adequate, the auditor must identify that fact in the auditor's report.

Question 23

Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period into the foreseeable future.

Question 24

Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying footnotes.

Question 25

If the auditor continues to have substantial doubt about the client continuing as a going concern, the auditor should evaluate the adequacy of the client's related disclosures.

Question 26

When obtaining reasonable assurance that the financial statements are free from material misstatements, auditors should consider the applicable legal and regulatory frameworks that apply to the entity.

Question 27

Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to the entity's compliance with laws and regulations.

Question 28

The auditor should consider matters for disclosure only while gathering evidence during the course of the audit.

Question 29

According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and design and maintain an adequate system of internal accounting controls.

Question 30

If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials, this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA).

Question 31

Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatements, including material misstatements related to noncompliance with laws and regulations.

Question 32

The auditor's report specifically covers the statements and disclosures made by management in the "Management Discussion and Analysis" (MD&A) section of the annual report.

Question 33

If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations, then the auditor should withdraw from the engagement.

Question 34

Noncompliance with laws and regulations includes only acts of omission by the entity that are considered to be unintentional and contrary to the prevailing laws or regulations.

Question 35

Events or transactions occurring after the balance sheet date and before the audit report date, can be useful in identifying and evaluating the reasonableness of estimates.

Question 36

Disclosures can be made either on the face of the financial statements in the form of classifications or in parenthetical notations and/or in the notes to the statements.

Question 37

A disclosure checklist is a convenient documentation format for evidence that the auditor adequately evaluated the client's disclosures.

Question 38

A policy providing a reserve for returned products at the original sales price rather than at replacement cost violates GAAP.

Question 39

The auditor should consider the historical experience of the client in making past estimates.

Question 40

If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA), the auditor should notify the CFO about the violations, their circumstance, and the effect on the financial statements.

Question 41

The signing officers for the certifications under the Sarbanes-Oxley Act are typically the controller and the treasurer of the company.

Question 42

Analytical procedures may indicate that new controls need to be designed before completing the audit.

Question 43

The auditor should apply a basic three-step process for using analytical procedures during the final review.

Question 44

Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for this purpose.

Question 45

A number of studies of bankruptcies have shown that certain combinations of ratios, like the Altman Z-score, have good predictive power in indicating the likelihood of bankruptcy.

Question 46

Management's refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion.

Question 47

Some auditors may be reluctant to issue a going-concern audit opinion because it may hasten the failure of the client company.

Question 48

Research has shown that auditors' qualifications of audit reports are better predictors of going-concern problems than are Z-score models.

Question 49

By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report.

Question 50

In a quality audit, the auditor will review management's processes for certification to provide reasonable assurance that those processes are adequate and that they can be relied upon.

Question 51

Auditors should obtain a management representation letter at the end of each audit.

Question 52

Management will often resist a going-concern modification because investors, lenders, and customers may lose faith in the business.

Question 53

An audit opinion is a guarantee that the business is a going concern.

Question 54

Analytical procedures conducted during the final review phase of the audit should corroborate conclusions formed during the audit, which enables the auditor to draw conclusions upon which to base the audit opinion.

Question 55

Analytical procedures help auditors assess the overall presentation of the financial statements.

Question 56

When management is unable to provide an explanation for a previously unrecognized risk identified through the analytical procedures, the auditor must issue an adverse opinion.

Question 57

Two paragraphs should be added to the auditor's report when the auditor concludes that substantial doubt remains about the client's ability to continue as a going concern for a reasonable period of time.

Question 58

The auditor's expectations in final analytical procedures must be more precise than those for substantive analytics.

Question 59

The going-concern evaluation must be based on separate procedures that test the client's ability to continue as a going concern.

Question 60

Significant changes in the competitive market and a decrease in the competitiveness of the client's products are potential indicators of going-concern problems.

Question 61

If an omission of an important audit procedure is discovered, the auditor should immediately issue a disclaimer of opinion for the audit.

Question 62

All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee.

Question 63

The engagement quality review is a risk-based review.

Question 64

The audit committee is typically independent of the board of directors.

Question 65

If an experienced reviewer who was not a part of the audit team, but who has appropriate competence, independence, integrity, and objectivity, performs an independent quality review, this is referred to as a reoccurring partner review.

Question 66

As part of a quality audit, the audit firm must have policies and procedures in place for conducting an engagement quality review of each audit before issuing the audit opinion for public companies.

Question 67

A management letter is the same as a management representation letter.

Question 68

It is important that the external auditor have a constructive and detailed dialogue with the audit committee on important aspects of the audit.

Question 69

The audit documentation when performing an engagement quality review should include such information such as how much the firm paid for the review.

Question 70

A management letter is not required.

Question 71

When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if this fact had been known at year-end.

Question 72

The auditor generally reports things that management could do better in a management letter as a constructive part of the audit.

Question 73

Type I subsequent events indicate conditions that did not exist at the balance sheet date, but that may require disclosure.

Question 74

An additional procedure related to subsequent events is the reading of the meeting minutes for the board of directors meeting.

Question 75

If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify the report, if necessary.

Question 76

When it is discovered that an important audit procedure was not performed, the SEC imposes sanctions against the audit firm responsible.

Question 77

If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report due to subsequent events after issuance of the audit report, the auditor should not try to obtain client cooperation, but should immediately notify any regulatory agency having jurisdiction over the client, such as the SEC, that the audit report should no longer be associated with the client's financial statements.

Question 78

An example of a Type I subsequent event would be a significant lawsuit that is initiated relating to an incident that occurred after the balance sheet date.

Question 79

Typically, omissions may be discovered when audit documentation is reviewed as part of an external or internal review program.

Question 80

Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events.