Deck 17: Completing the audit

Question 1

Adjustment of the financial statement may be necessary if the contingent liability is:

A) remote.
B) probable.
C) reasonably possible.
D) none of the above

Answer 1

B

Question 2

The auditor needs to perform procedures to satisfy the three categories of audit objectives: transaction-related objectives, balance-related objectives, and ________ -related objectives

A) balance-day
B) sufficient-appropriate
C) presentation- and disclosure
D) financial-statement

Answer 2

C

Question 3

When auditing contingent liabilities, the primary objective at the initial stage of the tests is to determine:

A) the materiality of any liability.
B) the likelihood of the liability.
C) what constitutes adequate disclosure of the liability.
D) the existence of the liability.

Answer 3

C

Question 4

'A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place contingent on a future event' is the definition of:

A) a current liability.
B) a long-term liability.
C) an accrued liability.
D) contingent liability

Question 5

Footnote disclosure in the financial statement is necessary if the contingent liability:

A) is remote.
B) is probable.
C) is reasonably possible.
D) has occurred.

Question 6

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) Frequently, the audit firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or the client's legal counsel.
C) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
D) The auditor should primarily rely on management's judgement about potential liabilities.

Question 7

A letter from the client's external legal counsel requesting information about any litigations or claims of which the lawyer is aware appears in the:

A) lawyer's representation letter.
B) management representation letter.
C) letter of inquiry.
D) letters testamentary.

Question 8

How many presentation and disclosure objectives are there?

A) two
B) four
C) one
D) three

Question 9

Inquiries of management (orally and in writing)regarding the possibility of unrecorded contingencies will NOT be useful in uncovering:

A) a particular type of contingency which management has overlooked.
B) a contingency where management does not comprehend account disclosure requirements.
C) management's intentional failure to disclose existing contingencies.
D) all of the above

Question 10

No disclosure in the financial statement is necessary if the contingent liability:

A) is remote.
B) is probable.
C) is reasonably possible.
D) has occurred.

Question 11

One of the auditor's primary concerns related to presentation- and disclosure-related objectives is the ________ assertion.

A) cutoff
B) classification
C) completeness
D) both B and C

Question 12

Which of the following is NOT an example of a contingent liability?

A) income tax disputes
B) writing off a bad debt
C) product warranties
D) pending legal action for patent infringement, product liability, or other actions

Question 13

Often, procedures for presentation- and disclosure-related objectives are integrated with the auditor's tests for:

A) transaction-related objectives.
B) balance-related objectives.
C) both A and B above
D) none of the above

Question 14

Completing the audit is which phase of the audit?

A) four
B) two
C) one
D) three

Question 15

Which one of the following is a required condition for a contingent liability to exist?

A) There is a potential liability to an employee of the client.
B) The amount of the future payment is known.
C) The liability resulted from an existing condition.
D) The outcome has been resolved by a current event.

Question 16

Which one of the following is NOT an audit procedure that is commonly used to search for contingent liabilities?

A) Review the minutes of directors and shareholders meetings.
B) Perform inquiries of management (orally and in writing).
C) Analyse legal expense for the period under audit.
D) Review the current year's tax return.

Question 17

When the proper disclosure in the financial statements of material contingencies is through footnotes, the footnote should describe the nature of the contingency to the extent it is known and the:

A) auditor's opinion as to the expected outcome.
B) steps the client has taken to ensure that it doesn't recur.
C) opinion of legal advisers or management as to the expected outcome.
D) opinion of an outside independent party, such as an appraiser, as to the expected outcome.

Question 18

Which one of the following is NOT a presentation and disclosure objective?

A) completeness
B) rights and obligations
C) cutoff
D) classification

Question 19

'An agreement which commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole' is a definition of a:

A) commitment.
B) potentially hazardous agreement.
C) conditional contract.
D) contingent liability.

Question 20

Which one of the following items would NOT be of concern to the auditor as a potential contingent liability, assuming each event could generate a loss of $20 000?

A) loans receivable discounted
B) obsolete inventory
C) unused balances of outstanding letters of credit
D) income tax disputes

Question 21

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 came 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) did not take place until after year-end.
B) took place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.

Question 22

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 provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
B) Request that client management engage outside legal counsel to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
C) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
D) Request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

Question 23

A client has a calendar year-end.Listed below are four events that occurred after 31 December.Which one of these subsequent events might result in adjustment of the 31 December financial statements?

A) settlement of a litigation for a different amount from that recorded in the accounts
B) adoption of accelerated depreciation methods
C) collection of 90% of the accounts receivable existing at 31 December
D) sale of a major subsidiary

Question 24

Which type of subsequent event requires consideration by management and evaluation by the auditor?

A) subsequent events that have no direct effect on the financial statements but for which disclosure is advisable
B) subsequent events that have a direct effect on the financial statements and require adjustment
C) both A and B
D) none of the above

Question 25

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with applicable accounting standards.Which one of the following procedures would be LEAST appropriate for this purpose?

A) Confirm, as of the completion of fieldwork, accounts receivable that have increased significantly from the year-end date.
B) Inquire of management concerning events that may have occurred.
C) Read the minutes of the board of directors meetings.
D) Obtain a legal counsel's letter as of the completion of fieldwork.

Question 26

Which one 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) major purchase of a business that is expected to double the sales volume
B) settlement of litigation in excess of the recorded liability
C) sale of long-term debt or capital stock
D) loss of a plant as a result of a flood

Question 27

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:

A) neither reported nor disclosed in footnotes.
B) disclosed in the auditor's report but not disclosed on the financial statements.
C) disclosed in footnotes but not accrued.
D) included in the financial statements as an actual liability.

Question 28

If the response from the client's legal representative contains a disagreement with management, the auditor should:

A) seek resolution through discussion with management and the lawyer.
B) confirm the information using alternative audit procedures.
C) issue a qualified audit report.
D) seek resolution with management.

Question 29

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) a postdated footnote.
B) the final billing for audit services rendered.
C) the auditor's report.
D) the next scheduled interim visit.

Question 30

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would require an adjustment to the account balances as at 30 June 2012?

A) Unused equipment recorded at $100 000 at 30 June, 2012 was disposed of on 3 July 2012 for $60 000.
B) Inventory valued at $100 000 on 30 June 2012 was destroyed by a fire on 1 August 2012.
C) The client disposed of a major subsidiary on 30 July 2012.
D) The auditee will market $2 million of preference shares on 31 July 2012.

Question 31

During the final review of working papers and financial statements, it is common to have the analytical procedures done by a:

A) partner.
B) senior.
C) junior staff member.
D) manager.

Question 32

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 one of the following procedures is in the first category?

A) Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1.
B) Obtain a management representation letter written by the client.
C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.
D) Inquire of the client regarding contingent liabilities.

Question 33

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.
B) permit inclusion of a footnote captioned event (unaudited) subsequent to the date of the auditor's report.
C) assume responsibility for events subsequent to the issuance of the auditor's report.
D) accept responsibility for subsequent events.

Question 34

Which event that occurred after the end of the financial year under audit but prior to issuance of the auditor's report would NOT require disclosure in the financial statements?

A) a major drop in the quoted market price of the shares of the corporation
B) loss of plant or inventories as a result of fire or flood
C) settlement of litigation when the event giving rise to the claim took place after the balance sheet date
D) sale of a bond or share issue

Question 35

The auditor's responsibility for 'reviewing the subsequent events' of a client is normally limited to the period of time beginning with the:

A) start of the financial year under audit and ending with the balance sheet date.
B) balance sheet date and ending with the date of the annual general meeting.
C) start of the financial year under audit and ending with the date of the auditor's report.
D) balance sheet date and ending with the date of the auditor's report.

Question 36

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that the:

A) auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
B) auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
C) 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) auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.

Question 37

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 the second category?

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

Question 38

A specific letter of inquiry to the client's external legal counsel would include:

A) management's assessment of the outcome of each identified litigation.
B) a list of litigation and claims.
C) a request from the client's external legal counsel confirming the reasonableness of management's assessment of the outcome of each identified litigation.
D) all of the above

Question 39

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would NOT require an adjustment to the account balances as at 30 June 2012?

A) Uninsured inventory valued at $100 000 on 30 June 2012 was destroyed in a fire on 5 July 2012.
B) Investments recorded at cost ($100 000) were sold on 2 July 2012 for $60 000.
C) A contingent liability disclosed in the notes at an estimated amount of $100 000 was settled out of court on 15 July 2012 for $125 000.
D) A customer declared bankruptcy on 31 July 2012.

Question 40

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited.The auditing procedures required to verify these transactions are commonly referred to as the review for:

A) late unusual occurrences.
B) subsequent events.
C) contingent liabilities.
D) subsequent years' transactions.

Question 41

The management letter:

A) is required by ASA 580 whenever there are 'reportable conditions'.
B) must follow the format prescribed by the ASIC.
C) spells out to the audit committee the auditor's responsibilities under generally accepted auditing standards.
D) is optional and is intended to help the client operate its business more effectively.

Question 42

An important part of evaluating whether the financial statements are fairly stated is summarising the misstatements uncovered in the audit.Whenever the auditor uncovers misstatements that are in themselves material:

A) it is necessary to combine individually immaterial misstatements with the material misstatements and make entries to correct the statements.
B) it is necessary to combine individually immaterial misstatements with the material misstatements and make full disclosure in the footnotes.
C) the trial balance should be adjusted to correct the statements.
D) no entries need be made, but footnote disclosure is required.

Question 43

After the financial statements have been issued, if a 'subsequent discovery of facts occurs' (the auditor becomes aware that some information in the statements is materially misleading), the auditor should ask the client to issue an immediate revision.This is required only if:

A) management makes the discovery and informs the auditor.
B) the discovery of facts relates to developments that occurred after the date of the auditor's report.
C) the facts discovered already existed at the audit report date.
D) the auditor makes the subsequent discovery of facts himself or herself.

Question 44

A management representation letter is a written statement from a non-independent source and therefore:

A) can be regarded as sufficient evidence only if the auditor finds a strong internal control system.
B) can be regarded as sufficient evidence if the high-level corporate officials who sign it are trustworthy.
C) needs to be confirmed by an outside independent source such as a financial institution or law firm.
D) cannot be regarded as sufficient evidence.

Question 45

The subsequent discovery of facts requiring the recall or reissuance of financial statements ________ from developments occurring after the date of the auditor's report.

A) will probably not arise
B) will not arise
C) will certainly arise
D) will probably arise

Question 46

Which one of the following auditing procedures is ordinarily performed last?

A) testing the purchasing function
B) confirming accounts payable
C) reading the minutes of the directors meetings
D) obtaining a management representation letter

Question 47

The following five categories of specific matters that might be included in a management representation letter are consistent with ASA 580:

A) financial reports; completeness of information; internal control; significant risks and uncertainties; and subsequent events.
B) financial reports; accuracy of information; recognition, measurement, and disclosure; significant risks and uncertainties; and subsequent events.
C) financial reports; completeness of information; recognition, measurement, and disclosure; going concern; and subsequent events.
D) financial reports; completeness of information; recognition, measurement, and disclosure; significant risks and uncertainties; and subsequent events.

Question 48

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that there is sufficient evidence but it does not support a conclusion of fairly presented financial statements, the auditor has several choices:

A) issue a qualified opinion or issue an adverse opinion.
B) revise the statements to the auditor's satisfaction or issue either a qualified or an adverse opinion.
C) issue a disclaimer of opinion or issue an adverse opinion.
D) revise the statements to the auditor's satisfaction or issue a disclaimer of opinion.

Question 49

ASA 570 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 date of the auditor's report.
B) one year beyond the date of the auditor's report.
C) one year beyond the reporting date.
D) one quarter beyond the balance sheet date.

Question 50

ASA 720 requires the auditor to read other information in documents containing audited financial reports that pertains directly to the financial report and to compare that information to make sure that it corresponds.If there is a material inconsistency, the client should be requested to change the information.If the client refuses, the auditor should:

A) include an explanatory paragraph in the audit report or withdraw from the engagement.
B) issue a qualified opinion or withdraw from the engagement.
C) issue an adverse opinion.
D) include an emphasis of matter section in the audit report.

Question 51

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that sufficient evidence has NOT been obtained to draw a conclusion about fairness of the client's representations, there are several choices:

A) issue a disclaimer of opinion or withdraw from the engagement.
B) obtain additional information or issue an adverse opinion.
C) issue a qualified opinion or issue a disclaimer of opinion.
D) obtain additional evidence, issue a qualified opinion, or issue a disclaimer of opinion.

Question 52

ASA 240 requires the auditor to communicate all irregularities, including fraud and illegal acts, to the audit committee:

A) only if the act is highly material.
B) only if the act is immaterial.
C) only if the act is material.
D) regardless of materiality.

Question 53

Often, there is a large number of immaterial errors discovered that do not require an adjustment at the time they are found.

A) Since there are a large number of these, the auditor would recommend adjusting entries to the client.
B) The auditor would never combine these individually immaterial amounts because that would mix dissimilar data.
C) Since these items are individually immaterial, the auditor would not recommend adjusting entries to the client.
D) The auditor must combine the individually immaterial errors and evaluate whether the combined amount is material.

Question 54

Although there is no professional requirement to do so on audit engagements, auditors normally issue a formal 'management letter' to their clients.This letter:

A) demonstrates to management that the audit firm adds value beyond the audit service.
B) encourages a better relationship between the audit firm and management, and suggests additional services that the firm can provide.
C) provides a written record of the auditor's observations and suggestions for improvement.
D) all of the above

Question 55

ASA 570 requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern.One of the most important types of evidence to assess the going concern question is:

A) analytical procedures.
B) inquiries of the client and its legal counsel.
C) confirmations of creditors.
D) statistical sampling procedures.

Question 56

Which of the following is NOT required to be communicated to the audit committee or similarly designed body under ASA 260?

A) difficulties encountered in performing the audit, such as lack of availability of client personnel and failure to provide necessary information
B) all material irregularities and illegal acts of a material nature
C) the auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal control and the concept of reasonable rather than absolute assurance
D) disagreements with management about the scope of the audit, applicability of accounting principles, or wording of the audit report

Question 57

To ensure that the audit meets the public accounting firm's standard of performance:

A) a financial disclosure checklist is used for every engagement.
B) an audit engagement checklist is completed.
C) the working papers are reviewed by another member of the audit firm.
D) it is common to gather more evidence than is actually necessary.

Question 58

Which one of the following is NOT one of the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit?

A) to make sure that the audit meets the firm's standard of performance
B) to evaluate the performance of inexperienced personnel
C) to evaluate the accuracy of the auditing firm's time budget for the engagement
D) to counteract the bias that frequently enters into the auditor's judgement

Question 59

If the auditor concludes that it is highly improbable that the client will continue as a going concern, the auditor should, in accordance with ASA 700:

A) issue a disclaimer of opinion.
B) issue an unqualified report but explain the concerns in the opinion paragraph.
C) include an emphasis of matter section in the audit report.
D) express an adverse opinion.

Question 60

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) Perform final analytical procedures.
B) Search for contingent liabilities.
C) Acquire the management representation letter.
D) Evaluate the going concern assumption.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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.

Question 69

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

Question 70

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

Question 71

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

Question 72

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.

Question 73

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.

Question 74

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

Question 75

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

Question 76

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.

Question 77

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.

Question 78

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

Question 79

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.

Question 80

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.