Deck 18: Completing the Audit

Question 1

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

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

Answer 1

D

Question 2

IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event. Which of the following would require note disclosure in the financial statements adjusted?

A) likely to occur and the amount can be estimated
B) possible that an outflow of resources is not required
C) likelihood is remote
D) amount is yet to be confirmed

Answer 2

D

Question 3

What situation represents a contingent liability for a company?

A) A candy company's monthly production requires 1000 kg of chocolate. The company entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over the next six months at the market price.
B) A bike company learned that a racer using its bike was seriously injured in an accident on December 30th, 2015, as the front wheel of the bike was released as the result of a manufacturing defect. The company had not received a claim at December 31st, 2015, but management expects to receive a claim.
C) A restaurant received a $10 000 claim from a customer for emotional damages as a result of poor service. The legal counsel of the restaurant indicated that the claim was not supported and there was less than a 5% chance that the restaurant would have to pay.
D) A hotel chain was found guilty by a judge for not refunding customers who had online reservations. The hotel chain will have to pay $50 000 to various customers in the following year.

Answer 3

B

Question 4

Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that management is intentionally neglecting to disclose?

A) inquiries (orally and in writing) of management
B) analyzing legal expense and reviewing invoices and statements from outside legal counsel
C) reviewing current and previous years' Canada Revenue Agency correspondence
D) obtaining a letter of representation from management that it is not aware of any undisclosed contingent liabilities

Question 5

Which level of risk does the auditor normally assign to the presentation and disclosure-related assertion of completeness for contingent liabilities and subsequent events?

A) low risk for inherent risks that required information may not be disclosed in the notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high risk that all required information may not be disclosed in the notes

Question 6

What audit approach is used to search for unknown commitments?

A) include as part of the search for subsequent events
B) conduct with substantive tests associated with the cutoff assertion
C) perform as part of the audit of each cycle or audit area
D) include with the legal letter sent to lawyers

Question 7

Which 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 known events.
D) The outcome has been resolved by a current event.

Question 8

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

A) the auditor's opinion as to the expected outcome.
B) the opinion of legal counsel or management as to the expected outcome.
C) an estimate of the amount or a statement that the amount cannot be estimated.
D) the steps the client has taken to ensure that it doesn't recur.

Question 9

If the amount of a probable loss on a contingent liability is not determinable, the liability should be

A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.

Question 10

Which of the following substantive tests would the auditor conduct as a search for contingent liabilities?

A) select an attribute sample of legal expenses for matching to invoices
B) select a dollar unit sample of legal expenses for matching to invoices
C) inspect legal expense invoices and perform a census test of legal expenses
D) review a sample of legal invoices, looking for appropriate authorization for payment

Question 11

If a potential loss on a contingent liability is unlikely and the event will not likely have a significant adverse financial effect, the liability should be

A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.

Question 12

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

Question 13

Discuss three audit procedures commonly used to search for contingent liabilities.

Question 14

The auditor's responsibility with regards to contingent liabilities is to

A) identify the appropriate accounting treatment.
B) decide on the appropriate accounting treatment.
C) prepare note disclosure.
D) evaluate the accounting treatment of known contingent liabilities.

Question 15

If the amount of a probable loss on a contingent liability cannot be estimated but the event is likely, the liability should be

A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.

Question 16

IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event. Which of the following would need to provide for the (i.e. the financial statements adjusted)?

A) outflow of resources is required, but cannot be reliably estimated
B) possibility that an outflow of resources is required
C) likelihood is remote
D) amount is yet to be confirmed

Question 17

Management furnishes the 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 the client's lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
B) Request that the client's management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
C) Request that the client's 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 the client's management engage outside lawyers to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Question 18

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

A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.

Question 19

Which of the following scenarios regarding a lawsuit filed against a client by a third party would qualify as a "contingent liability"?

A) A lawsuit has been filed but not yet resolved.
B) A lawsuit was filed and concluded with the client winning.
C) A lawsuit was filed and concluded with a third party winning an award of $100 000, but the client hasn't paid yet.
D) A lawsuit was filed and concluded with a third party winning an award of $100 000, which the client paid after the balance sheet date but before the statements were issued.

Question 20

There are two categories of lawsuits: outstanding (or asserted) claims, and

A) possible or unasserted claims.
B) disputed claims among several parties.
C) settled claims.
D) claims that could result in material misstatements.

Question 21

Inquiries of management are used to help identify subsequent events. To help obtain meaningful answers

A) the standard firm checklist should be followed.
B) these inquiries must be conducted with the proper client personnel.
C) the inquiries should be conducted by senior audit personnel.
D) they should be asked after the effective date of the audit report.

Question 22

The auditor has sent inquiry letters to all of the client's law firms. Two law firms stated that the client was unlikely to win the lawsuits in question, whereas the client had said the opposite. What action should the auditor take?

A) Ask management for invoices supporting the omitted lawsuits.
B) Request a meeting with management and the respective law firms.
C) Ask the law firms to provide additional details with respect to the lawsuits.
D) Change control risk to maximum and increase substantive testing.

Question 23

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 would be in the second category?

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

Question 24

Kendra is inquiring about subsequent events with regards to lawsuits and contingent claims. To obtain a meaningful answer, Kendra should hold the enquiry with

A) the Vice President of Legal of the company.
B) the accountant in charge of the legal liability reconciliation.
C) the mail clerk.
D) the assistant controller.

Question 25

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 26

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

Question 27

The standard letter of confirmation from a client's legal counsel should ask for information about the period of time

A) covered by the client's financial statements.
B) covered by the client's financial statements plus the preceding year.
C) covered by the client's financial statements plus the succeeding year.
D) approximately up to the date of the auditor's report.

Question 28

If a lawyer refuses to provide the auditor with information that is within the lawyer's jurisdiction and may directly affect the fair presentation of financial statements about material existing lawsuits (asserted claims) or unasserted claims, the audit report would have to be

A) an adverse opinion.
B) a qualified opinion.
C) an unqualified opinion with an explanatory paragraph.
D) modified to reflect the lack of available evidence (i.e., scope limitation).

Question 29

Subsequent events affecting the valuation 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) final estimates of losses relating to casualties occurring in the subsequent events period.
C) discovery of new conditions occurring in the subsequent events period.
D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Question 30

State three types of information that should be included in a standard letter of inquiry of a client's law firms.

Question 31

The auditor has a responsibility to review transactions and activities occurring after the year-end 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) contingent liabilities.
B) subsequent year's transactions.
C) late unusual occurrences.
D) subsequent events.

Question 32

You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied that "his practice consists of conducting real estate closings, and so he could not respond to the letter." What impact does this have on the financial statement audit?

A) There is no impact upon the financial statement audit.
B) The audit opinion will need to be qualified.
C) The auditor will need to provide a denial of opinion.
D) Additional information is needed by reference to legal invoices from this lawyer.

Question 33

What action will a lawyer likely take if they have information about a lawsuit that was not mentioned by the client?

A) They will tell the auditor the number of suits and request the auditor to contact the client.
B) They will request the client to notify the auditor about the lawsuit.
C) They will not mention the lawsuits since they are confidential.
D) They will refuse to answer the legal letter, since it is incorrect.

Question 34

The following events all occurred after the balance sheet date (6/30/15) but prior to the auditor's report (9/10/15). Which one would require an adjustment to the account balances as of 6/30/15?

A) client will market a new series of equity securities ($2 million of preferred stock) on 8/1/15
B) unused equipment on the books at 6/30/15 for $100 000 was disposed of 7/31/15 for $60 000
C) securities costing $30 000 held for temporary investment on 6/30/15 declined in value by one-third when the market took a plunge on 8/15/15
D) inventory valued at $100 000 on 6/30/15 was destroyed in a fire on 8/1/15

Question 35

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 would be in the first category?

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

Question 36

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor's fieldwork. The auditor should

A) advise management to adjust the balance sheet to reflect the acquisition.
B) issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
C) advise management to disclose the acquisition in the notes to the financial statements.
D) disclose the acquisition in the opinion paragraph of the auditor's report.

Question 37

The standard letter of confirmation sent to the client's legal counsel should be prepared on

A) the auditor's stationery and signed by an audit partner.
B) the lawyer's stationery and signed by the lawyer.
C) the client's stationery and signed by a company official.
D) plain paper and be unsigned.

Question 38

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

A) adoption of accelerated depreciation methods
B) write-off of a substantial portion of inventory as obsolete
C) collection of 90% of the accounts receivable existing at December 31
D) sale of a major subsidiary

Question 39

As part of the review for subsequent events, the auditor will review financial statements prepared after the balance sheet date. The purpose of this review is to examine changes after year end and to look for

A) errors in capital versus maintenance charge allocations that occurred after the year end.
B) subsequent payments to accounts payable and long term debt.
C) subsequent receipts in accounts receivable, especially for the larger customers.
D) changes in the business relative to results for the same period in the year under audit.

Question 40

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

A) balance sheet date and ending with the date of the auditor's report.
B) start of the fiscal year under audit and ending with the balance sheet date.
C) start of the fiscal year under audit and ending with the date of the auditor's report
D) balance sheet date and ending with the date the registration statement becomes effective.

Question 41

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

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

Question 42

One of the purposes of a client representation letter is to

A) reduce the amount of audit procedures performed by the auditor.
B) document the responses from management to inquiries about various aspects of the audit.
C) serve as audit evidence for the accuracy of the contingent liabilities.
D) reduce the detection risk.

Question 43

When several staff are working together on an audit engagement, what type of quality control review is conducted on a daily basis?

A) the partner reviews the electronic files
B) team review by interview
C) second partner review
D) manager review of sections

Question 44

As part of the review for subsequent events, the auditor will review financial statements prepared after the balance sheet date. The statements should be discussed with management to determine whether they

A) were approved by the controller prior to your review.
B) are mathematically correct, including calculation of depreciation.
C) are prepared on the same basis as the current-period statements.
D) were completed on a comparative basis, showing the last three years.

Question 45

In addition to the financial statements, MD&A (management discussion and analysis) are appended to the financial statements to inform users of management's expectations for the foreseeable future, as well as to provide management's assessment of the financial results. MD&A is prepared primarily because it is

A) an additional piece of evidence used by auditors to assess the financial statements.
B) generally required by securities regulators in Canada.
C) an unbiased view of the prospective future results of the company.
D) required so that the company can borrow more funds or sell more shares to the public.

Question 46

List four specific matters that should be included in a client representation letter.

Question 47

Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.

Question 48

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

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

Question 49

The initial review of the working papers prepared by any given auditor is normally done by the

A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.

Question 50

State 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.

Question 51

The primary objective of analytical procedures used in the final review stage of an audit is to

A) obtain evidence from details tested to corroborate particular assertions.
B) identify areas that represent specific risks relevant to the audit.
C) assist the auditor in looking for potential material misstatements.
D) satisfy doubts when questions arise about a client's ability to continue operations.

Question 52

There are often a large number of immaterial errors discovered that do not require an adjustment at the time they are found. How should these errors be dealt with by the auditor?

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

Question 53

CAS require the auditor to review the other information in the annual report to ascertain its consistency with the financial statements. If there is a material inconsistency, the client should be requested to change the information. If the client refuses, the auditor should

A) issue an adverse opinion.
B) issue a qualified opinion.
C) consider what further action is warranted, including making contact with the audit committee.
D) issue an unqualified opinion, bill the client, and withdraw from any future engagements.

Question 54

Klein Corporation has reported a loss for the 6th year in a row. Klein also has a large bank loan due in the coming year, bringing its current ratio to .60. Further, due to recent economic slowdown, Klein had to increase its bad debt expense by 4% and also saw its largest client, Forest Prairie file for bankruptcy. Forest Prairie's purchases made up 18% of Klein's total sales in the past year. Forest Prairie also had an unpaid balance to Klein at year end.
To reduce expenses Klein has reduced employee training from 5 days to 1 day. During the year, an employee was seriously injured in the production process when his arm was caught in a press. The employee has filed a lawsuit against Klein for $1 000 000 and claims that he was not properly trained to use the equipment. The legal proceeding for this case should begin in the next fiscal year. Since Klein has never been involved in such a lawsuit before, the legal counsel indicated that they were not able to estimate the amount and likelihood that Klein would have to pay.
Required:
Evaluate the going concern situation at Klein and indicate what the auditor would be required to do under CAS 570.

Question 55

A) Discuss the purposes of performing analytical procedures during the audit completion phase.
B) State the two purposes of the client representation letter.

Question 56

Which of the following auditing procedures is ordinarily performed last?

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

Question 57

State the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

Question 58

CAS 570 - Going Concern, requires that the auditor evaluate management's assessment of the ability of the entity to continue as a going concern based on

A) inquiry with management.
B) the opinion of the legal counsel of the company.
C) the liquidity and solvency ratios of the firm.
D) the evidence collected throughout the audit.

Question 59

Refusal by a client to prepare and sign the representation letter would require a(n)

A) qualified opinion as to scope limitation or a disclaimer of opinion.
B) adverse opinion or a denial of opinion.
C) qualified opinion as to accounting treatment departure or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.

Question 60

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) representation letter.
C) engagement letter.
D) letters testamentary.

Question 61

CAS 250 requires the auditor to communicate illegal acts to the audit committee

A) if the illegal acts are slightly material.
B) if the illegal acts are material.
C) if the illegal acts are other than trivial.
D) regardless of materiality.

Question 62

CAS 450 requires the auditor to communicate all misstatements to the audit committee

A) if the misstatements are slightly material.
B) if the misstatements are material.
C) if the misstatements are other than trivial.
D) regardless of materiality.

Question 63

Discuss the purpose of a management letter.

Question 64

Describe the items the auditor is required to report to the audit committee.

Question 65

The management letter

A) is required by CAS whenever there are "reportable conditions."
B) must follow the format prescribed by the CPA.
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.