Question 1

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

Accepted Answer

The management letter is a communication from the auditor to the management highlighting areas where improvements could be made. This is done in a constructive manner to help the organization enhance its operations and financial reporting.

Question 2

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

Accepted Answer

A management letter and a management representation letter are not the same. A management letter is a letter from an auditor to management that communicates any findings or concerns from the audit. A management representation letter is a letter from management to the auditor that confirms certain representations about the financial statements and the company's operations.

Question 3

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

Accepted Answer

It is crucial for the external auditor to have candid and substantive discussions with the audit committee about significant audit issues to ensure transparency and accountability in the audit process.

Question 4

A management letter is not required.

Accepted Answer

A management letter is a document provided by an auditor to a client, detailing internal control weaknesses and suggestions for improvement. It is not a mandatory requirement for all audits but is often issued as a best practice to help the client improve their operations.

Question 5

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

Accepted Answer

The answer of The audit committee is typically independent of...

Question 6

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

Accepted Answer

The reading of meeting minutes for the board of directors meeting is related to subsequent events as it captures the past decisions and actions of the board that may have a bearing on future events.

Question 7

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.

Accepted Answer

The auditor would not change the date of the audit report to reflect the date of the event or the date the fact became known. Instead, the auditor would either add an emphasis-of-matter paragraph to the report to refer to the note disclosing the event, or if the event requires adjustment of the financial statements, ensure that the adjustment is made and disclosed appropriately without changing the original audit report date.

Question 8

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.

Accepted Answer

This statement is true. As per professional standards, audit firms are required to conduct an engagement quality review of each audit before issuing the audit opinion for public companies. This ensures that the audit was conducted in compliance with professional standards and that the conclusions reached are appropriate. The audit firm must have policies and procedures in place for conducting such reviews, which are conducted by qualified individuals who are independent of the audit engagement.

Question 9

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.

Accepted Answer

This is referred to as an external quality control review, not a reoccurring partner review. A reoccurring partner review typically involves a partner within the audit firm (not external) reviewing the work of another partner's audit to ensure quality and compliance.

Question 10

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

Accepted Answer

This is true because the audit committee is responsible for oversight of the company's financial reporting, including the work of the external auditor. Any major accounting disagreements with management can impact the accuracy and completeness of financial statements, which is why it is important for the audit committee to be informed and involved in the resolution process.

Question 11

The engagement quality review is a risk-based review.

Accepted Answer

The engagement quality review assesses the risk factors of the engagement, such as the complexity of the engagement, the risk of material misstatement, and the level of professional judgement required. Based on these risk factors, the reviewer engages in a risk-based review to identify and address any potential issues or errors in the engagement.

Question 12

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

Accepted Answer

Audit documentation reviews are a common way to identify omissions in an audit. These reviews can be conducted by internal or external auditors to ensure that all necessary procedures were followed and that there are no missing or incomplete documents.

Question 13

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

Accepted Answer

Type I subsequent events refer to events that provide additional evidence about conditions that existed at the balance sheet date, not conditions that did not exist at that time.

Question 14

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

Accepted Answer

The audit documentation for an engagement quality review should focus on the results of the review and any identified significant matters, rather than the cost of the review. The focus should be on ensuring that the audit was performed in accordance with professional standards, rather than on the financial aspect of the review.

Question 15

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

Accepted Answer

The SEC (Securities and Exchange Commission) may investigate and take action if it finds significant issues with an audit firm's work, but discovering that an important audit procedure was not performed does not automatically lead to sanctions. The response would depend on the specifics of the situation, including the nature of the missed procedure and its impact on the audit's conclusions.

Question 16

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.

Accepted Answer

The auditor should first attempt to obtain the client's cooperation in preventing further reliance on the financial statements and audit report. Notifying regulatory agencies is a further step if client cooperation is not achieved or if such notification is required by law or regulation.

Question 17

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

Accepted Answer

If an omission of an important audit procedure is discovered, the auditor should determine the effect on the audit report and consider performing additional procedures to obtain sufficient evidence. If the omission is material and pervasive, the auditor should issue a qualified or adverse opinion, respectively. A disclaimer of opinion is only appropriate if the auditor is unable to obtain sufficient evidence to form an opinion on the financial statements as a whole.

Question 18

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

Accepted Answer

If certain audit procedures cannot be performed, the auditor should evaluate the potential impact on the financial statements and consider alternative procedures to obtain sufficient evidence. If alternative procedures cannot be performed or if the auditor concludes that the matter is material and pervasive, the auditor should modify the opinion in the audit report or, if necessary, withdraw from the engagement. However, if the omitted procedures are not considered material and pervasive, the auditor may extend previous work done or perform the procedures at a later time and disclose the matter in the audit report.

Question 19

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

Accepted Answer

Cutoff test and search for unrecorded liabilities are procedures performed by auditors in relation to subsequent events, which means events or transactions that occur after the balance sheet date. These procedures ensure that all transactions and events that should be recognized in the financial statements are properly recorded and disclosed.

Question 20

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.

Accepted Answer

A Type I subsequent event refers to events that provide additional evidence about conditions that existed at the balance sheet date, not events that occurred after the balance sheet date.

Quiz 14: Activities Required in Completing a Quality Audit