Question 1

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

Accepted Answer

Presentation- and disclosure-related objectives are often integrated with the auditor's tests for both transaction-related objectives and balance-related objectives. This ensures that the information presented in the financial statements is complete and accurate.

Question 2

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

Accepted Answer

B

Question 3

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

Accepted Answer

A major drop in the quoted market price of the shares of the corporation is considered a non-adjusting event that does not require disclosure in the financial statements, as it does not provide evidence of conditions that existed at the balance sheet date.

Question 4

To ensure that the audit meets the public accounting firm's standard of performance:
A) the working papers are reviewed by another member of the audit firm.
B) a financial disclosure checklist is used for every engagement.
C) an audit engagement checklist is completed.
D) it is common to gather more evidence than is actually necessary.

Accepted Answer

Reviewing the working papers by another member of the audit firm is a common practice to ensure quality control and to maintain the firm's standard of performance. The other options, while helpful in the audit process, may not be enough to ensure the public accounting firm's standard of performance. Additionally, gathering more evidence than necessary may not always be the best choice as it could increase the cost and time of the audit without providing significant benefits.

Question 5

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 full disclosure in the footnotes.
B) no entries need 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) the trial balance should be adjusted to correct the statements.

Accepted Answer

If a misstatement is material, the financial statements must be adjusted to correct the misstatement to ensure they are fairly stated.

Question 6

ASA 240 requires the auditor to communicate all irregularities, including fraud and illegal acts to the audit committee:
A) regardless of materiality.
B) only if the act is immaterial.
C) only if the act is highly material.
D) only if the act is material.

Accepted Answer

ASA 240 requires the auditor to communicate all irregularities, including fraud and illegal acts to the audit committee regardless of materiality. This is because fraud and illegal acts, even if immaterial, can have a significant impact on the reputation of the company and its stakeholders. Therefore, it is important that the audit committee is fully informed about any irregularities, regardless of their materiality.

Question 7

Which one of the following items would NOT be of concern to the auditor as a potential contingent liability? In each case, the event could generate a loss of $20 000.
A) Loans receivable discounted
B) Unused balances of outstanding letters of credit
C) Income tax disputes
D) Obsolete inventory

Accepted Answer

The auditor would be concerned about loans receivable discounted, unused balances of outstanding letters of credit, and income tax disputes as potential contingent liabilities because they are all events that could generate a loss. However, obsolete inventory does not fall under the category of a contingent liability as it is a regular business risk and does not depend on any uncertain events.

Question 8

If the response from the client's legal representative contains a disagreement with management, the auditor should:
A) issue a qualified audit report.
B) seek resolution through discussion with management and the lawyer.
C) confirm the information using alternative audit procedures.
D) seek resolution with management.

Accepted Answer

The auditor should seek resolution through discussion with management and the lawyer.

Question 9

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) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
B) The potential liability is sufficiently well- known in some instances to be included in the financial statements as an actual liability.
C) The auditor should primarily rely on management's judgement about potential liabilities.
D) 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.

Accepted Answer

The answer of If the auditor concludes that there are...

Question 10

The auditor's responsibility for 'reviewing the subsequent events' of a client 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 financial year under audit and ending with the balance sheet date.
C) beginning with the balance sheet date and ending with the date of the annual general meeting.
D) beginning with the start of the financial year under audit and ending with the date of the auditor's report.

Accepted Answer

The auditor's responsibility for reviewing the subsequent events of a client is normally limited to the period of time beginning with the balance sheet date and ending with the date of the auditor's report. This is because the financial statements are meant to reflect the financial position of the client as at the balance sheet date, and events happening after that date may have a significant impact on the financial statements. The auditor needs to consider such events to ensure that the financial statements are not materially misstated.

Question 11

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) Neither A nor B

Accepted Answer

Both types of subsequent events require consideration by management and evaluation by the auditor. Subsequent events that have a direct effect on the financial statements and require adjustment should be recognized and disclosed in the financial statements. Subsequent events that have no direct effect on the financial statements but for which disclosure is advisable should be disclosed in the footnotes to the financial statements. Therefore, both types of subsequent events are important to the financial statements and should be evaluated and disclosed accordingly.

Question 12

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

Accepted Answer

Analytical procedures are crucial for assessing a client's financial health and identifying trends or conditions that may indicate going concern issues.

Question 13

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

Accepted Answer

The settlement of litigation in excess of the recorded liability is a material event that occurred after the balance sheet date and would require an adjustment to the financial statements before they could be issued. This adjustment would involve recognizing an additional expense or liability related to the litigation settlement. Choices A, B, and D do not necessarily require adjustments to the financial statements as they do not relate to events occurring after the balance sheet date.

Question 14

How many presentation and disclosure objectives are there?
A) Four
B) Two
C) Three
D) One

Accepted Answer

There are four presentation and disclosure objectives in financial reporting, which ensure that financial statements are presented fairly and that all necessary information is disclosed to users.

Question 15

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

Accepted Answer

The auditor's responsibility to review transactions and activities occurring after the balance sheet date is commonly referred to as the review for subsequent events. These subsequent events may include things like contingent liabilities, but the term "subsequent events" encompasses a broader range of transactions and activities that occurred after the balance sheet date. Choices A, B, and D are not as comprehensive or accurate as choice C.

Question 16

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 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.
B) Request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning 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 lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate and account for litigation, claims and assessments.

Accepted Answer

The auditor's primary means of corroborating information related to litigation, claims, and assessments is to request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning these matters. This allows the auditor to obtain independent confirmation of the information provided by management and understand the nature and current status of any ongoing litigation, claims or assessments. Option A is incorrect because it involves engaging outside legal counsel to suggest wording for the text of a footnote, which may not provide any additional substantive information. Option C is incorrect because it is not practical to ask client lawyers to completely reconsider previously consulted matters during the period under examination, especially if the matters are complex and involve a significant amount of legal analysis. Option D is incorrect because it is focused on obtaining a legal opinion on the policies and procedures surrounding the identification, evaluation, and accounting of such matters, which may not provide sufficient corroboration of specific information related to litigation, claims, and assessments.

Question 17

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

Accepted Answer

A management representation letter is not considered sufficient evidence on its own as it comes from a non-independent source, i.e., the management of the entity being audited. The auditor needs to gather additional evidence to support their opinion.

Question 18

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

Accepted Answer

The auditor must consider the cumulative effect of individually immaterial errors to determine if they are material in aggregate, which may require adjustments.

Question 19

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

Accepted Answer

The disclosure in footnotes should describe the nature of the contingency to the extent it is known and the opinion of legal advisers or management as to the expected outcome. The auditor's opinion should not be included as it is not the auditor's job to provide an opinion on the contingency itself. The steps the client has taken to ensure that it doesn't recur and the opinion of an outside independent party are not relevant to the disclosure of material contingencies.

Question 20

When auditing contingent liabilities, the primary objective at the initial stage of the tests is to determine:
A) the likelihood of the liability.
B) the materiality of any liability.
C) the existence of the liability.
D) what constitutes adequate disclosure of the liability.

Accepted Answer

The answer of When auditing contingent liabilities, the primary objective...

Quiz 17: Completing the Audit

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

An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to:

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?

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

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:

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

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

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

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?

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

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

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:

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?

How many presentation and disclosure objectives are there?

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

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

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:

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