Question 1

A legal representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.

Accepted Answer

False

Question 2

FASB ASC Topic 450, Contingencies, provides accounting guidance for _______.
A)the accounting treatment for intangible assets
B)depreciable methods for property, plant and equipment
C)events, or potential events, that create uncertainty for a company
D)business combinations

Accepted Answer

FASB ASC Topic 450 specifically covers events or potential events that create uncertainty for a company, and provides guidance on how to account for these contingencies in financial reporting. It does not cover intangible assets, depreciable methods for property, plant and equipment, or business combinations.

Question 3

If, in addition to external legal counsel, the client also has in-house legal counsel responsible for litigation, claims, and assessments, a legal letter would NOT be sent to the in-house legal counsel.

Accepted Answer

In-house legal counsel is often involved in the process and may receive a legal letter as part of the organization's internal legal team's responsibility to manage litigation, claims, and assessments, working alongside external legal counsel.

Question 4

A legal letter refers to a letter_______.
A)of inquiry sent to the client's legal counsel
B)of inquiry sent to the prior auditor
C)sent to the Securities and Exchange Commission to advise of questionable accounting practices
D)sent to the client's internal audit function, questioning certain legal practices employed by the client

Accepted Answer

A legal letter is typically a form of communication sent to a client's legal counsel, often to inquire about the status of legal matters that could affect the financial statements.

Question 5

An example of a loss contingency includes _______.
A)guarantees of debt of others
B)collection of accounts receivable
C)payment of accounts payable
D)repurchasing outstanding shares

Accepted Answer

A loss contingency is a potential liability that depends on whether a particular event occurs, such as a lawsuit or warranty claim. Guarantees of debt of others meet this criteria as they represent a potential liability that could be triggered if the borrower defaults on the loan. The other options do not involve potential liabilities and therefore do not fit the definition of a loss contingency.

Question 6

Estimating the amount of a loss contingency from a material litigation situation is not a critical accounting estimate.

Accepted Answer

Estimating the amount of a loss contingency from a material litigation situation is a critical accounting estimate as it involves significant judgment and uncertainty. The outcome of the litigation and the potential financial impact on the company may be difficult to predict and can have a significant impact on the financial statements.

Question 7

Analytical procedures during risk assessment may identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations

Accepted Answer

Analytical procedures during risk assessment can identify negative trends in a company's financial statements, including working capital deficiencies, adverse financial ratios, and decreasing cash flow. These trends can indicate potential financial risks and help auditors plan their audit procedures accordingly.

Question 8

A Type I subsequent event requires an adjustment to the financial statements.

Accepted Answer

A Type I subsequent event is an event that occurred after the balance sheet date but before the financial statements were issued, and it provides additional information about a condition that existed at the balance sheet date. Since this event provides new information, it requires an adjustment to the financial statements.

Question 9

The Financial Accounting Standards Board (FASB) defines a loss contingency as _______.
A)an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur
B)an existing condition or situation involving certainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur
C)an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events fail to occur
D)an existing condition or situation involving uncertainty as to possible gain that will ultimately be resolved when one or more future events occur or fail to occur

Accepted Answer

A loss contingency is defined as an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. It is not a certainty of possible loss (option B) nor does it involve uncertainty as to possible gain (option D). Option C is partially correct but incomplete as it only considers the possibility of future events failing to occur.

Question 10

AS 1301 specifies that only critical accounting policies and practices must be communicated to the audit committee.

Accepted Answer

AS 1301 requires auditors to communicate with the audit committee regarding significant accounting policies, practices, estimates, and judgments, not just the critical ones.

Question 11

The Financial Accounting Standards Board (FASB) defines a loss contingency as an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.

Accepted Answer

This is the correct definition of a loss contingency as defined by the FASB.

Question 12

The likelihood of loss contingencies is considered reasonably possible when the future event is likely to occur.

Accepted Answer

The likelihood of loss contingencies is considered "reasonably possible" when the chance of the future event or events occurring is more than remote but less than likely.

Question 13

Analytical procedures may include ratio analysis, trend analysis, and other procedures.

Accepted Answer

This statement is true. Analytical procedures can include various techniques such as ratio analysis and trend analysis to evaluate financial information and detect any unusual fluctuations or anomalies.

Question 14

An example of a Type II subsequent event would be the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date.

Accepted Answer

A Type II subsequent event refers to events that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The bankruptcy of a client's customer due to poor financial condition existing as of the balance sheet date would be considered a Type I subsequent event, as it provides additional evidence about conditions that existed at the balance sheet date.

Question 15

At the conclusion of the audit, auditors revisit the materiality level determined at the beginning of the audit to ensure it is still appropriate based on the results of audit procedures.

Accepted Answer

It is standard practice for auditors to evaluate the materiality level at the end of the audit to ensure it still reflects the appropriate level of significance based on the findings of the audit procedures. This helps to ensure that the financial statements fairly represent the company's financial position and performance.

Question 16

As the audit is being performed, the engagement partner should conduct timely reviews of work completed on accounts, transactions, or disclosures that require extensive judgment or involve significant risks.

Accepted Answer

Timely reviews of work completed on accounts, transactions, or disclosures that require extensive judgment or involve significant risks are necessary to ensure the accuracy and completeness of the audit.

Question 17

If auditors determine there is substantial doubt about the entity continuing as a going concern, the next step is to obtain information about management's plans to mitigate or minimize the adverse effects of the situation.

Accepted Answer

This is correct according to auditing standards. If auditors determine there is substantial doubt about the entity continuing as a going concern, they should obtain information about management's plans to mitigate or minimize the adverse effects of the situation. This information is important for the auditor to consider in evaluating the entity's ability to continue as a going concern.

Question 18

For public companies, the SEC (Securities and Exchange Commission) has strict deadlines for the filing of Form 10-K, which is the document that contains the company's audited annual financial statements.

Accepted Answer

The SEC does have strict deadlines for the filing of Form 10-K for public companies.

Question 19

Attorneys and their clients have a _______.
A)confidential relationship
B)fiduciary relationship
C)privileged relationship
D)legal relationship

Accepted Answer

The answer of Attorneys and their clients have a _______.
A)confidential...

Question 20

Large publicly traded companies are under great scrutiny _______.
A)from the SEC only
B)from both the public and the SEC
C)from the public only
D)from the internal audit function

Accepted Answer

Large publicly traded companies are under great scrutiny from both the public and the SEC. The public expects transparency and accountability from these companies, while the SEC enforces regulations and standards to ensure fair and honest practices. Additionally, investors, shareholders, and other stakeholders closely monitor these companies' financial performance and decisions. Therefore, large companies face significant pressure to meet the expectations of both the public and the SEC.

Quiz 14: Completing the Audit