Question 1

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 assess the impact of the omission on the audit opinion and consider performing alternative procedures to obtain sufficient evidence. If the auditor is unable to obtain sufficient evidence, a qualified or adverse opinion may be issued, but not necessarily a disclaimer of opinion.

Question 2

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

Accepted Answer

All major accounting disagreements with management should be discussed with the audit committee to ensure transparency and objectivity in the financial reporting process.

Question 3

The engagement quality review is a risk-based review.

Accepted Answer

Engagement quality review is a risk-based review that is performed to evaluate the significant judgments made by the engagement team and the conclusions reached in support of the opinion expressed in the auditor's report. The review ensures that the engagement complies with ethical requirements and relevant auditing standards.

Question 4

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

Accepted Answer

The audit committee is a subset of the board of directors and is typically composed of independent directors, but it is not independent of the board itself.

Question 5

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 because the correct term is "recurring (or repeated) external quality assessment", not "reoccurring partner review". The reviewing party should not be a part of the audit team nor have any close relationship with them.

Question 6

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. Engagement quality review is a mandatory part of the quality control policies and procedures established by audit firms. It involves reviewing the significant audit areas, judgments, conclusions, and overall quality of the audit work performed by the engagement team before issuing the audit report. The objective is to ensure that the audit complies with professional standards and that the audit report is appropriate given the results of the audit. This requirement is specifically applicable to public companies.

Question 7

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

Accepted Answer

A management letter is a report from the auditor to the management of the company, highlighting areas that need improvement to better manage risks and operations. On the other hand, a management representation letter is a written assertion from the management to the auditor, stating that all information provided is accurate and complete. They are not the same thing.

Question 8

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 important for the external auditor to have a constructive and detailed dialogue with the audit committee to ensure transparency, understanding, and agreement on important aspects of the audit such as materiality, risks, and accounting treatments. This helps to enhance the quality of the audit and strengthen the independence of the auditor.

Question 9

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 review process and conclusions, including any identified deficiencies and the actions taken to address them. The cost of the review is not relevant or necessary information to include in the documentation.

Question 10

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 11

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 12

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

Accepted Answer

The auditor's management letter typically includes recommendations for improvements that could benefit the organization, making it a constructive part of the audit process.

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

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

Accepted Answer

Reading the meeting minutes for the board of directors meeting is a common procedure related to subsequent events.

Question 15

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

Accepted Answer

If the auditor cannot perform certain audit procedures, they are required to extend previous work done and modify the report as necessary to reflect the limitation in the audit. This is in accordance with Generally Accepted Auditing Standards (GAAS).

Question 16

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 17

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 18

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.

Question 19

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

Accepted Answer

This statement is true. Auditors may discover omissions in their documentation during reviews conducted by external or internal review programs. These reviews are designed to evaluate the quality of audit work performed by the auditor and identify any deficiencies or areas for improvement.

Question 20

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

Accepted Answer

Both the cutoff test and a search for unrecorded liabilities are procedures performed during the subsequent events period, where transactions and events occurring after the balance sheet date are evaluated for potential adjustments to the financial statements.

Quiz 14: Activities Required in Completing a Quality Audit