Question 1

Which of the following is generally requested in a legal letter?

Accepted Answer

A legal letter generally requests the attorney to comment on unasserted claims where his or her views differ from management's evaluation. This is important because it provides assurance that there are no material unasserted claims that could have a significant impact on the financial statements. Option B is not necessary, as it is not relevant to the purpose of a legal letter. Option C is not accurate, as the attorney's responsibility is limited to the fair presentation of asserted claims, not unasserted claims. Option D is not necessary, as it is not relevant to the purpose of a legal letter.

Question 2

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?

Accepted Answer

Confirming accounts receivable only addresses a specific type of subsequent event (increase in receivables), whereas the other procedures listed address a broader range of events that may require adjustment or disclosure in the financial statements.

Question 3

An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was:

Accepted Answer

The auditor's responsibility for events occurring subsequent to the completion of fieldwork is limited to the specific event referenced when the audit report is dual dated. This means the auditor is only responsible for the particular subsequent event that led to the dual dating of the report, not for all events that may have occurred after the completion of fieldwork.

Question 4

Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the:

Accepted Answer

Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the balance sheet date but prior to the issuance of the financial statements. The auditor must evaluate the impact of such events on the financial statements and ensure that they are appropriately disclosed or recognized.

Question 5

Generally, loss contingencies that are judged to be remote:

Accepted Answer

Loss contingencies that are judged to be remote should not be disclosed in the footnotes or recorded in the financial statements. This is because remote contingencies are not expected to have a material impact on the financial statements. However, if the company has disclosed the contingency in a prior period and it no longer meets the criteria for disclosure, it should be removed from the footnotes.

Question 6

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

Accepted Answer

During the review of subsequent events, it is important for the auditor to review the available minutes of meetings of stockholders, directors, or other committees for the subsequent-events period to identify any potential events that may have an impact on the financial statements. Options A, B, and D are not necessarily related to the review of subsequent events.

Question 7

Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?

Accepted Answer

An auditor should communicate significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters to those charged with governance in a publicly traded company. This information is important for them to make informed decisions related to financial reporting and management.

Question 8

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments in audit procedures for subsequent events and contingent liabilities?

Accepted Answer

The independent auditor would not confirm directly with the entity's lawyer that all claims have been recorded in the financial statements. This is not a typical audit procedure as the entity's lawyer may not be able to provide complete and accurate information regarding the recording of claims in the financial statements. Rather, the auditor would primarily rely on management's policies and procedures, legal letters, and written representations to obtain sufficient audit evidence with respect to litigation, claims, and assessments.

Question 9

An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the:

Accepted Answer

The subsequent period involving formal audit procedures extends to the date of the issuance of the financial statements, as this is the point at which the financial statements are considered finalized and ready for external use. While the final review of the audit working papers and the delivery of the auditor's report to the entity are important steps in completing the audit process, they occur after the substantive procedures involving subsequent events have been completed. The auditor's report is issued after the completion of all audit procedures, including those related to subsequent events.

Question 10

An attorney is responding to an independent auditor as a result of the entity's letter of inquiry. The attorney may appropriately limit the response to:

Accepted Answer

The attorney's response is typically limited to matters to which they have given substantive attention in the form of legal consultation or representation, as these are the matters they are most knowledgeable about and can provide accurate information on.

Question 11

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?

Accepted Answer

Asking legal counsel about any developments relating to litigation, claims, or assessments against the company is a standard procedure for obtaining evidence about subsequent events. This information can help the auditor to determine whether any events have occurred that may have an impact on the financial statements. The other options listed are not directly related to subsequent events.

Question 12

Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?

Accepted Answer

Material changes in the quoted market prices of listed investment securities since the balance sheet date will least likely result in an adjustment to the financial statements because they are measured at fair value, which means that any changes in market prices are already reflected in the financial statements. Whereas, options A, B, and C are events that could potentially require adjustments to the financial statements as they affect the valuation of assets and liabilities that were recorded as of the balance sheet date.

Question 13

A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork. The entity believes that this event could have a significant direct effect on the financial statements. The auditor should:

Accepted Answer

The auditor should advise management to disclose the event in the notes to the financial statements, as this is the appropriate way to inform users of the financial statements about the possibility of a significant direct effect on the financial statements. Disclosing the event in the auditor's report or withholding submission of the auditor's report until the extent of the effect is known are not necessary or practical options. Advising management to adjust the financial statements would be premature before the extent of the effect is known.

Question 14

The date of the management representation letter generally coincides with the:

Accepted Answer

The management representation letter is typically dated the same as the auditor's report because it is meant to confirm that all relevant information has been disclosed to the auditor up to that date.

Question 15

Which of the following auditing procedures is ordinarily performed last?

Accepted Answer

Obtaining a management representation letter is typically the last auditing procedure performed. This is because it involves obtaining a written statement from management confirming the accuracy and completeness of the information provided to the auditor during the audit. It is usually obtained after all other audit procedures have been completed to ensure that all necessary information has been gathered before management affirms its accuracy.  Confirming accounts payable, testing the purchasing function, and reading the minutes of directors' meetings can all be completed at different stages throughout the audit.

Question 16

The purpose of analytical procedures at the completion of the audit includes all of the following except:

Accepted Answer

The purpose of analytical procedures at the completion of the audit is to assess the conclusions reached on the financial statement components, evaluate the overall financial statement presentation, and recalculating some of the ratios examined during audit planning to evaluate how these ratios may have been affected by audit adjustments. Revising the audit plan is not a purpose of analytical procedures at the completion of the audit.

Question 17

Which of the following procedures should an auditor generally perform regarding subsequent events?

Accepted Answer

The auditor should compare the latest available interim financial statements issued after year-end with the financial statements being audited to identify any material subsequent events that may require adjustment or disclosure in the financial statements. This is a required audit procedure according to auditing standards. The other choices are not directly related to the auditor's procedures regarding subsequent events.

Question 18

An example of a Type I subsequent event is:

Accepted Answer

Type I subsequent events provide additional evidence about conditions that existed at the balance sheet date. Choice B, which involves the obsolescence of inventory, is an example of a condition that existed at the balance sheet date and is confirmed by events after that date.

Question 19

The management letter is used:

Accepted Answer

The management letter is a report that includes observations made by the auditor during the audit and recommendations for improvement. It is not used to document oral representations or confirm the terms of the engagement. While the report may include reportable conditions with respect to internal controls, this is not the primary purpose of the management letter.

Question 20

If an auditor dates the auditor's report on financial statements for the year ended December 31, 2013, as of February 10, 2014, except for Note J, as to which the date is March 3, 2014, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of:

Accepted Answer

By dating the auditor's report as of February 10, 2014, the auditor is acknowledging responsibility for subsequent events occurring through that date. However, by specifically dating Note J as of March 3, 2014, the auditor is acknowledging responsibility for a specific subsequent event that occurred after the date of the report. Therefore, the auditor is responsible for subsequent events occurring through February 10, 2014, and the specific subsequent event referred to in Note J through March 3, 2014. Choice A is incorrect as it includes subsequent events occurring after March 3, 2014, which are not the responsibility of the auditor. Choice B is incorrect because it does not take into account the specific subsequent event referred to in Note J. Choice D is incorrect because it limits the responsibility of the auditor to only the specific subsequent event referred to in Note J.

Quiz 17: Completing the Audit Engagement