Question 1

Discuss the internal control communication requirements of the PCAOB. What must auditors of public companies report to those charged with governance?

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Question 2

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
A)Significant related party transactions are pervasive.
B)Usual trade credit from suppliers is denied.
C)Arrearages in preferred stock dividends are paid.
D)Restrictions on the disposal of principal assets are present.

Accepted Answer

When suppliers deny usual trade credit, it indicates difficulty in obtaining funds to run the operations of the entity. This lack of funds can lead to operational difficulties and ultimately lead to the entity being unable to continue as a going concern. The other choices may indicate potential risks, but they do not necessarily imply that the entity will be unable to continue operating.

Question 3

Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

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Question 4

What is the difference between a contingent liability and a commitment?

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Question 5

From the list below, select the procedures that an auditor would use to test for contingent liabilities.
a. Inquire of SEC officials regarding reported violations by the entity that create claims.
b. Read the entity's contracts, loan agreements, leases, and other documents.
c. Read the entity's minutes of meetings of shareholders, directors, and committees.
d. Request a representation letter from all the entity's employees.
e. Read the legal briefs of all suits filed against the entity's competitors.
f. Request the entity's management to prepare a letter of inquiry to the entity's attorney regarding pending litigation against the entity.

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Question 6

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions. Provide some examples of contingent liabilities.

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Question 7

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A)Inspecting title documents to verify whether any assets are pledged as collateral.
B)Confirming with third parties the details of arrangements to maintain financial support.
C)Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation.
D)Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Accepted Answer

Confirming with third parties the details of arrangements to maintain financial support is the most appropriate procedure to identify conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern. This procedure enables the auditor to obtain reliable and relevant information about the entity's ability to obtain financial resources in the future.

Question 8

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
A)Cash flows from operating activities are negative.
B)Research and development projects are postponed.
C)Significant related party transactions are pervasive.
D)Stock dividends replace annual cash dividends.

Accepted Answer

Negative cash flows from operating activities indicate that the entity may not be generating enough cash to meet its obligations as they come due, which can result in a going concern issue.

Question 9

State the two primary purposes of the management representation letter.

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Question 10

While auditing other business processes, an auditor may identify information about contingent liabilities. What specific audit procedures relating to other business processes could uncover these liabilities?

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Question 11

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
A)This communication is required to occur before the auditor's report on the financial statements is issued.
B)This communication should provide timely observations arising from the audit that are significant to the financial reporting process.
C)Any significant matter communicated to those charged with governance also should be communicated to management.
D)Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

Accepted Answer

The auditor's communication with those charged with governance should include timely observations that are significant to the financial reporting process to ensure transparency and address any issues promptly.

Question 12

Pretty People Incorporated is the defendant in a pending discrimination lawsuit. What information about the lawsuit would you, as an auditor, need to know to decide whether to disclose the litigation in the financial statements?

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Question 13

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

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Question 14

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the:
A)possibility of purchasing certain assets rather than leasing them.
B)capability of extending the due dates of existing debt.
C)appropriateness of changing depreciation methods from double declining balance to straight line.
D)marketability of property and equipment that management plans to keep.

Accepted Answer

The capability of extending the due dates of existing debt can mitigate the significance of negative information regarding the entity's means for maintaining adequate cash flow because it provides the entity with additional time to generate sufficient cash flow to pay off the debt. Options A, C, and D may have an impact on the entity's financial statements but do not directly address the issue of maintaining adequate cash flow.

Question 15

After issuance of the financial statements and the accompanying auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless:
A)a lawsuit in which risk of loss was considered remote is resolved in the company's favor.
B)a development occurs that may affect the entity's ability to continue as a going concern.
C)a material fraud is initiated by an employee after the report is issued.
D)evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.

Accepted Answer

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Question 16

For which of the following matters should an auditor obtain written management representations?
A)Management's cost-benefit justifications for not correcting internal control weaknesses.
B)Management's knowledge of future plans that may affect the price of the entity's stock.
C)Management's addressing control deficiencies communicated to the audit committee during previous engagements.
D)Management's acknowledgment of its responsibility for employees' violations of laws.

Accepted Answer

Auditors typically obtain written management representations regarding management's addressing of control deficiencies communicated during previous engagements to ensure that management has taken appropriate actions to address these issues.

Question 17

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:
A)ability to expand operations into new product lines in the future.
B)feasibility of plans to purchase leased equipment at less than market value.
C)marketability of assets that management plans to sell.
D)committed arrangements to convert preferred stock to long-term debt.

Accepted Answer

The marketability of assets that management plans to sell can provide evidence that the entity has the ability to generate cash flow to support its ongoing operations and address any financial difficulties it may be facing. This evidence can help mitigate the adverse effects of events causing an auditor to have doubt about the entity's ability to continue as a going concern. Options A, B, and D are not necessarily relevant to the entity's ability to continue as a going concern.

Question 18

After the financials have been issued with an accompanying audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:
A)new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
B)material adverse events occur after the date of the auditor's report.
C)final determination or resolution was made on matters that had resulted in a qualification in the auditor's report.
D)final determination or resolution was made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution.

Accepted Answer

According to the Generally Accepted Auditing Standards (GAAS), an auditor has no obligation to make any further audit tests or inquiries after the financials have been issued with an accompanying audit report, unless new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report. Therefore, choice A is the best answer. Material adverse events occurring after the date of the auditor's report, the final determination or resolution made on matters that had resulted in a qualification in the auditor's report, or the final determination or resolution made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution do not require further audit tests or inquiries, according to GAAS.

Question 19

What information is typically requested in a legal letter to an entity's attorney?

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Question 20

Which of the following statements is correct about an auditor's required communication with management and those charged with governance?
A)Any matters communicated to those charged with governance are also required to be communicated to the entity's management.
B)The auditor is required to discuss considerations relating to assessment of going concern.
C)The auditor does not have any requirement to communicate with anyone outside of management.
D)Weaknesses in internal control previously reported to those charged with governance are required to be communicated to those charged with governance after each subsequent audit until the weaknesses are corrected.

Accepted Answer

The auditor is required to discuss considerations related to the assessment of going concern with management and those charged with governance. This is because the going concern assumption is a fundamental principle in the preparation of financial statements, and any concerns about the entity's ability to continue as a going concern need to be thoroughly communicated and understood by both management and those charged with governance.

Quiz 17: Completing the Audit Engagement

Discuss the internal control communication requirements of the PCAOB. What must auditors of public companies report to those charged with governance?

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

What is the difference between a contingent liability and a commitment?

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions. Provide some examples of contingent liabilities.

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

State the two primary purposes of the management representation letter.

While auditing other business processes, an auditor may identify information about contingent liabilities. What specific audit procedures relating to other business processes could uncover these liabilities?

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Pretty People Incorporated is the defendant in a pending discrimination lawsuit. What information about the lawsuit would you, as an auditor, need to know to decide whether to disclose the litigation in the financial statements?

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the:

After issuance of the financial statements and the accompanying auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless:

For which of the following matters should an auditor obtain written management representations?

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:

After the financials have been issued with an accompanying audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:

What information is typically requested in a legal letter to an entity's attorney?

Which of the following statements is correct about an auditor's required communication with management and those charged with governance?