Question 1

On what information does the auditor base a going concern evaluation?
A)On separate procedures.
B)On the management discussion and analysis (MD&A).
C)On information obtained from normal audit procedures performed to test management's assertions.
D)On the statement of cash flows for the current period.

Accepted Answer

The auditor bases a going concern evaluation on information obtained from normal audit procedures performed to test management's assertions. These procedures provide evidence about the entity's ability to continue as a going concern for a reasonable period of time. The auditor may also consider any additional information that is available, such as the management discussion and analysis (MD&A) or the statement of cash flows, but these are not the primary sources of information used for the going concern evaluation.

Question 2

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of which of the following?
A)The client's external controls.
B)The client's interim financial statements.
C)The client's internal controls over financial reporting.
D)The client's segment reports.

Accepted Answer

The intentional misstatement, even if immaterial, indicates a weakness or breakdown in the client's internal controls over financial reporting, which could impact the auditor's opinion on the effectiveness of those controls. The other options are not directly related to the intentional misstatement.

Question 3

Which of the following is false regarding the use of an audit checklist for disclosures?
A)It is a convenient documentation format.
B)It reminds the auditor of matters that should be considered for disclosure.
C)It can be organized to include relevant professional guidance.
D)It covers all potential unusual circumstances.

Accepted Answer

An audit checklist for disclosures cannot cover all potential unusual circumstances as such situations are often unique, and standardized checklists may not be comprehensive or applicable in all cases. Therefore, auditors require professional judgment and experience to evaluate and determine whether a particular disclosure is necessary or not.

Question 4

What should an auditor do when becoming aware of violations of the FCPA?
A)Contact foreign officials in the country where the client has business operations.
B)Notify the audit committee about the violations,their circumstance,and the effect on the financial statements.
C)Contact the U.S.marshals.
D)Design internal controls to deter improper payments.

Accepted Answer

When an auditor becomes aware of violations of the FCPA, the best course of action is to notify the audit committee about the violations, their circumstances, and the effect on the financial statements. This is because the audit committee is responsible for overseeing the company's financial reporting process and ensuring compliance with relevant laws and regulations. Contacting foreign officials in the country where the client has business operations or contacting the U.S. marshals may not be appropriate actions for an auditor, as they could potentially interfere with ongoing investigations or violate confidentiality agreements. Designing internal controls to deter improper payments may be a proactive step, but it may not be sufficient to address existing violations.

Question 5

Assume a situation in which an attorney who provided significant litigation counsel to a client refuses to furnish information requested in an audit.Which of the following descriptions best describes this situation from the auditor's perspective?
A)A departure from GAAP.
B)A scope limitation.
C)A violation of the attorney-client privilege.
D)A contingent liability.

Accepted Answer

This situation would be considered a scope limitation because the attorney's refusal to provide requested information prevents the auditor from obtaining sufficient evidence to support their audit conclusions. This is not a departure from GAAP, a violation of the attorney-client privilege, or a contingent liability.

Question 6

In the letter of audit inquiry concerning a description and evaluation of litigation,claims and assessment provided by management to the auditor,which of the following is the client's lawyer not requested to provide?
A)Information on the completeness of management's list.
B)Information on the compliance of the disclosures with GAAP.
C)Information on the likelihood and range of possible losses.
D)Information on any limitations on the lawyer's response.

Accepted Answer

The client's lawyer is not requested to provide information on the compliance of the disclosures with GAAP. This is because it is the responsibility of management to ensure that the financial statements are prepared in accordance with GAAP, not the responsibility of the lawyer. The lawyer's role is to provide information on the description and evaluation of litigation, claims, and assessments, including information on the completeness of management's list, the likelihood and range of possible losses, and any limitations on the lawyer's response.

Question 7

Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims?
A)A letter of audit inquiry.
B)A management representation letter.
C)A management letter.
D)A loss reserve confirmation.

Accepted Answer

The auditor would send a letter of audit inquiry to the client's legal counsel requesting information about asserted claims. This inquiry would seek information about existing claims, potential claims, and unasserted claims that could result in future litigation or other disputes. The inquiry would also seek information about the likelihood and magnitude of any potential losses, and would request that the client's legal counsel provide any relevant legal opinions or documentation. A management representation letter is a separate document that the auditor would request from the client's management, not from its legal counsel. A management letter is a communication to management concerning less significant matters identified during the audit, and a loss reserve confirmation is a confirmation of the adequacy of reserves maintained by the client for potential losses.

Question 8

Which of the following is not an inherent limitation in an auditor's ability to detect material misstatements relating to a client's compliance with laws and regulations?
A)Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements,so the information systems relating to financial reporting may not capture noncompliance.
B)The legal implications of noncompliance are ultimately a matter for legal authorities to resolve,and are not a matter about which the auditor can resolve.
C)Management may act to conceal noncompliance,or may override controls,or may intentionally misrepresent facts to the auditor.
D)Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the entity.

Accepted Answer

Auditors are in fact required to consider the applicable legal and regulatory frameworks that apply to the entity. Therefore, D is not an inherent limitation. A, B, and C are all inherent limitations in an auditor's ability to detect material misstatements relating to a client's compliance with laws and regulations.

Question 9

Fulton Educational Company,Inc.has a matter of material litigation that is threatened,but that has not gone to trial. The auditor's consideration of such a matter will not include which of the following?
A)Sending a letter to the client's attorneys for more information.
B)Discussing the matter with the client and their insurance adjuster.
C)Confirming with the harmed party regarding the amount that will be claimed.
D)Assessing whether accrual or disclosure by the client was reported in accordance with GAAP.

Accepted Answer

The auditor is not required to confirm with the harmed party regarding the amount that will be claimed in a threatened litigation. The amount claimed is usually uncertain and subject to change, and the auditor's responsibility is to evaluate whether the potential liability associated with the litigation has been appropriately accrued or disclosed in accordance with GAAP. The auditor may also communicate with the client's attorneys and insurance adjusters for more information and discuss the matter with the client.

Question 10

Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA)?
A)No U.S.person or companies that have securities listed on U.S.markets may make a payment to a foreign official for the purpose of obtaining or retaining business.
B)Companies that have securities listed on U.S.markets must make and keep financial records that accurately and fairly reflect the transactions of the company.
C)Designing and maintaining internal accounting controls is the role of internal auditors when management conducts business in a foreign country.
D)Certain payments made to an official to expedite the performance of the duties that the official would already be bound to perform are acceptable.

Accepted Answer

The FCPA requires companies to maintain accurate books and records and to have a system of internal controls. However, it does not specify that designing and maintaining internal accounting controls is solely the role of internal auditors. This is a broader responsibility that involves management and can involve various departments within a company, not just internal auditors.

Question 11

Which of the following is a category that does not reflect the contingent nature of losses and the guiding criteria organized around probability of outcomes as provided by the FASB?
A)Guaranteed.
B)Reasonably possible.
C)Remote.
D)Probable.

Accepted Answer

The category of "guaranteed" does not reflect the contingent nature of losses because it implies a certainty of loss, rather than a possibility or probability of loss. The other categories (reasonably possible, remote, and probable) reflect varying degrees of likelihood or probability of the loss occurring.

Question 12

Which one of the following is false regarding the adequacy of disclosures in a financial statement audit?
A)The auditor should consider matters for disclosure while gathering evidence during the course of the audit,not just at the end of the audit.
B)One of the key disclosures is a summary of significant accounting policies used by the company.
C)Disclosures should be limited to only checklist items.
D)The auditor's report does not specifically cover the statements made by management in the "Management Discussion and Analysis" (MD&A)section of the annual report.

Accepted Answer

Disclosures should not be limited to only checklist items. The auditor should exercise professional judgment to determine the adequacy of disclosures based on the financial statements and the relevant accounting standards. Therefore, option C is false. The other options are true statements about the adequacy of disclosures in a financial statement audit.

Question 13

Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures?
A)Management representation letter.
B)GAAS.
C)Inquiry of the CFO.
D)Checklists.

Accepted Answer

Checklists are the best tool for the audit team to determine if the client has included all disclosures. Checklists provide a comprehensive list of required disclosures and help auditors to ensure that all relevant information has been disclosed in the financial statements. Management representation letter, GAAS, and inquiry of the CFO may provide information about the financial statements but are not as effective in ensuring that all disclosures have been included.

Question 14

Assessing disclosures does not require reasonable assurance of which of the following?
A)The disclosures are understandable to users.
B)Disclosed events and transactions have occurred and pertain to the entity.
C)All material and immaterial disclosures have been reported.
D)The information is disclosed accurately and at appropriate amounts.

Accepted Answer

Assessing disclosures does not require reasonable assurance that all material and immaterial disclosures have been reported. However, disclosures that are material to the financial statements must be presented fairly and accurately in accordance with the applicable financial reporting framework. The other options (A, B, and D) are all important requirements for assessing disclosures.

Question 15

When requiring a letter of audit inquiry from the client's attorney,which of the following information will be requested?
A)A statement regarding conflicts of interest that the attorney may have with the client.
B)The attorney's expert opinion of proper GAAP treatment related to client contingencies.
C)An evaluation of the likelihood of unfavorable outcome of,and estimated losses from contingencies.
D)Possible auditor defenses for third-party litigation related to ordinary negligence claims.

Accepted Answer

When requesting a letter of audit inquiry from the client's attorney, the auditor would typically request an evaluation of the likelihood of an unfavorable outcome of, and estimated losses from, contingencies. It is important to note that the attorney's evaluation would be based on legal principles, as opposed to GAAP. While the other options may also be requested from the attorney in certain circumstances, they are not typically included in the letter of audit inquiry.

Question 16

Which of the following parties has the responsibility for designing and maintaining policies and procedures to identify,evaluate,and account for contingencies?
A)Management.
B)The auditor.
C)The audit committee.
D)The client's attorney.

Accepted Answer

Management is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies. This includes developing and implementing a system to identify potential contingencies, assessing their likelihood and potential impact on the financial statements, and recording them in the financial statements when they meet the criteria for recognition. The auditor is responsible for evaluating the adequacy of management's policies and procedures related to contingencies and assessing the financial statement disclosures related to contingencies. The audit committee provides oversight of the financial reporting process but typically does not have direct responsibility for designing policies and procedures related to specific financial statement items. The client's attorney may provide legal advice related to contingencies, but is not responsible for designing or maintaining policies and procedures related to the financial reporting process.

Question 17

Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies?
A)Information about major contracts in which contingencies may be present.
B)Documentation of communication with internal and external legal counsel of the client.
C)Accounts receivable confirmations.
D)Documentation of contingent liabilities contained in corporate minutes,correspondence from governmental agencies,and bank confirmations.

Accepted Answer

Accounts receivable confirmations do not provide information about contingencies. The other choices are all types of evidence that the auditor should obtain concerning contingencies.

Question 18

Which of the following is required by the dual approach for assessing uncorrected misstatements?
A)The application of the rollover method.
B)The application of the iron curtain method.
C)Simultaneous application of both the rollover and iron curtain methods.
D)Sequential application of both the rollover and iron curtain methods.

Accepted Answer

The dual approach for assessing uncorrected misstatements requires the simultaneous application of both the rollover and iron curtain methods to evaluate the materiality of misstatements over different periods.

Question 19

Which of the following items is not typically requested from the lawyer of a company regarding contingencies?
A)Any limitations on the lawyer's response such as not devoting substantial attention to the item or that the amounts are not material.
B)Information about the attorney's other clients with similar contingencies.
C)A description of each contingency,as well as progress and action that the company plans to take.
D)A comment on the completeness of management's list of contingencies and an evaluation.

Accepted Answer

Information about the attorney's other clients with similar contingencies is not typically requested, as it is not relevant to the company's specific situation. A, C, and D are all typical requests regarding contingencies.

Question 20

When responding to the auditor as a result of the audit client's letter of inquiry,how might the attorney limit the response?
A)Limit the response to litigations in process.
B)Limit the response to asserted claims.
C)Limit the response to matters to which the attorney has given substantive attention in the form of legal consultation or representation.
D)Limit the response to items which the attorney believes will result in loss to the client.

Accepted Answer

The attorney should limit the response to matters to which they have given substantive attention in the form of legal consultation or representation. This is to maintain confidentiality and protect the attorney-client privilege. They should not disclose any information beyond what is necessary to answer the inquiry. Limiting the response to litigations in process or asserted claims could result in a partial response that does not address all relevant matters. Limiting the response to items that the attorney believes will result in loss to the client may also be too narrow, as there may be other relevant matters that are not directly related to financial loss.

Quiz 14: Completing a Quality Audit

On what information does the auditor base a going concern evaluation?

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of which of the following?

Which of the following is false regarding the use of an audit checklist for disclosures?

What should an auditor do when becoming aware of violations of the FCPA?

Assume a situation in which an attorney who provided significant litigation counsel to a client refuses to furnish information requested in an audit.Which of the following descriptions best describes this situation from the auditor's perspective?

In the letter of audit inquiry concerning a description and evaluation of litigation,claims and assessment provided by management to the auditor,which of the following is the client's lawyer not requested to provide?

Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims?

Which of the following is not an inherent limitation in an auditor's ability to detect material misstatements relating to a client's compliance with laws and regulations?

Fulton Educational Company,Inc.has a matter of material litigation that is threatened,but that has not gone to trial. The auditor's consideration of such a matter will not include which of the following?

Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA) ?

Which of the following is a category that does not reflect the contingent nature of losses and the guiding criteria organized around probability of outcomes as provided by the FASB?

Which one of the following is false regarding the adequacy of disclosures in a financial statement audit?

Which of the following is a tool that is best used by the audit team to determine if the client has included all disclosures?

Assessing disclosures does not require reasonable assurance of which of the following?

When requiring a letter of audit inquiry from the client's attorney,which of the following information will be requested?

Which of the following parties has the responsibility for designing and maintaining policies and procedures to identify,evaluate,and account for contingencies?

Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies?

Which of the following is required by the dual approach for assessing uncorrected misstatements?

Which of the following items is not typically requested from the lawyer of a company regarding contingencies?

When responding to the auditor as a result of the audit client's letter of inquiry,how might the attorney limit the response?