Question 1

Management of AllTech,Inc.refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy.What does this refusal constitute?
A)A violation of full and fair disclosure.
B)A securities law violation.
C)A scope limitation.
D)A breakdown in internal controls.

Accepted Answer

The refusal to sign the management representation letter constitutes a scope limitation as it indicates that the auditors were unable to obtain sufficient evidence regarding the management's representation on the financial statements and related disclosures. The management representation letter is a standard audit procedure that helps the auditors gather appropriate audit evidence and maintain the overall quality of the audit process. The management's refusal to sign it can compromise the auditors' ability to perform an adequate audit and can result in a disclaimer of opinion or an adverse opinion on the financial statements.

Question 2

Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for audits of public companies?
A)Subsequent event review.
B)Engagement quality review.
C)Disclosure of all contingent liabilities.
D)Seven-year client rotation.

Accepted Answer

The Sarbanes-Oxley Act of 2002 explicitly requires engagement quality review for audits of public companies. Subsequent event review and disclosure of all contingent liabilities are implicit requirements and seven-year client rotation is not explicitly required by the act.

Question 3

Which one of the following is not an example of an additional procedure that typically relates to the discovery of subsequent events?
A)Partner review of all workpapers.
B)Reading interim financial statements and comparing them to the audited statements to note significant changes.
C)Reading the board of directors' minutes for all meetings during the year and after year-end through the end of field work.
D)Management inquiry.

Accepted Answer

Partner review of all workpapers is a standard procedure in the audit process and is not specifically related to the discovery of subsequent events. The other options (B, C, and D) are all examples of additional procedures that may be performed to identify subsequent events that could impact the financial statements.

Question 4

When a subsequent event provides evidence about conditions that did not exist at the balance sheet date,what is the best course of action for the auditor to follow?
A)Ensure that any necessary footnote disclosures be included with the statements.
B)Ensure that the financial statements are adjusted to reflect the information,including any necessary footnote disclosures.
C)Give an inappropriate opinion.
D)Provide management with a new engagement letter to document the terms of the revised arrangement.

Accepted Answer

The best course of action for the auditor in this situation is to ensure that any necessary footnote disclosures be included with the statements. This will provide transparency and clarity to the users of the financial statements regarding the subsequent event and its impact on the financial statements. Adjusting the financial statements without proper documentation or disclosure could result in an inappropriate opinion, and providing management with a new engagement letter is not relevant to addressing the subsequent event.

Question 5

Where would the auditor make mention of issues noted during audit procedures that are not of audit significance?
A)Engagement letter.
B)Management letter.
C)Representation letter.
D)Attorney letter.

Accepted Answer

Issues noted during audit procedures that are not of audit significance would be included in the management letter. The engagement letter is issued before the audit to define the terms of the engagement. The representation letter is used to obtain written representations from management regarding the financial statements. The attorney letter is used to verify or request information related to litigation, claims, and assessments.

Question 6

Which of the following is false regarding the management letter?
A)The management letter is not required
B)The management letter is the same as the management representation letter.
C)The management letter helps to provide management comfort that the auditor has done a quality job.
D)The management letter helps provide management with information that the auditor knows and understands the client's business.

Accepted Answer

The management letter is not the same as the management representation letter. The management representation letter is a letter written by management to the auditor to confirm certain representations. The management letter, on the other hand, is a letter issued by the auditor to management, which provides recommendations for improving the client's internal controls and other areas of the business. Choices A, C, and D are true statements about the management letter.

Question 7

Which of the following is the best example of a Type I subsequent event?
A)A related-party transaction occurs during the course of the audit.
B)The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion.
C)Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for an amount in excess of estimates.
D)The company initiates an initial public offering subsequent to year-end.

Accepted Answer

A Type I subsequent event is an event that provides additional evidence about conditions that existed at the balance sheet date. In this example, the settlement of litigation provides new information about a liability that was accrued at year-end, suggesting that the estimate of the liability at year-end was incorrect. This event would require adjustment to the financial statements, and disclosure in the notes to the financial statements. None of the other choices relate to conditions that existed at the balance sheet date.

Question 8

The partner performing an engagement quality review will review the working papers and financial statements but will not perform which of the following?
A)Assess completeness of the audit work and sufficiency of the evidence.
B)Determine the adequacy of financial statement disclosures.
C)Raise questions about the reasonableness of various financial statement presentations.
D)Perform a substantial portion of the audit procedures as an additional check.

Accepted Answer

The partner performing an engagement quality review will not perform a substantial portion of the audit procedures as this is the responsibility of the audit team. The review is an additional check to ensure the audit was performed in accordance with auditing standards and the financial statements are free from material misstatements. The partner will review the working papers and financial statements to assess completeness, sufficiency, adequacy of disclosures, and reasonableness of various financial statement presentations.

Question 9

Which one of the following is not a purpose of the management representation letter?
A)It clearly documents the audit procedures that were performed by the auditors.
B)It further acknowledges management's responsibility for the financial statements.
C)It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
D)It reduces the possibility of misunderstanding concerning the matters that are the subject of the representations.

Accepted Answer

The management representation letter is not intended to document the audit procedures performed by the auditors. Its main purposes are to acknowledge management's responsibility for the financial statements, confirm oral responses obtained by the auditor earlier in the audit, confirm the continuing appropriateness of those responses, and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations.

Question 10

Which of the following correctly states the period for which the auditor is responsible for subsequent events?
A)The balance sheet date to the date the audit report is issued.
B)The balance sheet date to the end of field work.
C)The balance sheet date to the date of subsequent discovery of omitted procedures.
D)All of the above.

Accepted Answer

The answer of Which of the following correctly states the...

Question 11

Which one of the following subsequent events will least likely result in an adjustment to the financial statements?
A)Material change in the amount of settlement of a lawsuit which had been estimated at year end.
B)Bankruptcy of a customer who owes your client a material amount on open account at year end for which there is an inadequate allowance estimate.
C)Sale of a large block of inventory at a price materially below carrying value.
D)Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.

Accepted Answer

The signing of a letter-of-intent by the client to acquire 55% of another entity for stock is a non-material event that does not require an adjustment to the financial statements. A is incorrect because a material change in the amount of settlement of a lawsuit would require an adjustment. B is incorrect because the bankruptcy of a customer would require an adjustment to the allowance for doubtful accounts. C is incorrect because selling inventory at a price materially below carrying value would require a write-down of inventory and therefore an adjustment to the financial statements.

Question 12

After completing the audit report of Blair Corporation,but before delivering the audit report to the client,a tornado demolished the main production facility.In this case,what option is available to the auditor other than dual dating the report?
A)Use the original audit report date.
B)Go back to the client's office and extend testing to the date of the tornado,thereby taking responsibility for all events up to the date of the tornado.
C)Report the situation in the management representation letter.
D)Issue a scope limitation.

Accepted Answer

The auditor can extend testing to the date of the tornado to take responsibility for all events up to that date, ensuring the audit report reflects the most current information regarding the company's financial condition following the disaster.

Question 13

Which one of the following would be the most effective procedure for discovering material Type II subsequent events?
A)Updating the search for unrecorded liabilities.
B)Resending all bank confirmations returned.
C)Reading of the minutes of board of directors' meetings.
D)Surprise cash count at random locations.

Accepted Answer

Reading the minutes of the board of directors' meetings is the most effective procedure for discovering material Type II subsequent events. This is because the board of directors is responsible for making decisions that may affect the financial statements, and they are required to disclose any material subsequent events. Therefore, reviewing the minutes of the meetings can provide insight into any significant events that may have occurred after the reporting date. Updating the search for unrecorded liabilities and resending bank confirmations returned are procedures for discovering Type I subsequent events, which is events that occurred before the reporting date but were not known at the time of the financial statement preparation. A surprise cash count at random locations may uncover fraud or errors but is not specific to subsequent events.

Question 14

Which of the following individuals should sign the management representation letter?
A)The members of the audit committee and board of directors.
B)The chief executive officer and the chief financial officer.
C)The chief financial officer and the treasurer.
D)The controller and the auditor.

Accepted Answer

The management representation letter should be signed by the CEO and CFO as they are the individuals with primary responsibility for the financial statements and disclosures. They should be in a position to ensure the completeness and accuracy of the information provided to the auditor. The other individuals listed may have oversight responsibilities but are not directly responsible for the financial statements.

Question 15

What is the letter called that is drafted by the auditor and reports observations to management which may help management perform more effectively?
A)The letter of reportable conditions.
B)The management representation letter.
C)The management letter.
D)The contingent events document.

Accepted Answer

The letter referred to in the question is the management letter, which is typically included in an audit report and provides observations and recommendations to the entity's management. Choice A refers to a type of letter that highlights significant deficiencies or material weaknesses in internal control, whereas choice B refers to a letter from management providing representations about financial statements and other matters. Choice D is not a relevant document in this context.

Question 16

When a subsequent event provides evidence about conditions that existed at the balance sheet date,what is the best course of action for the auditor to follow?
A)Assign a specialist.
B)Ensure that the financial statements are adjusted to reflect the information,including any necessary footnote disclosures.
C)Shop for an opinion that fits the desired type of event.
D)Provide management with a new engagement letter to document the terms of the revised arrangement.

Accepted Answer

The best course of action for the auditor is to ensure that the financial statements are adjusted to reflect the information obtained from the subsequent event, including any necessary footnote disclosures. This will ensure that the financial statements are fairly stated and in compliance with the applicable accounting standards. The other options, such as assigning a specialist, shopping for an opinion, or providing a new engagement letter, may not be relevant or appropriate based on the specific circumstances of the subsequent event.

Question 17

Which of the following is not a purpose of the management representation letter?
A)It reminds management of its responsibility for the financial statements.
B)It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
C)It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations.
D)It implies that the auditor is responsible for the design of the internal controls.

Accepted Answer

The management representation letter does not imply that the auditor is responsible for the design of the internal controls. Rather, it confirms management's responsibility for the design and effectiveness of those controls. Choices A, B, and C are all legitimate purposes of the management representation letter.

Question 18

An additional partner review of the audit and its findings is typically performed by an experienced member of the firm.Which of the following individuals is most qualified to perform this concurring partner review?
A)The engagement partner who has worked on the client for three years.
B)An employee of the enforcement division of the SEC.
C)An experienced partner of the firm who did not actively participate on the audit.
D)A partner of another firm or office who knows the client well and who was a vital member of the audit team.

Accepted Answer

An experienced partner of the firm who did not actively participate on the audit is the best choice for performing the concurring partner review as they bring an independent perspective without any bias or vested interest in the audit. The engagement partner who has worked on the client for three years may not be able to provide an unbiased opinion. An employee of the enforcement division of the SEC may not have knowledge of the client's operations, and a partner of another firm or office who knows the client well and who was a vital member of the audit team may have a vested interest in the audit.

Question 19

Which one of the following is the best example of a Type II subsequent event?
A)Election of new board members.
B)Change in auditors.
C)Inability to collect from a significant customer.
D)Acquisition of a subsidiary.

Accepted Answer

The answer of Which one of the following is the...

Question 20

Which of the following procedures is not performed as part of an engagement quality review?
A)Evaluate judgments about materiality and the disposition of corrected and uncorrected identified misstatements.
B)Call each board member to discuss the potential for fraud.
C)Confirm with the lead audit partner that there are no significant unresolved matters.
D)Evaluate whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit.

Accepted Answer

Calling each board member to discuss the potential for fraud is not a typical procedure performed as part of an engagement quality review. The other options listed are all procedures that are commonly performed during an engagement quality review.

Quiz 14: Completing a Quality Audit

Management of AllTech,Inc.refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy.What does this refusal constitute?

Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for audits of public companies?

Which one of the following is not an example of an additional procedure that typically relates to the discovery of subsequent events?

When a subsequent event provides evidence about conditions that did not exist at the balance sheet date,what is the best course of action for the auditor to follow?

Where would the auditor make mention of issues noted during audit procedures that are not of audit significance?

Which of the following is false regarding the management letter?

Which of the following is the best example of a Type I subsequent event?

The partner performing an engagement quality review will review the working papers and financial statements but will not perform which of the following?

Which one of the following is not a purpose of the management representation letter?

Which of the following correctly states the period for which the auditor is responsible for subsequent events?

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

After completing the audit report of Blair Corporation,but before delivering the audit report to the client,a tornado demolished the main production facility.In this case,what option is available to the auditor other than dual dating the report?

Which one of the following would be the most effective procedure for discovering material Type II subsequent events?

Which of the following individuals should sign the management representation letter?

What is the letter called that is drafted by the auditor and reports observations to management which may help management perform more effectively?

When a subsequent event provides evidence about conditions that existed at the balance sheet date,what is the best course of action for the auditor to follow?

Which of the following is not a purpose of the management representation letter?

An additional partner review of the audit and its findings is typically performed by an experienced member of the firm.Which of the following individuals is most qualified to perform this concurring partner review?

Which one of the following is the best example of a Type II subsequent event?

Which of the following procedures is not performed as part of an engagement quality review?