Question 1

If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.

Accepted Answer

As per the AICPA guidelines, the lawyer's responsibility is limited to responding to the specific unasserted claims that are listed in the letter of inquiry. Therefore, if management fails to list a claim, the lawyer is not obligated to disclose it to the auditors. It is the responsibility of management to ensure that all relevant claims are listed in the letter of inquiry.

Question 2

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
A) Miscellaneous revenue.
B) Professional fees.
C) Travel expense.
D) Repairs and maintenance.

Accepted Answer

C

Question 3

Analytical procedures are required as a part of the:
A) Detailed tests of balances.
B) Internal control assessment.
C) Procedures performed near the end of the audit.
D) Substantive testing.

Accepted Answer

C

Question 4

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
A) Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
B) Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
C) Determine whether reportable conditions have been corrected.
D) Develop an estimate of the total likely misstatement in the financial statements.

Accepted Answer

At the conclusion of an audit, auditors evaluate audit findings by developing an estimate of the total likely misstatement in the financial statements to determine if the financial statements are materially misstated.

Question 5

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
A) Cash.
B) Accounts receivable.
C) Property, plant, and equipment.
D) Intangible assets.

Accepted Answer

The answer of The audit of which of the following...

Question 6

Dual-dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.

Accepted Answer

Dual-dating of an audit report extends the auditors' liability for disclosure only for the specific event or transaction that occurred between the original date of the auditor's report and the later date. It does not extend liability for all areas of the financial statements.

Question 7

In the audit of a nonpublic company, the auditors have a responsibility to report on all FASB-required supplementary information.

Accepted Answer

The Generally Accepted Auditing Standards (GAAS) state that auditors of nonpublic companies are required to report on all FASB-required supplementary information. This is to ensure that the financial statements are complete and in compliance with accounting standards.

Question 8

The Miscellaneous Revenue account should only be analyzed if it is material in amount.

Accepted Answer

The answer of The Miscellaneous Revenue account should only be...

Question 9

When auditing the statement of cash flows of a profitable, growing company which combination is most likely? $$\begin{array} { | l | l | l | } 
\hline & \text { Cash fows from operations } & \text { Cash flows from imesting } \
\hline \text { A. } & \text { Positive } & \text { Positive } \
\hline \text { B. } & \text { Positive } & \text { Negative } \
\hline \text { C. } & \text { Negative } & \text { Positive } \
\hline \text { D. } & \text { Negative } & \text { Negative } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

A profitable, growing company is likely to have positive cash flows from operations due to its profitability, and negative cash flows from investing as it reinvests earnings into growth opportunities.

Question 10

An example of an internal control weakness is to assign the payroll department the responsibility for:
A) Preparing the payroll expense distribution.
B) Preparing the payroll checks.
C) Authorizing increases in pay.
D) Preparing journal entries for payroll expense.

Accepted Answer

Authorizing increases in pay should be a responsibility of a higher management level or a separate department to ensure segregation of duties and to prevent potential fraud or errors. Assigning this task to the payroll department creates a conflict of interest and weakens internal controls.

Question 11

Auditors should perform audit procedures relating to subsequent events?
A) Through year-end.
B) Through issuance of the audit report.
C) Through the date of the audit report.
D) For a reasonable period after year-end.

Accepted Answer

Auditors should perform audit procedures relating to subsequent events through the date of the audit report. This is because the audit report is the communication of the auditor's opinion on the financial statements as of a particular date, and any events occurring after that date could affect the fairness of the financial statements. The auditor's responsibility is to ensure that the financial statements are fairly presented as of the date of the report, and performing audit procedures through the date of the report helps to ensure this.

Question 12

Analytical procedures are often used for verification of income statement accounts.

Accepted Answer

Analytical procedures involve analyzing financial information to identify unexpected fluctuations or trends that may indicate errors or fraud. They are commonly used for verifying income statement accounts, such as revenue and expense accounts, as they can be used to identify any abnormal or unexpected changes in account balances or trends.

Question 13

Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end.

Accepted Answer

Future purchase commitments are not recorded as liabilities on the balance sheet until the goods or services are received or the commitment becomes a firm obligation.

Question 14

Normally, general risk contingencies need not be disclosed in the financial statements.

Accepted Answer

General risk contingencies do not meet the definition of a liability and therefore are not required to be disclosed in the financial statements. However, if a specific contingency is deemed to be probable and the amount can be reasonably estimated, then it must be disclosed as a footnote.

Question 15

Internal control over payroll is enhanced when the personnel department distributes payroll checks.

Accepted Answer

Internal control over payroll is enhanced when the payroll department distributes payroll checks, not the personnel department. This ensures that only authorized individuals have access to payroll information and reduces the risk of fraud or errors.

Question 16

Shortly after year-end, Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end-none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances: $$\begin{array} { | c | c | c | c | } 
\hline & \begin{array} { c } 
\text { The financial statements } \
\text { shoud be acjusted }
\end{array} & \begin{array} { c } 
\text { The event requires financial statement } \
\text { disclosure, but no adjustment }
\end{array} & \begin{array} { c } 
\text { The auditor's report should be modified } \
\text { for a lack of consistency }
\end{array} \
\hline \text { A. } & \text { Yes } & \text { No } & \text { No } \
\hline \text { B. } & \text { Yes } & \text { No } & \text { Yes } \
\hline \text { C. } & \text { No } & \text { Yes } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { Yes } & \text { No } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The answer of Shortly after year-end, Zero Corporation was informed...

Question 17

If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.

Accepted Answer

A situation where the total likely misstatement in the financial statements exceeds a material amount is considered a material misstatement. Material misstatement requires an audit report modification according to generally accepted auditing standards (GAAS). Therefore, if the misstatement is not adjusted, it will lead to an audit report modification.

Question 18

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
A) Sales and Cost of Goods Sold.
B) Interest and Bad Debt Expense.
C) Sales and Bad Debt Expense.
D) Interest and Cost of Goods Sold.

Accepted Answer

When auditing Accounts Receivable, the most likely accounts to be audited are Sales and Bad Debt Expense, as they are directly related to the accuracy of the Accounts Receivable balance. Cost of Goods Sold is indirectly related, but not as significant as Bad Debt Expense. Interest is not directly related to Accounts Receivable and is therefore not as relevant to the audit.

Question 19

Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.

Accepted Answer

Subsequent events can provide additional evidence about conditions that existed at the balance sheet date, and adjusting journal entries may be made as a result. This is consistent with Generally Accepted Accounting Principles (GAAP) and the accrual basis of accounting.

Question 20

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that:
A) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
B) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
C) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work.
D) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

Accepted Answer

The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is to determine that a proper cutoff has been made and perform a general review of events occurring in the subsequent period. The auditor is not expected to extend all detailed procedures through the last day of field work, nor is the auditor fully responsible for events occurring in the subsequent period unless they affect transactions recorded on or before the balance sheet date. Therefore, choice D is the most appropriate statement.

Quiz 16: Auditing Operations and Completing the Audit

If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?

Analytical procedures are required as a part of the:

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?

Dual-dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.

In the audit of a nonpublic company, the auditors have a responsibility to report on all FASB-required supplementary information.

The Miscellaneous Revenue account should only be analyzed if it is material in amount.

An example of an internal control weakness is to assign the payroll department the responsibility for:

Auditors should perform audit procedures relating to subsequent events?