Question 1

A subsequent event occurs:
A) before the end of the financial year
B) between the client's financial year-end and the date of the auditor's report
C) after the audit completes the tests of controls
D) after the auditor signs the audit engagement letter

Accepted Answer

A subsequent event is an event that occurs between the client's financial year-end and the date of the auditor's report. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because they do not accurately describe when a subsequent event occurs.

Question 2

The final phase of an audit is to assess all of the audit evidence obtained and determine whether it is sufficient and appropriate.

Accepted Answer

This statement is true. The final phase of an audit is to evaluate all of the audit evidence gathered and decide if it is adequate and appropriate to support the audit opinion.

Question 3

Sufficiency relates to the quality of audit evidence gathered.

Accepted Answer

False

Question 4

A type 1 subsequent event provides evidence with respect to conditions that developed subsequent to year-end.

Accepted Answer

A type 1 subsequent event provides evidence about conditions that existed at the balance sheet date, not conditions that developed after the year-end.

Question 5

Generally, the further into the future an event is likely to take place, the greater the uncertainty surrounding the event.

Accepted Answer

As time passes, there are many potential factors that can affect the outcome of an event, making it difficult to predict with certainty. Therefore, the further into the future an event is predicted to occur, the greater the uncertainty surrounding it.

Question 6

Subsequent events procedures are normally performed through to and including the date of the auditor's report.

Accepted Answer

Subsequent events procedures are performed through to and including the date of the auditor's report to ensure that any events that may have a material impact on the financial statements are reflected accurately.

Question 7

A limitation on the scope of the auditor's work could result from an inability to perform procedures or an imposition by the entity.

Accepted Answer

An auditor may face limitations in conducting their work due to various reasons, such as a lack of documentation, restricted access to certain areas or individuals, or an entity imposing constraints on the audit process. These limitations may impact the scope of the auditor's work and may require them to modify their audit approach or issue a disclaimer of opinion in their audit report.

Question 8

Under section 311 of the Corporations Act, auditors are required to report to ASIC any actual or suspected contraventions of the Act within 28 days of an event.

Accepted Answer

This statement is true. Under section 311 of the Corporations Act, auditors are required to report to ASIC any actual or suspected contraventions of the Act within 28 days of an event.

Question 9

Which of the following factors is not relevant when management is assessing the going concern assumption?
A) Whether the auditor specialises in the client's industry
B) The time into the future that an event is likely to take place
C) The nature and condition of the entity's business
D) The size and complexity of the entity

Accepted Answer

The auditor specialising in the client's industry is not relevant when assessing the going concern assumption. Relevant factors include the time into the future that an event is likely to take place, the nature and condition of the entity's business, and the size and complexity of the entity.

Question 10

The client's compliance with contractual requirements of operating agreements is an example of a qualitative factor that may cause misstatements of quantitatively immaterial amounts to be considered material.

Accepted Answer

Noncompliance with contractual requirements can have significant legal and reputational consequences, even if the financial impact is not material. As a result, failing to disclose or address such noncompliance could be considered material misstatements.

Question 11

An unqualified audit report with an emphasis of matter should be issued if a subsequent event has occurred that has resulted in a new auditor's report being prepared on a revised financial report.

Accepted Answer

An unqualified audit report with an emphasis of matter is appropriate when the financial statements are not materially misstated but require additional information or explanation to understand. If a subsequent event occurs that requires revision to the financial statements, a new auditor's report must be issued, and it may be unqualified but include an emphasis of matter paragraph discussing the changes made to the financial statements.

Question 12

Under the going concern assumption:
A) an entity is viewed as not likely to continue in operation for the foreseeable future.
B) an entity's assets and liabilities are recorded at liquidation values.
C) an entity is viewed as continuing in business for the foreseeable future.
D) an entity is considered to be a separate legal entity from its owners.

Accepted Answer

The going concern assumption assumes that the entity will continue to operate for the foreseeable future, and therefore its assets and liabilities are recorded at their carrying values rather than liquidation values.

Question 13

The uninsured loss of inventory as a result of fire subsequent to year-end is an example of a type 2 subsequent event.

Accepted Answer

A type 2 subsequent event is an event that provides information about conditions that existed at the balance sheet date and which arose after the balance sheet date. An uninsured loss of inventory due to fire that occurred after the year-end is an example of type 2 subsequent event as it provides information about the condition of inventory at the balance sheet date (which was not damaged) and an event that occurred after the balance sheet date (the fire that caused damage).

Question 14

Which of the following are areas normally covered during the wrap-up of an audit engagement?
A) Perform subsequent events procedures
B) Consider the amount used for materiality
C) Reconsider the assessments of internal control at the entity level and the risk of fraud
D) All of the above

Accepted Answer

All of the above areas are normally covered during the wrap-up of an audit engagement. Performing subsequent events procedures ensures that any events that occurred after the balance sheet date are properly disclosed in the financial statements. Considering the amount used for materiality is important to ensure that the audit is being conducted at an appropriate level of detail. Reconsidering the assessments of internal control at the entity level and the risk of fraud is important to identify any deficiencies or areas of concern that were not previously detected during the audit.

Question 15

Procedures used by an auditor when conducting a subsequent events review include:
A) assessing continued compliance with borrowing limits and loan covenants.
B) enquiring of those charged with governance as to whether any subsequent events have occurred that may affect the financial report.
C) reading minutes of the meetings of the board of directors.
D) All of the above

Accepted Answer

All of the choices above are procedures that an auditor would typically perform when conducting a subsequent events review. Assessing continued compliance with borrowing limits and loan covenants ensures that any changes in the borrower's financial position are taken into account. Enquiring of those charged with governance ensures that the auditor is informed of any subsequent events that may affect the financial report. Reading minutes of the meetings of the board of directors can help to identify any subsequent events that have occurred since the year-end. Therefore, all three choices are appropriate procedures for an auditor to use when conducting a subsequent events review.

Question 16

Which of the following statements is regarding a type 1 subsequent event?
A) they are events that do not result in changes to amounts in the financial report.
B) they occur before the end of the client's financial year.
C) they may be of such significance as to require disclosure in the financial report.
D) the financial report is adjusted for any material changes in estimates from these types of events.

Accepted Answer

Type 1 subsequent events provide additional evidence about conditions that existed at the balance sheet date and require adjustments to the financial statements for any material changes.

Question 17

An error is an intentional misstatement in the client's financial report.

Accepted Answer

An error is an unintentional misstatement in the client's financial report. If the misstatement is intentional, it is called a fraud.

Question 18

Breaches of accounting standards are not considered to be significant contraventions of the Corporations Act.

Accepted Answer

Breaches of accounting standards are considered to be significant contraventions of the Corporations Act.

Question 19

Matters of governance that the auditor may wish to discuss with those charged with governance include any practical difficulties encountered in performing the audit.

Accepted Answer

The statement is true as per the International Standards on Auditing (ISA) 260 Communication with Those Charged with Governance. The auditor is required to discuss any practical difficulties encountered during the audit and seek their views on any concerns.

Question 20

The auditor's responsibility for the financial report includes selecting and applying appropriate accounting policies.

Accepted Answer

The auditor's responsibility is to form an opinion on the fair presentation of the financial report in accordance with the applicable financial reporting framework. Selecting and applying accounting policies is the responsibility of management.

Quiz 12: Completing and Reporting on the Audit

A subsequent event occurs: