Deck 14: Completing a Quality Audit

Question 1

The total likely misstatements found during the audit are equal to the sum of known and projected misstatements.

Answer 1

True

Question 2

The auditor compares the total likely misstatements to each significant segment of the financial statements,such as total current assets,total noncurrent assets,total current liabilities,total noncurrent liabilities,owners' equity,and pretax income,to determine if they are,in aggregate,material to the financial statements.

Answer 2

True

Question 3

When evaluating identified misstatements,the auditor only needs to consider misstatements in the current year,and not misstatements from the prior year.

Answer 3

False

Question 4

The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years.

Question 5

A culture that encourages auditors to seek consultation with other members of the audit firm will be more likely to result in auditors who will acquiesce to inappropriate or aggressive client preferences.

Question 6

At the end of an audit,adjustments for misstatements that are "waived" will remain uncorrected.

Question 7

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Question 8

The materiality of a misstatement is based on only the quantitative amount of the misstatement.

Question 9

FASB has set forth four categories of potential losses that can be reasonably estimated.

Question 10

Clients can waive audit adjustments,but only for misstatements that are immaterial.

Question 11

Review activities that are completed towards the end of the audit are quite varied.

Question 12

Auditors are responsible for designing and maintaining policies and procedures to identify,evaluate,and account for contingencies.

Question 13

A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional.

Question 14

The SEC's Staff Accounting Bulletin 108 mandates what is termed a dual approach to assessing materiality of uncorrected misstatements.

Question 15

The discovery of an intentional misstatement,even if immaterial,could impact the auditor's opinion on the effectiveness of the client's internal control over financial reporting.

Question 16

An audit firm culture that emphasizes "doing the right thing" encourages auditors to deal with difficult issues in a short period of time.

Question 17

The primary source of evidence concerning contingencies is the client's external attorney.

Question 18

If the client is publicly traded,Section 10A(b)of the Securities Exchange Act requires auditors to take action upon discovery of an illegal act if the act has a material effect on the financial statements.

Question 19

Regarding loss contingencies,legal counsel should be instructed by the client to respond directly to the auditors.

Question 20

Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements.

Question 21

If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials,this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA).

Question 22

The auditor should consider matters for disclosure only while gathering evidence during the course of the audit.

Question 23

Two paragraphs should be added to the auditor's report when the auditor concludes that substantial doubt remains about the client's ability to continue as a going concern for a reasonable period of time.

Question 24

Noncompliance with laws and regulations includes only acts of omission by the entity that are considered to be unintentional and contrary to the prevailing laws or regulations.

Question 25

Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to the entity's compliance with laws and regulations.

Question 26

If the auditor continues to have substantial doubt about the client continuing as a going concern,the auditor should evaluate the adequacy of the client's related disclosures.

Question 27

When obtaining reasonable assurance that the financial statements are free from material misstatements,auditors should consider the applicable legal and regulatory frameworks that apply to the entity.

Question 28

Disclosures can be made either on the face of the financial statements in the form of classifications or parenthetical notations,or they can be made in the notes to the statements.

Question 29

If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA),the auditor should notify the CFO about the violations,their circumstance,and the effect on the financial statements.

Question 30

A disclosure checklist is a convenient documentation format for evidence that the auditor adequately evaluated the client's disclosures.

Question 31

The auditor's report specifically covers the statements and disclosures made by management in the "Management Discussion and Analysis" (MD&A)section of the annual report.

Question 32

Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatements,including material misstatements related to noncompliance with laws and regulations.

Question 33

If a lawyer refuses to furnish the requested information about the client's contingencies to the auditor,the auditor should issue an unqualified audit opinion.

Question 34

Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period into the foreseeable future.

Question 35

The going-concern assumption must be based on separate procedures that test the client's ability to continue as a going concern.

Question 36

If the auditor determines that informative disclosures are not reasonably adequate,the auditor must identify that fact in the auditor's report.

Question 37

An audit opinion is a guarantee that the business is a going concern.

Question 38

According to the Foreign Corrupt Practices Act of 1977 (FCPA),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 and design and maintain an adequate system of internal accounting controls.

Question 39

If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations,then the auditor should withdraw from the engagement.

Question 40

Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying notes.

Question 41

Management's refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion.

Question 42

Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events.

Question 43

Significant changes in the competitive market and a decrease in the competitiveness of the client's products are potential indicators of going-concern problems.

Question 44

A number of studies of bankruptcies have shown that certain combinations of ratios,like the Altman Z-score,have good predictive power in indicating the likelihood of bankruptcy.

Question 45

Ratio analysis,common-size analysis,and analysis of the dollar and percentage changes in each income statement item over the previous year are useful in assessing whether certain relationships make sense in light of knowledge obtained during the audit.

Question 46

Auditors should obtain a management representation letter at the end of each audit.

Question 47

Type I subsequent events indicate conditions that did not exist at the balance sheet date,but that may require disclosure.

Question 48

An example of a Type I subsequent event would be a significant lawsuit that is initiated relating to an incident that occurred after the balance sheet date.

Question 49

An additional procedure related to subsequent events is the reading of the meeting minutes for the board of directors meeting.

Question 50

Analytical procedures may indicate that new controls need to be designed before completing the audit.

Question 51

Review analytical procedures help auditors assess the overall presentation of the financial statements.

Question 52

By performing a final analytical review,the audit firm will identify any unusual,unexpected,or unexplained relationships that should be resolved before the issuance of the audit report.

Question 53

Management will often resist a going-concern modification because investors,lenders,and customers may lose faith in the business.

Question 54

Analytical procedures conducted during the final review phase of the audit should corroborate conclusions formed during the audit,which enables the auditor to draw conclusions upon which to base the audit opinion.

Question 55

When management is unable to provide an explanation for a previously unrecognized risk identified through the review analytical procedures,the auditor must issue an adverse opinion.

Question 56

When the auditor becomes aware of an event that occurs after the audit report date,but before the issuance of the audit report to the client and the event is disclosed in the footnotes,the auditor would date the report as if this fact had been known at year-end.

Question 57

If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report due to subsequent events after issuance of the audit report,the auditor should not try to obtain client cooperation,but should immediately notify any regulatory agency having jurisdiction over the client,such as the SEC,that the audit report should no longer be associated with the client's financial statements.

Question 58

The auditor's expectation when performing review analytical procedures will be more precise than if the auditor were performing substantive analytical procedures.

Question 59

The auditor generally reports things that management could do better in a management letter as a constructive part of the audit.

Question 60

Some auditors may be reluctant to issue a going-concern audit opinion because it may hasten the failure of the client company.

Question 61

Most audit firms use a schedule,often referred to as a summary of unadjusted audit differences (SUAD),to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements.Which of the following statements regarding this process is false?

A)Individually immaterial misstatements are not entered on the SUAD.
B)Possible adjustments to the financial statements that are left uncorrected are referred to as waived.
C)Tax effects are shown on the SUAD.
D)The nature of the misstatement,as well as the quantitative amount,is considered in the judgment of materiality.

Question 62

If an experienced reviewer who was not a part of the audit team,but who has appropriate competence,independence,integrity,and objectivity,performs an independent quality review,this is referred to as a reoccurring partner review.

Question 63

The audit committee is an independent subcommittee of the board of directors.

Question 64

Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to determine which of the following?

A)Materiality.
B)Quantitative effect.
C)Aggregate effects.
D)Nature of misstatement.

Question 65

A management letter is the same as a management representation letter.

Question 66

According to the SEC's Staff Accounting Bulletin 108,what approach is used when assessing uncorrected misstatements?

A)Matrix approach.
B)Dual approach.
C)Percentage approach.
D)Judgmental approach.

Question 67

A management letter is not required.

Question 68

Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?

A)Rollover method.
B)Iron curtain method.
C)Percentage approach.
D)Judgmental method.

Question 69

All major accounting disagreements with management,even if eventually resolved,should be discussed with the audit committee.

Question 70

During the course of an audit,misstatements that are individually immaterial may be detected.What should the auditor do with these?

A)Permanently pass on these immaterial misstatements as they do not individually impact the financial statements.
B)Request that management footnote the immaterial misstatements in the financial statements for fair presentation.
C)Accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate.
D)Roll them forward for three years when they will become material enough to adjust.

Question 71

Which of the following would be considered "the nature of a misstatement" that might make it material?

A)Comparing the sum of known and projected misstatements to total current assets.
B)Comparing the sum of known and projected misstatements to total current liabilities.
C)Comparing the sum of known and projected misstatements to pretax income.
D)Having the effect of changing a positive earnings trend to a negative earnings trend.

Question 72

Which of the following is one of the most important drivers of audit quality in cases where an auditor may feel some pressure to acquiesce to management's demands to not require that misstatements be corrected in order to preserve a harmonious working relationship?

A)Firm culture.
B)Ethics training.
C)Annual income of the CPA firm.
D)PCAOB guidance.

Question 73

The audit documentation when performing an engagement quality review should include information such as how much the firm paid for the review.

Question 74

The engagement quality review is a risk-based review.

Question 75

It is important that the auditor have a constructive and detailed dialogue with the audit committee on important aspects of the audit.

Question 76

As part of a quality audit,the audit firm must have policies and procedures in place for conducting an engagement quality review of each audit before issuing the audit opinion for public companies.

Question 77

Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years?

A)Rollover.
B)Iron curtain.
C)Dual.
D)Percentage.

Question 78

An audit firm culture that emphasizes "doing the right thing" does not incorporate which of the following to enhance audit quality?

A)Encouraging auditors to seek consultation with other members of the audit firm.
B)Yielding to management's demands in order to promote additional service engagements.
C)Taking sufficient time to deal with difficult client issues.
D)Emphasizing long-term reputation over the immediate satisfaction of client preferences.

Question 79

The auditor should discuss with the audit committee any control deficiencies that were identified and were not remediated prior to year-end.

Question 80

The auditor should have a sound basis,supported by objective evidence,regarding accounting estimates and should not fall victim to an "all estimates are subjective" argument in order to waive which of the following?

A)Contingent liability.
B)Material misstatements.
C)Unrecorded liability.
D)Material adjustments.