Question 1

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's consideration of a threatened matter of material litigation does not necessarily involve confirming with the harmed party the amount that will be claimed. This type of information would typically be obtained from the client's management and legal counsel. The other choices (A, B, and D) are all appropriate actions for the auditor to take in this situation.

Question 2

If the auditor concludes that there may be a going-concern problem,which of the following is not typically evaluated to determine the reasonableness of management's plans to overcome this problem?
A)Management's assumption about increasing prices or market share in relationship to current industry developments.
B)Management's assumptions about cost savings related to a reduction in the work force should be recomputed and evaluated to determine any hidden costs.
C)Management's past track record related to delaying unnecessary expenditures.
D)Management's assumptions about selling off assets and their relationship to current market prices.

Accepted Answer

Management's past track record related to delaying unnecessary expenditures is not typically evaluated to determine the reasonableness of management's plans to overcome a going-concern problem. Instead, the evaluation typically focuses on management's assumptions and plans related to revenue generation, cost reduction, asset sale, and other similar actions to overcome the going-concern problem.

Question 3

Which of the following is not a reason why the auditor needs to take special care to review significant estimates in the financial statements?
A)Organizations may try to use the estimates to "smooth" earnings.
B)Organizations may create hidden reserves in unusually good years that can be used in years when real profits do not meet expectations.
C)Companies may underestimate liabilities or impairment of asset values to achieve reported earning goals in years when real profits to not meet expectations.
D)Companies may try to overestimate liabilities in computing leverage ratios.

Accepted Answer

The other options (A, B, and C) all suggest ways in which organizations may manipulate their financial statements using significant estimates, but option D suggests the opposite behavior (overestimating liabilities) which would work against achieving certain financial goals. As such, it is not a reason why the auditor needs to take special care to review significant estimates.

Question 4

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 5

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 Foreign Corrupt Practices Act (FCPA), the best course of action is to immediately notify the audit committee about the violations, their circumstances, and the effect on the financial statements. This enables the committee to assess the risk and determine the appropriate actions to take, including potentially reporting the violations to the relevant authorities. Contacting foreign officials or designing internal controls are not appropriate actions for an auditor when FCPA violations are discovered. Contacting the U.S. marshals would only be necessary if there was evidence of criminal activity that needed to be prosecuted.

Question 6

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 a useful tool for the audit team to ensure that all disclosures required by GAAP have been included in the financial statements. The checklist can be prepared based on the accounting standards and regulations applicable to the specific industry or business. The audit team can use this checklist to review the financial statements and supporting documentation to verify that all required disclosures have been included. Option A is incorrect because the management representation letter is a document that the client provides to the audit team, and it is used to confirm the accuracy of the financial statements. Option B is incorrect because GAAS (Generally Accepted Auditing Standards) is a set of standards that govern the conduct of audits and does not specifically address disclosures. Option C is incorrect because inquiry of the CFO is a standard audit procedure, but it may not be the most effective tool for determining the completeness of disclosures.

Question 7

When evaluating accounting estimates,the auditor would not concentrate on which of the following key factors and assumptions?
A)Those that are within budgetary expectations.
B)Those that are subjective and susceptible to misstatement and bias.
C)Those that are inconsistent with current economic trends.
D)Those that are sensitive to variations.

Accepted Answer

The key factors and assumptions that are within budgetary expectations may not necessarily be accurate or reliable, and the auditor should not rely solely on whether they are within budget. Instead, the auditor should focus on factors and assumptions that are subjective, susceptible to misstatement, inconsistent with economic trends, and sensitive to variations, as these are more likely to have a significant impact on the financial statements.

Question 8

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

It is the responsibility of management to design and maintain policies and procedures to identify, evaluate, and account for contingencies. The management is responsible for ensuring that the financial statements fairly present the entity's financial position and results of operations, which includes disclosing all material contingencies. The auditor's responsibility is to obtain sufficient appropriate audit evidence to support the management's assertions in the financial statements about contingencies. The audit committee oversees and approves the audit process and financial reporting, but they do not have the responsibility for designing and maintaining policies and procedures related to contingencies. The client's attorney may assist management in identifying and evaluating contingencies, but they do not have the ultimate responsibility for designing and maintaining policies and procedures related to contingencies.

Question 9

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 each client's situation may be unique and require specific disclosures that may not be captured in a general checklist.

Question 10

Which of the following is not an indicator of a potential going-concern problem?
A)Negative trends in profitability.
B)External matters increasing regulatory requirements.
C)Significant changes in competition.
D)An Altman Z-score above 3.0.

Accepted Answer

An Altman Z-score above 3.0 is considered a strong indication that a company is financially stable and not at risk of a going-concern problem. Negative profitability trends, increasing regulatory requirements, and significant changes in competition are all potential indicators of a going-concern problem.

Question 11

The client makes estimates relative to recorded amounts in the financial statements.Which of the following assumptions best represents the auditor's primary focus regarding the reasonableness of such estimates?
A)That historical trends are followed.
B)That income is managed.
C)That there is an adequate cushion.
D)That management reverses estimates when opportune.

Accepted Answer

The auditor's primary focus is to ensure that management's estimates are consistent with historical trends and external factors. This is because historical trends are a reasonable basis for estimating future amounts and external factors can have a significant impact on the reasonableness of estimates. The other choices (B, C, and D) do not represent the auditor's primary focus on assessing the reasonableness of estimates.

Question 12

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, as this falls under the responsibility of management and the auditor. The other choices are commonly included in the letter of audit inquiry to obtain information on potential litigation, claims, and assessments.

Question 13

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 require reasonable assurance that disclosures are understandable to users, disclosed events and transactions have occurred and pertain to the entity, and information is disclosed accurately and at appropriate amounts. However, it is not necessary to provide assurance that all material and immaterial disclosures have been reported, as some immaterial disclosures may not need to be reported.

Question 14

Assume a situation in which an attorney who provided significant litigation counsel to a client to 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 describes a scope limitation, as the attorney's refusal to provide information requested in an audit limits the scope of the audit and may restrict the auditor's ability to obtain sufficient evidence. It is not a departure from GAAP, a violation of the attorney-client privilege, or a contingent liability.

Question 15

Which of the following is not true regarding accounting estimates?
A)Accounting estimates are based on management's knowledge and experience of past and current events.
B)Accounting estimates are based on management's assumptions about conditions that are expected to exist and courses of action the company expects to take.
C)Accounting estimates are based on both subjective and objective factors
D)Because accounting estimates are based,in part,on management's knowledge and experience,they are not biased.

Accepted Answer

The statement "Because accounting estimates are based, in part, on management's knowledge and experience, they are not biased" is not true. Accounting estimates can still be biased even if based on management's knowledge and experience, as biases can arise from various factors such as personal interests and cognitive limitations.

Question 16

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 requiring a letter of audit inquiry from the client's attorney, the auditor typically requests an evaluation of the likelihood of unfavorable outcome of and estimated losses from contingencies. This information is important for the auditor to understand the potential impact on the client's financial statements. The other options may also be relevant, but they are not typically requested in a letter of audit inquiry.

Question 17

In evaluating the reasonableness of an estimate,the auditor would not normally concentrate on which of the following factors and assumptions?
A)Subjective judgments that introduce bias.
B)Deviations from historical patterns.
C)Amounts that are inconsistent with current economic trends.
D)All of these are a focus of the auditor regarding reasonable estimates.

Accepted Answer

In evaluating the reasonableness of an estimate, the auditor would focus on all of the factors and assumptions mentioned in options A, B, and C. Therefore, option D is the correct answer as it states that all of these factors should be considered by the auditor when evaluating the reasonableness of an estimate.

Question 18

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 required to consider the applicable legal and regulatory frameworks that apply to the entity. This means that D 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, 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 19

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 as the auditor should use professional judgment to determine what information is material and necessary to be disclosed in the financial statements.

Question 20

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. This includes reviewing the financial statements for indications of potential going concern issues, examining management's plans to mitigate any issues, and considering any other available information related to the company's ability to continue operating as a going concern. Separate procedures and the statement of cash flows may also be considered, but the primary source of information is the normal audit procedures. The MD&A may provide additional information, but it is not the sole basis for the evaluation.

Quiz 14: Activities Required in Completing a Quality Audit

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?

If the auditor concludes that there may be a going-concern problem,which of the following is not typically evaluated to determine the reasonableness of management's plans to overcome this problem?

Which of the following is not a reason why the auditor needs to take special care to review significant estimates in the financial statements?

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

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

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

When evaluating accounting estimates,the auditor would not concentrate on which of the following key factors and assumptions?

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

Which of the following is not an indicator of a potential going-concern problem?

The client makes estimates relative to recorded amounts in the financial statements.Which of the following assumptions best represents the auditor's primary focus regarding the reasonableness of such estimates?

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?

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

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

Which of the following is not true regarding accounting estimates?

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

In evaluating the reasonableness of an estimate,the auditor would not normally concentrate on which of the following factors and assumptions?

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?

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

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