Question 1

A deviation from historical patterns is one of the factors that an auditor focuses on when evaluating the reasonableness of an estimate.

Accepted Answer

Auditors focus on deviations from historical patterns as a potential indicator of management bias or errors in estimating. This helps them determine whether the estimate is reasonable and free of material misstatement.

Question 2

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

Accepted Answer

According to auditing standards, if the auditor concludes that the informative disclosures in the financial statements are not reasonably adequate, the auditor must identify that fact in the auditor's report. This is required to ensure that users of the financial statements are aware of the limitations of the disclosures and can make informed decisions based on the available information.

Question 3

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

Accepted Answer

Auditors are indeed required to evaluate the likelihood of the client continuing as a going concern for a reasonable period into the future, as specified in the generally accepted auditing standards (GAAS). The objective of this evaluation is to determine whether there is substantial doubt about the client's ability to continue as a going concern, and if so, to disclose this in the auditor's report.

Question 4

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 footnotes.

Accepted Answer

This statement is true. Auditors do review the Management Discussion and Analysis (MD&A) section of a company's annual report to ensure that the information presented is consistent with the financial statements and footnotes. This helps to ensure the accuracy and reliability of the financial information presented to investors and other stakeholders.

Question 5

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.

Accepted Answer

According to auditing standards, if the auditor has substantial doubt about the client continuing as a going concern, they must evaluate the adequacy of the client's disclosures about the issue in the financial statements. This is to ensure that the users of the financial statements are aware of the potential risks associated with the client's ability to continue as a going concern.

Question 6

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.

Accepted Answer

Auditors have a responsibility to consider the relevant legal and regulatory frameworks that apply to the entity being audited in order to obtain reasonable assurance that the financial statements are free from material misstatements. This includes laws and regulations related to accounting and financial reporting, as well as industry-specific regulations and standards. Compliance with these frameworks is important for ensuring the accuracy and completeness of financial statements.

Question 7

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.

Accepted Answer

Auditing standards acknowledge that the auditor's testing procedures may not detect all instances of noncompliance with laws and regulations, and that some instances of noncompliance may be material but difficult to detect. Therefore, auditors are not expected to provide absolute assurance that an entity is in compliance with all applicable laws and regulations.

Question 8

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

Accepted Answer

The auditor should consider matters for disclosure throughout the audit, including during planning and after completing the audit procedures. This includes disclosing significant findings or deficiencies in the audit report, as well as any other required disclosures.

Question 9

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.

Accepted Answer

This statement is true according to the Foreign Corrupt Practices Act of 1977 (FCPA).

Question 10

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).

Accepted Answer

This scenario could potentially be considered a violation of the FCPA as it involves payments to government officials for a tax refund, which could be perceived as bribery. The FCPA prohibits giving or offering anything of value to foreign government officials in exchange for business advantages.

Question 11

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.

Accepted Answer

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. This is a fundamental principle of auditing.

Question 12

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.

Accepted Answer

The auditor's report covers the financial statements and footnotes in the annual report, but it does not specifically cover the MD&A section. However, the auditor may refer to the MD&A section in the report if there are material inconsistencies with the financial statements.

Question 13

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.

Accepted Answer

The auditor's decision to withdraw from an engagement due to management's lack of commitment to internal controls over compliance with laws and regulations depends on the severity of the issues and the applicable auditing standards. Withdrawal is an extreme step and other actions, such as discussing the matter with governance, may be appropriate first.

Question 14

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.

Accepted Answer

Noncompliance with laws and regulations can also be intentional or deliberate acts of commission by the entity, in addition to acts of unintentional omission.

Question 15

Events or transactions occurring after the balance sheet date and before the audit report date, can be useful in identifying and evaluating the reasonableness of estimates.

Accepted Answer

This is true. Subsequent events or transactions can provide additional information that may impact the estimates made in the financial statements. As such, auditors may need to consider these events when evaluating the reasonableness of the estimates made by management.

Question 16

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

Accepted Answer

Disclosures can indeed be made on the face of the financial statements or in the notes to the statements.

Question 17

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

Accepted Answer

A disclosure checklist helps the auditor document their evaluation of the client's disclosures, ensuring that all necessary information has been reviewed and evaluated.

Question 18

A policy providing a reserve for returned products at the original sales price rather than at replacement cost violates GAAP.

Accepted Answer

According to GAAP, reserves for returned products should be measured at the estimated cost to obtain the inventory or the current replacement cost, whichever is lower. Valuing the reserve at the original sales price would overstate inventory and violate GAAP.

Question 19

The auditor should consider the historical experience of the client in making past estimates.

Accepted Answer

The auditor should consider the historical experience of the client in making past estimates to provide a basis for evaluating the reasonableness of the estimates made in the current period. This will help the auditor to assess the risks of material misstatement and design appropriate audit procedures for the estimates.

Question 20

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.

Accepted Answer

The answer of If an auditor becomes aware of violations...

Quiz 14: Activities Required in Completing a Quality Audit