Question 1

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

Accepted Answer

When an auditor becomes aware of violations of the Foreign Corrupt Practices Act (FCPA), the best thing to do is to notify the audit committee about the violations, their circumstance, and the effect on the financial statements. This action is in line with the auditor's responsibility to report any material misstatements, including fraud and non-compliance with laws and regulations, to the audit committee. The auditor should also discuss with the audit committee the appropriate course of action, such as conducting further investigation or reporting to the U.S. Securities and Exchange Commission (SEC) or the Department of Justice (DOJ). Contacting foreign officials or designing internal controls does not address the violation identified by the auditor. Contacting the U.S. marshals may be appropriate in certain circumstances, but it is not the best first step to take when an auditor becomes aware of FCPA violations.

Question 2

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

Accepted Answer

Checklists are a useful tool for auditors to ensure the completeness of disclosure in financial statements. They provide a list of required disclosures and help auditors verify if all disclosures are included in the financial statements. Management representation letter, GAAS, and inquiry of the CFO are not specifically designed to determine the completeness of disclosures.

Question 3

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?

Accepted Answer

Auditors are required to consider the applicable legal and regulatory frameworks that apply to the entity. This is an inherent limitation in an auditor's ability to detect material misstatements relating to a client's compliance with laws and regulations. Choices A and C are inherent limitations as they acknowledge situations that may prevent the auditor from detecting noncompliance. Choice B is partly true, but the auditor still has a responsibility to report noncompliance that leads to material misstatements in the financial statements.

Question 4

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

Accepted Answer

Disclosures should not be limited to only checklist items. The auditor should consider all relevant disclosures necessary for fair presentation of the financial statements, even if they are not specifically required by accounting standards. Therefore, option C is false. Options A, B, and D are true regarding the adequacy of disclosures in a financial statement audit.

Question 5

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

Accepted Answer

The auditor would not concentrate on accounting estimates that are within budgetary expectations since it does not necessarily increase the risk of misstatement in the financial statements. The auditor's focus is primarily on estimates that are subjective, susceptible to misstatement and bias, inconsistent with current economic trends, and sensitive to variations.

Question 6

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

Accepted Answer

While auditors are responsible for ensuring that material disclosures have been reported, they are not responsible for ensuring that all immaterial disclosures have been reported. Additionally, the other options (A, B, and D) do require reasonable assurance by auditors.

Question 7

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

Accepted Answer

When requiring a letter of audit inquiry from the client's attorney, the auditor will typically request an evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies. This is important information for the auditor to assess the adequacy of the client's disclosure related to contingencies in the financial statements. The other choices may be relevant to the audit, but they are not typically part of the letter of inquiry requested from the client's attorney.

Question 8

Which of the following parties has the responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies?

Accepted Answer

The responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies rests with management. The auditor's role is to evaluate the adequacy and effectiveness of these policies and procedures. The audit committee oversees the financial reporting process and the auditor's activities, but is not responsible for designing or maintaining policies and procedures. The client's attorney may be consulted in certain situations, but is not responsible for designing or maintaining policies and procedures.

Question 9

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

Accepted Answer

The auditor evaluates going concern based on information obtained from normal audit procedures performed to test management's assertions. Separate procedures or the MD&A may also be sources of information, but the primary basis for the evaluation is information gathered during the normal audit process. The statement of cash flows may be useful in the evaluation, but it is not the sole source of information relied upon.

Question 10

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

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 11

Which of the following is not true regarding accounting estimates?

Accepted Answer

This statement is not true. Accounting estimates can be biased due to management's subjective perspective and the influence of personal incentives or preferences.

Question 12

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

Accepted Answer

An audit checklist for disclosures cannot cover all potential unusual circumstances because every company's circumstances are unique and can vary greatly. The checklist can cover commonly occurring disclosure matters but cannot anticipate all potential situations.

Question 13

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?

Accepted Answer

Management's past track record related to delaying unnecessary expenditures is typically not evaluated to determine the reasonableness of management's plans to overcome a going-concern problem. The other options (A, B, and D) are typical factors that an auditor would consider in evaluating management's plans.

Question 14

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

Accepted Answer

The auditor actually needs to take special care to review significant estimates in the financial statements for all the reasons mentioned except for D. Companies would not try to overestimate liabilities in computing leverage ratios as this would make their financial position look weaker.

Question 15

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?

Accepted Answer

The auditor's primary focus regarding the reasonableness of estimates made by the client is to ensure that they are consistent with historical trends and are not excessively aggressive or conservative. This helps ensure that the financial statements are fairly presented and not misstated. The other choices (B, C, and D) are not assumptions that the auditor should make regarding estimates made by the client.

Question 16

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

Accepted Answer

An Altman Z-score above 3.0 is an indicator of financial stability and is not an indication 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 17

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

Accepted Answer

All of these factors are a focus of the auditor when evaluating the reasonableness of an estimate. The auditor should assess whether the assumptions used by management are supportable given the available information, and whether there are any factors that may require adjustments to the estimates. The auditor should also be alert to any biases or inconsistencies in the estimation process, and consider whether the estimates are consistent with current economic trends or other relevant factors.

Question 18

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?

Accepted Answer

The client's lawyer is not requested to provide information on the compliance of the disclosures with GAAP as this is the responsibility of management and the auditor to evaluate. The lawyer is requested to provide information on the completeness of management's list, the likelihood and range of possible losses, and any limitations on the lawyer's response.

Question 19

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?

Accepted Answer

The auditor's consideration of a threatened matter of material litigation does not include confirming with the harmed party regarding the amount that will be claimed. The auditor's focus is on the client's accrual or disclosure of the matter in accordance with GAAP, and discussing the matter with the client and their insurance adjuster, if applicable. Sending a letter to the client's attorneys for more information may also be necessary.

Question 20

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?

Accepted Answer

When an attorney refuses to furnish information requested in an audit, it is considered a scope limitation because the auditor is unable to obtain all the necessary information to provide an unqualified opinion on the financial statements. It is not a departure from GAAP, a violation of the attorney-client privilege, or a contingent liability, as these terms do not accurately reflect the situation.

Quiz 14: Activities Required in Completing a Quality Audit