Question 1

What information is typically requested in a legal letter to an entity's attorney?

Accepted Answer

The answer of What information is typically requested in a...

Question 2

After issuance of the auditor's report,the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless
A) a final resolution of a contingency that had resulted in a qualification of the auditor's report is made.
B) a development occurs that may affect the entity's ability to continue as a going concern.
C) an investigation of the auditor's practice by a peer review committee ensues.
D) new information is discovered concerning undisclosed related party transactions of the previously audited period.

Accepted Answer

If new information is discovered concerning undisclosed related party transactions of the previously audited period, the auditor may need to take action as it could affect the fairness of the financial statements.

Question 3

What is the difference between a contingent liability and a commitment?

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Question 4

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

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Question 5

What is an unasserted claim and why would an attorney and/or entity be reluctant to disclose an unasserted claim in the financial statements?

Accepted Answer

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Question 6

While auditing other business processes,an auditor may identify information about contingent liabilities.What specific audit procedures relating to other business processes could uncover these liabilities?

Accepted Answer

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Question 7

After an auditor has issued an audit report on a nonpublic entity,there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless
A) new information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report.
B) material adverse events occur after the date of the auditor's report.
C) final determination or resolution was made on matters that had resulted in a qualification in the auditor's report.
D) final determination or resolution was made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution.

Accepted Answer

The auditor has a duty to perform further audit tests and inquiries if they become aware of new information that may have affected their report. This is because the audit report is based on information available up to the date of the report. If new information comes to light after the report is issued, the auditor may need to update their report to reflect this information.

Question 8

Which of the following statements ordinarily is included among the written management representations obtained by the auditor?
A) Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
B) Management acknowledges responsibility for illegal actions committed by employees.
C) Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion.
D) Management acknowledges that there are no material weaknesses in the account balances.

Accepted Answer

Management representations typically include disclosures about compensating balances and restrictions on cash, as these are relevant to the financial statements.

Question 9

From the list below,select the procedures that an auditor would use to test for contingent liabilities.
a.Inquire of SEC officials regarding reported violations by the entity that create claims.
b.Read the entity's contracts,loan agreements,leases,and other documents.
c.Read the entity's minutes of meetings of shareholders,directors,and committees.
d.Request a representation letter from all the entity's employees.
e.Read the legal briefs of all suits filed against the entity's competitors.
f.Request the entity's management to prepare a letter of inquiry to the entity's attorney regarding pending litigation against the entity.

Accepted Answer

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Question 10

Pretty People Incorporated,is the defendant in a pending discrimination lawsuit.What information about the lawsuit would you,as an auditor,need to know to decide whether to disclose the litigation in the financial statements?

Accepted Answer

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Question 11

Who generally signs the legal letter?
A) The board of directors.
B) The audit partner.
C) The CEO of the entity being audited.
D) The entity's attorneys.

Accepted Answer

The answer of Who generally signs the legal letter?
A) The...

Question 12

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
A) This communication is required to occur before the auditor's report on the financial statements is issued.
B) This communication should include management changes in the application of significant accounting policies.
C) Any significant matter communicated to those charged with governance also should be communicated to management.
D) Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

Accepted Answer

The auditor's communication with those charged with governance should include significant matters, such as changes in the application of significant accounting policies by management.

Question 13

A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when
A) the outcome of the event is judged to be reasonably possible and the loss can be reasonably estimated.
B) the loss can be reasonably estimated, but the outcome is unknown.
C) the outcome of the event is judged to be reasonably possible but the loss cannot be reasonably estimated.
D) the outcome is unknown and the loss is reasonably estimable but the entity does not want to book the loss.

Accepted Answer

When the outcome of a contingent liability is judged to be reasonably possible but the loss cannot be reasonably estimated, a disclosure in the footnotes is the appropriate course of action. This is because the contingent liability does not meet the criteria for recognition in the financial statements, but it is important to provide information about the nature of the event and its potential impact on the company's financial position.

Question 14

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions.Provide some examples of contingent liabilities.

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Question 15

Key Co.plans to present comparative financial statements for the years ended December 31,2012 and 2013,respectively.Smith,CPA,audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1,2014.Key's current management team was not present until January 1,2013.What period of time should be covered by Key's management representation letter?
A) January 1, 2012 through December 31, 2013.
B) January 1, 2012 through May 1, 2014.
C) January 1, 2013 through December 31, 2013.
D) January 1, 2013 through May 1, 2014.

Accepted Answer

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Question 16

For which of the following matters should an auditor obtain written management representations?
A) Management's cost-benefit justifications for not correcting internal control weaknesses.
B) Management's knowledge of future plans that may affect the price of the entity's stock.
C) Management's compliance with contractual agreements that may affect the financial statements.
D) Management's acknowledgment of its responsibility for employees' violations of laws.

Accepted Answer

Management's compliance with contractual agreements that may affect the financial statements is a matter that requires written management representations to be obtained by the auditor. This representation helps the auditor in assessing the completeness of the financial statements and identifies any potential financial reporting risks associated with the entity's contracts. The other options do not require such written representations.

Question 17

Which of the following statements is correct about an auditor's required communication with management and those charged with governance?
A) Any matters communicated to those charged with governance are also required to be communicated to the entity's management.
B) The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.
C) The auditor does not have any requirement to communicate with anyone outside of management.
D) Weaknesses in internal control previously reported to those charged with governance are required to be communicated to those charged with governance after each subsequent audit until the weaknesses are corrected.

Accepted Answer

The correct statement is that the auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. This is in accordance with International Standard on Auditing (ISA) 260, which outlines the auditor's responsibility to communicate with those charged with governance about matters related to the audit. While weaknesses in internal control previously reported to those charged with governance do need to be followed up on, they only need to be communicated after subsequent audits if they have not been corrected. Choice A is incorrect as not all matters communicated to those charged with governance are required to be communicated to management. Choice C is incorrect as the auditor is required to communicate with both management and those charged with governance.

Question 18

A Type I subsequent event usually requires
A) an adjustment to the financial statements.
B) no adjustment to the financial statements.
C) withdrawal from the engagement.
D) no action.

Accepted Answer

A Type I subsequent event is one that provides additional evidence about conditions that existed at the balance sheet date. It requires adjustment to the financial statements to reflect the impact of the event.

Question 19

After issuance of the auditor's report,the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless
A) a lawsuit in which risk of loss was considered remote is resolved in the company's favor.
B) a development occurs that may affect the entity's ability to continue as a going concern.
C) a material fraud is initiated by an employee after the report is issued.
D) evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.

Accepted Answer

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Question 20

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to
A) extend auditing procedures.
B) accept responsibility for all events between year-end and the audit report date.
C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.
D) assume responsibility for events subsequent to the issuance of the auditor's report.

Accepted Answer

Dual dating the audit report is used when the auditor performs work on a subsequent event that occurred after the original date of the auditor's report. This indicates that the auditor has extended auditing procedures to verify the subsequent event.

Quiz 17: Completing the Audit Engagement

What information is typically requested in a legal letter to an entity's attorney?

After issuance of the auditor's report,the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless

What is the difference between a contingent liability and a commitment?

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

What is an unasserted claim and why would an attorney and/or entity be reluctant to disclose an unasserted claim in the financial statements?

While auditing other business processes,an auditor may identify information about contingent liabilities.What specific audit procedures relating to other business processes could uncover these liabilities?

After an auditor has issued an audit report on a nonpublic entity,there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless

Which of the following statements ordinarily is included among the written management representations obtained by the auditor?

Pretty People Incorporated,is the defendant in a pending discrimination lawsuit.What information about the lawsuit would you,as an auditor,need to know to decide whether to disclose the litigation in the financial statements?

Who generally signs the legal letter?

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions.Provide some examples of contingent liabilities.

For which of the following matters should an auditor obtain written management representations?

Which of the following statements is correct about an auditor's required communication with management and those charged with governance?

A Type I subsequent event usually requires

After issuance of the auditor's report,the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to