Question 1

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?

Accepted Answer

Individually immaterial misstatements are often entered on the SUAD because, in aggregate, they could become material. The SUAD is used to track all known and projected misstatements, regardless of their individual size, to assess their collective impact on the financial statements.

Question 2

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.

Accepted Answer

This is referred to as an external quality control review, not a reoccurring partner review. A reoccurring partner review typically involves a partner within the audit firm (not external) reviewing the work of another partner's audit to ensure quality and compliance.

Question 3

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

Accepted Answer

The audit committee is typically composed of independent members of the board of directors and is responsible for overseeing financial reporting, internal controls, and the audit process. It is considered an independent subcommittee of the board of directors.

Question 4

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

Accepted Answer

Aggregate effects are summarized to determine if the sum of misstatements, initially deemed immaterial, could collectively be material to the financial statements.

Question 5

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

Accepted Answer

A management letter is not the same as a management representation letter. A management letter is a document issued by an auditor that communicates internal control deficiencies or other issues identified during an audit, while a management representation letter is a document signed by management that provides written confirmation of certain assertions made by the company in connection with the audit.

Question 6

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

Accepted Answer

The SEC's Staff Accounting Bulletin 108 specifies the use of a "dual approach" for assessing uncorrected misstatements. This involves considering both the iron curtain and the rollover methods to evaluate the materiality of misstatements.

Question 7

A management letter is not required.

Accepted Answer

A management letter is a document provided by an auditor to a client, detailing internal control weaknesses and suggestions for improvement. It is not a mandatory requirement for all audits but is often issued as a best practice to help the client improve their operations.

Question 8

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

Accepted Answer

The rollover method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement. It takes into account the effect of prior-year misstatements that have not been corrected and considers their impact on the current year's financial statements. The other methods listed do not specifically address these factors.

Question 9

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

Accepted Answer

This is a standard practice for auditors to discuss major accounting disagreements with management with the audit committee, even if they are eventually resolved. This is to ensure transparency and proper oversight of the financial reporting process.

Question 10

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

Accepted Answer

The auditor should accumulate all of the known and projected misstatements to determine if the impact is material in the aggregate. Even though the misstatements may not be material individually, they could still have a material impact when aggregated. The auditor should consider the quantitative and qualitative factors of the misstatements to determine if they need to be adjusted or disclosed. The other options are not appropriate or in line with generally accepted auditing standards.

Question 11

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

Accepted Answer

The nature of a misstatement that might make it material would be if it has the effect of changing a positive earnings trend to a negative earnings trend. This is because it can impact investors' perception of the company's financial health and future prospects. Comparing the sum of misstatements to current assets, current liabilities, or pretax income may also be useful in evaluating materiality, but it is not necessarily a definitive factor.

Question 12

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?

Accepted Answer

Firm culture is one of the most important drivers of audit quality in cases where an auditor may feel pressure to compromise their professional judgment. A strong culture that emphasizes the importance of integrity, independence, and objectivity can help auditors overcome the pressure to acquiesce to management's demands and prioritize the accuracy and completeness of financial statements. Ethics training, PCAOB guidance, and annual income of the CPA firm are also important factors, but they are not as critical as firm culture in this context.

Question 13

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

Accepted Answer

Audit documentation for an engagement quality review primarily focuses on the review of the audit work performed and its compliance with relevant standards, rather than on the cost of the review itself.

Question 14

The engagement quality review is a risk-based review.

Accepted Answer

The engagement quality review (EQR) is a risk-based review that aims to provide an objective evaluation of the significant judgments and conclusions reached by the engagement team during the audit process. EQRs are typically performed by independent reviewers who are not part of the engagement team and are selected based on their technical expertise and understanding of the audit process. The review is risk-based because it focuses on the areas of the audit that are considered to be most significant and where the risk of material misstatement is highest.

Question 15

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

Accepted Answer

It is important for the auditor to have an open and constructive dialogue with the audit committee to address any issues, concerns, or significant matters that may arise during the audit process. This helps ensure that the audit is conducted in accordance with professional auditing standards and that the audit committee is fully informed of the results of the audit.

Question 16

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.

Accepted Answer

This statement is true. Engagement quality review is a required step in the audit process for public companies, and audit firms must have policies and procedures in place to ensure that this review is conducted properly. The purpose of the engagement quality review is to ensure that the audit has been conducted in accordance with auditing standards and that the audit opinion is supported by sufficient and appropriate evidence.

Question 17

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?

Accepted Answer

The Iron curtain 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. It ignores the effect of prior-year misstatements and only considers the current year's errors.

Question 18

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

Accepted Answer

Yielding to management's demands in order to promote additional service engagements compromises audit quality by potentially overlooking significant risks or material misstatements in financial statements. A culture that emphasizes "doing the right thing" should prioritize the integrity of the audit over short-term financial benefits. Thus, B is not included in enhancing audit quality. On the other hand, A, C, and D are included in enhancing audit quality. Encouraging auditors to seek consultation with other members of the audit firm helps to ensure a comprehensive and thorough audit. Taking the necessary time to deal with difficult client issues can help to uncover potential issues that may otherwise go unnoticed. Lastly, emphasizing long-term reputation over the immediate satisfaction of client preferences can help to build trust with clients and promote the integrity of the audit process.

Question 19

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

Accepted Answer

The answer of The auditor should discuss with the audit...

Question 20

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?

Accepted Answer

The answer of The auditor should have a sound basis,supported...

Quiz 14: Completing a Quality Audit

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?