Exam 14: Completing a Quality Audit

If the client is publicly traded,Section 10A(b)of the Securities Exchange Act requires auditors to take action upon discovery of an illegal act if the act has a material effect on the financial statements.

Adjustments In your audit of Lomar Company,you find a number of items that you believe represent possible adjustments to the company's books.Management does not want to make any adjustments. REQUIRED: Assuming that Lomar is a public company,describe how the adjustments might impact your audit report on internal control over financial reporting.

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

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?

The SEC's Staff Accounting Bulletin 108 mandates what is termed a dual approach to assessing materiality of uncorrected misstatements.

Type I subsequent events Provide two examples of a Type I subsequent event and explain how these events would be treated in the financial statements.

When auditing Global Alliance Industries, Inc., the auditor performed extensive analytical procedures and found the following: (a) The commission expenses as a percentage of sales has stayed constant for several years, but it has increased significantly in the current year. However, commission rates have not changed. (b) The rate of inventory turnover has steadily decreased for the past four years. (c) The inventory as a percentage of current assets has steadily increased for the past four years. (d) The number of days’ sales in accounts receivable has steadily increased for three years. (e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for three years. (f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets are significantly smaller than in the preceding year. REQUIRED: (1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of financial statements. (2) When assessing disclosures, what criteria do auditors use?

If the audit team encounters difficulties in performing an audit,who should the audit team communicate these matters to?

The date of the audit opinion of Upton Industries,Inc.reads: March 7,20Y8 except for Note D,as to which the date is March 12,20Y8.What is this an example of?

Which of the following would be a Type II subsequent event?

Which of the following is not a purpose of the management representation letter?

Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims?

Which of the following items is not typically requested from the lawyer of a company regarding contingencies?

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.

Barrett Jennings, CPA, has prepared a letter of representation for the president and controller to sign. The following items are contained in it: (a) Inventory is fairly stated at the lower of cost or market and includes no obsolete items. (b) All actual and contingent liabilities are properly included in the financial statements. (c) All subsequent events, relevant to the financial statements, have been disclosed. Required: (1) Why is it desirable to have a letter of management representation letter from the client concerning these matters when the evidence accumulated during the course of the audit is meant to verify the same information? (2) How is the letter of management representation useful as audit evidence? (3) What are several other types of information commonly included in the management representation letter?

Significant changes in the competitive market and a decrease in the competitiveness of the client's products are potential indicators of going-concern problems.

If a lawyer refuses to furnish the requested information about the client's contingencies to the auditor,the auditor should issue an unqualified audit opinion.

If the auditor concludes that there may be a going-concern problem with the client,which of the following is the best course of action for the auditor to follow?

An audit firm culture that emphasizes "doing the right thing" encourages auditors to deal with difficult issues in a short period of time.