Deck 19: Completing the Audit and Postaudit

Question 1

Many public accounting firms have detailed financial statement checklists that are completed by the auditor who performs the initial review of the financial statements.

Answer 1

True

Question 2

GAAS does not specify specific auditing requirements for all contingencies.

Answer 2

True

Question 3

The ultimate responsibility for summarizing and evaluating the separate audit findings in formulating the audit opinion rests with the in-charge senior.

Answer 3

False

Question 4

Gain contingencies present very little problem to the auditor.

Question 5

As aggregate likely misstatement increases, the risk that the financial statements may be materially misstated also increases.

Question 6

Obtaining a management representation letter is an optional audit procedure.

Question 7

A rep letter may complement other auditing procedures.

Question 8

Management's refusal to furnish written representations may be sufficient, in the auditor's judgment, to cause the auditor to withdraw from the engagement.

Question 9

When material, type 1 subsequent events require disclosure and type 2 subsequent events require adjustment.

Question 10

If, after considering identified conditions and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report is usually a qualified audit opinion with an explanatory paragraph about the uncertainty (following the opinion paragraph) to reflect that conclusion.

Question 11

Analytical procedures performed during the final review are normally performed at the detailed-account level.

Question 12

The starting point in making the final assessment of materiality and audit risk is to total the misstatements found in examining all accounts that were corrected by the client.

Question 13

An attorney's letter will have no impact on the audit report when the response indicates that there is a high probability of favorable outcome.

Question 14

Uncorrected misstatements specifically identified through substantive tests of details of transactions and balances are referred to as known misstatement.

Question 15

In the phrase subsequent events period, the word subsequent relates to the report date.

Question 16

Failure to record or properly disclose subsequent events in the financial statements will require the auditor to express either a qualified opinion, or a disclaimer of opinion, depending on materiality.

Question 17

When the auditor concludes that audit risk is at an acceptable level, he or she can proceed to formulate the opinion supported by the findings.

Question 18

A letter of audit inquiry should be sent to a sample of lawyers who have been engaged by the client and have given substantive attention during the year to LCA.

Question 19

The auditor's reading of the minutes of meetings of stockholders, the board of directors, and its subcommittees, should be documented in the working papers.

Question 20

The auditor has no responsibility to search for items in the subsequent events period that would have an impact on the financial statements.

Question 21

On discovery of an omitted procedure, the auditor should assess its importance to his or her ability to currently support the opinion expressed on the financial statements.

Question 22

Which of the following events in a subsequent period is an example of a type 1 subsequent event?

A) issuance of long-term bonds
B) settlement of warranties in excess of recorded amounts
C) purchase of a business
D) issuance of preferred stock
E) casualty loss resulting from a flood

Question 23

In regard to identifying and evaluating subsequent events, AU 560.12 specifies that the auditor inquires of management having responsibility for financial and accounting matters as to:

A) any substantial contingent liabilities or commitments existing at the balance sheet date or report date.
B) any significant changes in capital stock, long-term debt, or working capital to the date of inquiry.
C) the current status of items previously accounted for on the basis of tentative, preliminary, or conclusive data.
D) whether any unusual adjustments have been made since the report date.
E) litigation, claims, and assessments.

Question 24

Which of the following is not among the characteristics of the procedures performed in completing the audit?

A) They are optional since they have only an indirect impact on the opinion to be expressed.
B) They involve many subjective judgments by the auditor.
C) They are performed after the balance sheet date.
D) They are usually performed by audit managers or other senior members of the audit team who have extensive audit experience with the client.
E) They do not pertain to specific transaction cycles or accounts.

Question 25

Professional standards state that the auditor is not required to search for reportable conditions.

Question 26

Matters relevant to management letters should be noted in the audit working papers as the audit progresses to ensure that they are not overlooked.

Question 27

Pro forma data attached to the financial statements are only required with:

A) a material type 1 subsequent event.
B) a very material type 1 subsequent event.
C) a material type 2 subsequent event.
D) a very material type 2 subsequent event.
E) either a material type 1 or a very material type 2 subsequent event.

Question 28

Auditing standards require the auditor to conduct postaudit reviews of his or her work upon discovery of omitted procedures.

Question 29

The auditor is required by GAAS to separately identify and communicate material weaknesses in the report to the audit committee.

Question 30

In the final review process, a "cold" (or second) review is one performed by a partner from another CPA firm.

Question 31

Because of the potential for misinterpretation, the auditor should not state in the report that no reportable conditions were noted.

Question 32

Ordinarily, type 1 subsequent events require:

A) adjustment.
B) adjustment and disclosure.
C) a disclaimer.
D) inclusion as a reportable condition.
E) Disclosure.

Question 33

Additional reviews of the working papers are made at the end of fieldwork by members of the audit team.

Question 34

If the client refuses to disclose newly discovered facts, the auditor should withdraw from the engagement.

Question 35

In regard to identifying and evaluating subsequent events, AU 560.12 specifies that the auditor inquires of management having responsibility for financial and accounting matters as to all of the following except:

A) any substantial contingent liabilities or commitments existing at the balance sheet date or date of inquiry.
B) any significant changes in capital stock, long-term debt, or working capital to the date of inquiry.
C) the minutes of meetings of directors, stockholders, and other appropriate committees.
D) the current status of items previously accounted for on the basis of tentative, preliminary, or inconclusive data.
E) whether any unusual adjustments have been made since the balance sheet date.

Question 36

The communication of significant deficiencies must be in writing.

Question 37

Which of the following events in the subsequent period is an example of a Type 2 subsequent event?

A) realization of recorded year-end receivables at a different amount than recorded
B) settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded
C) purchase of a machine
D) purchase of a business
E) sale of equipment

Question 38

Which of the following is not among the specific auditing procedures the auditor performs to obtain additional audit evidence?

A) making subsequent events review
B) reading minutes of meetings
C) reviewing evidence concerning litigation, claims, and assessments
D) obtaining client representation letter
E) performing analytical procedures

Question 39

Ordinarily, type 2 subsequent events require:

A) adjustment.
B) adjustment and disclosure.
C) a disclaimer.
D) inclusion as a reportable condition.
E) disclosure.

Question 40

By definition, subsequent events occur between:

A) the interim and balance sheet date.
B) the balance sheet date and the report date.
C) the report date and the date the report is issued.
D) the date the report is approved and the date the report is issued.
E) the balance sheet date and the date the report is issued.

Question 41

Analytical procedures in the overall review should be:

A) applied to every item on the financial statements.
B) performed by the partner or manager on the engagement.
C) based on financial statement data before all audit adjustments and reclassifications have been recognized.
D) performed only when material misstatement is expected.
E) performed only when unusual or unexpected balances and relationships are anticipated.

Question 42

A client's refusal to provide a client representation letter to the auditor will normally require the auditor to:

A) issue a qualified opinion or a disclaimer of opinion.
B) issue an unqualified opinion with an explanatory paragraph.
C) issue a qualified or adverse opinion.
D) issue a standard three-paragraph unqualified opinion.
E) contact the audit committee for the relevant information.

Question 43

The letter of audit inquiry to the client's lawyer(s) is the auditor's primary means of obtaining:

A) initial information about litigation, claims, and assessments.
B) initial information about unasserted claims.
C) corroboration of the information on litigation, claims, and assessments provided by the other party to the matter.
D) corroboration of the information on litigation, claims, and assessments provided by management.
E) corroboration of the information on litigation, claims, and assessments provided by the auditor's attorneys.

Question 44

The auditor, concluding that substantial doubt does not exist, usually decides to disclose all of the following except:

A) possible discontinuance of operations.
B) the possible effects of pertinent conditions and events.
C) information about the recoverability or classification of recorded expense amounts or the amounts or classification of income amounts.
D) management's plans.
E) management's evaluation of the significance of pertinent conditions and events and any mitigating factors.

Question 45

Which of the following subsequent events is least likely to be discovered by reading the minutes of meetings?

A) a new bond issue authorization
B) the payment of a cash dividend.
C) a treasury stock purchase.
D) the discontinuance of a product line.
E) a major increase in the writeoff of receivables.

Question 46

Which of the following subsequent events is least likely to be discovered by reading the latest interim financial statements?

A) a new bond issue authorization
B) a major increase in the writeoff of receivables.
C) a treasury stock purchase made immediately after year-end.
D) the discontinuance of a product line.
E) the payment of a cash dividend.

Question 47

The primary source of information about litigation, claims, and assessments is:

A) the board of directors.
B) the client's attorneys.
C) management.
D) direct confirmation with the other party involved.
E) the audit committee.

Question 48

A client has provided a client representation letter to the auditor, but the auditor is not able to support a management representation that is material to the financial statements. This will normally require the auditor to:

A) issue an unqualified opinion with an explanatory paragraph.
B) issue a qualified opinion or a disclaimer of opinion.
C) issue a qualified or adverse opinion.
D) issue a standard three-paragraph unqualified opinion.
E) withdraw from the engagement.

Question 49

The auditor is required to obtain evidential matter on litigation, claims, and assessments. This information need not include the:

A) existence of the condition or situation.
B) period in which the underlying cause for legal action occurred.
C) degree of probability of an unfavorable outcome.
D) description and evaluation of the situation.
E) amount or range of potential loss.

Question 50

In making the technical review of the financial statements, the auditor is likely to use a detailed financial statement checklist provided by the:

A) CPA firm.
B) client.
C) AICPA.
D) SEC.
E) internal auditors.

Question 51

Which of the following is not an example of a loss contingency?

A) guarantees of obligations of others
B) income tax disputes under appeal
C) the client's claim against another for patent infringement
D) secondary endorsements
E) product warranties

Question 52

The auditor's determination of misstatements in an account should include all of the following except:

A) known misstatements.
B) projected uncorrected misstatements through audit sampling techniques.
C) estimated misstatements detected through analytical procedures and quantified by other auditing procedures.
D) uncorrected misstatements specifically identified through substantive tests of details of transactions and balances.
E) corrected misstatements specifically detected by the tests of details.

Question 53

The following steps are taken during the evaluation of the audit findings:A:Making technical review of financial statements B:Making final review(s) of working papers
C:Making final assessment of materiality and audit risk
D:Formulating opinion and drafting audit report
E:Evaluating whether there is substantial doubt about the entity's ability to continue as a going concern
The order in which these steps should be performed is:

A) ABCDE.
B) CEADB.
C) EDCAB.
D) BAECD.
E) ADCEB.

Question 54

The client representation letter should include representations about all of the following except:

A) financial statements.
B) completeness of information.
C) recognition, measurement, and disclosures.
D) subsequent events.
E) major client policy changes.

Question 55

The auditor relies on the client representation letter to:

A) confirm written representations given to the auditor.
B) document the continuing materiality of client representations.
C) guarantee the absence of management fraud.
D) reduce the possibility of misunderstanding concerning management's representations.
E) replace more costly evidence gathering procedures.

Question 56

A lawyer's refusal to respond to a letter of audit inquiry normally requires the auditor to:

A) issue a qualified opinion or a disclaimer of opinion.
B) issue an unqualified opinion with an explanatory paragraph.
C) issue a qualified or adverse opinion.
D) issue a standard three-paragraph unqualified opinion.
E) contact the client's in-house attorney for the relevant information.

Question 57

In working with the minutes of meetings of stockholders, board of directors, and its subcommittees, the auditor should:

A) read the minutes of all important meetings.
B) read the minutes of all meetings.
C) read the significant items in all meetings.
D) read the minutes of all stockholders' meetings.
E) scan the minutes of all meetings.

Question 58

Before reaching a final decision on the opinion to be issued, a conference generally is held with the client. At this meeting, all of the following may be expected, except:

A) an oral report of the auditor's major findings.
B) the auditor's rationale for proposed adjustments or additional disclosures.
C) management's attempt to defend its position.
D) agreement between the auditor and client on the changes to be made.
E) delivery of the management letter.

Question 59

The client representation letter will not normally be:

A) prepared on the client's stationery.
B) addressed to the auditor.
C) sent to the audit committee.
D) dated as of the date of the auditor's report.
E) signed by the CEO and the CFO.

Question 60

The auditor is required to obtain certain written representations from management in meeting the:

A) first standard of field work.
B) third standard of field work.
C) third standard of reporting.
D) second standard of field work.
E) second standard of reporting.

Question 61

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Obsolescence losses on inventory on January 12 due to extended downturn in product line sales
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 62

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Unfavorable settlement of 20X5 patent infringement suit on January 25
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 63

The practice of dual dating is associated with:

A) subsequent events between the balance sheet date and the report date.
B) subsequent events between the balance sheet date and the issuance of the report.
C) subsequent events between the report date and the issuance of the report.
D) the discovery of omitted procedures.
E) the discovery of facts existing at the report date.

Question 64

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Additional assessment on March 1 pertaining to the 20X4 income tax return

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 65

When an investigation of the discovery of facts existing at the report date confirms the existence of the fact and the auditor believes the information is important to those relying or likely to rely on the financial statements, the auditor should immediately:

A) take steps to prevent future reliance on the audit report.
B) notify the SEC or other regulatory agency.
C) notify the audit committee.
D) resign from the engagement.
E) take no action since the auditor is not responsible for such matters.

Question 66

Professional standards require the auditor to communicate certain matters pertaining to the audit to those who have responsibility for overseeing the financial reporting process. This communication would normally include all of the following except:

A) the auditor's responsibility under GAAS.
B) specific audit procedures performed.
C) significant audit adjustments.
D) difficulties encountered in performing the audit.
E) significant accounting policies.

Question 67

The management letter is least likely to include comments on:

A) internal control matters that are not considered to be reportable conditions.
B) recommendations regarding the management of resources.
C) tax-related matters.
D) recommendations regarding the management of value-added services noted during the audit.
E) the auditor's rationale for proposed additional statement disclosures.

Question 68

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Bankruptcy of major customer due to fire loss on January 15 _____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 69

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Acquisition of a subsidiary on February 4 A
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 70

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Sale of marketable equity securities at a loss on January 8 _____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 71

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Adverse court decision on February 15 pertaining to legality of ownership of

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 72

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Resignation of chief executive officer on January 31
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 73

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Loss from hurricane on February 5
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 74

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Arrest of two company officers for fraud on February 15
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 75

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Issuance of additional capital stock on January 10
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 76

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Write-off of an account receivable on January 17 resulting from bankruptcy proceeding begun in 20X5
_____

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 77

The auditor is most likely to discover omitted audit procedures during:

A) preparation of the management letter.
B) follow-up procedures performed in compliance with generally accepted auditing standards.
C) the conference held with the client prior to issuing the audit report.
D) a postengagement review performed as part of the firm's quality control inspection program.
E) the final review of the working papers.

Question 78

Listed below are material events that pertain to the financial statements of the Henry Corporation as of December 31, 20X5. Your field work on this audit ended on January 31, 20X6, and your report was issued February 10, 20X6. Indicate the nature of each event by using the following code letters:

-Sale on January 25 of common stock investment accounted for under the equity

A)Postaudit discovery of existing facts
B)None of the above
C)None of the above.
D)Sale of a subsidiary on January 20

Question 79

The partner's review of the working papers should not be designed to obtain assurance that:

A) the judgments exercised by subordinates were reasonable and appropriate in the circumstances.
B) the working papers support the auditor's opinion.
C) assistants have followed proper work paper techniques.
D) all significant accounting, auditing, and reporting questions raised during the audit have been properly resolved.
E) the work done by subordinates has been accurate and thorough.

Question 80

During the final reviews of the working papers, the partner in charge of the engagement would ordinarily be expected to review all working papers:

A) reviewed by managers.
B) prepared by managers.
C) prepared by seniors.
D) reviewed by seniors.
E) prepared by the staff assistants.