Deck 17: Completing the Audit Engagement

Question 1

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:

A)letter of audit inquiry to the entity's lawyer.
B)letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C)confirmation of claims and assessments from the other parties to the litigation.
D)confirmation of claims and assessments from an officer of the court presiding over the litigation.

Answer 1

A

Question 2

Type II subsequent events are conditions that require an adjustment to the account balance shown on the financial statements.

Answer 2

False

Question 3

An example of a Type I event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements.

Answer 3

True

Question 4

Every contingent liability must be recorded.

Question 5

If there is substantial doubt about the entity's ability to continue as a going concern, the auditor should obtain information about the management's plans to mitigate the problem and assess the likelihood that such plans can be implemented.

Question 6

When auditing contingent liabilities, which of the following procedures would be least effective?

A)Reading the minutes of the board of directors.
B)Obtaining a legal letter.
C)Examining customer confirmation replies.
D)Examining invoices for legal services.

Question 7

Dual dating is used to identify unrecorded contingent liabilities.

Question 8

A legal letter will include and evaluate all contingent liabilities of the company.

Question 9

Which of the following situations would require adjustment to or disclosure in the financial statements?

A)A merger discussion.
B)The application for a patent on a new production process.
C)Discussions with a customer that could lead to a 40 percent increase in the entity's sales if agreement is successful.
D)The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

Question 10

An example of a contingent liability is an income tax dispute.

Question 11

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

A)Sale of long-term debt or capital stock.
B)Loss of a plant as a result of a flood.
C)Major purchase of a business that is expected to double sales volume.
D)Settlement of litigation, in excess of the previously recorded liability.

Question 12

The responsibility to assess the entity's ability to continue as a going concern rests solely with the auditor.

Question 13

Reading contracts and loan agreements is one way to identify unrecorded contingent liabilities.

Question 14

If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should:

A)honor the confidentiality of the client-lawyer relationship.
B)consider the refusal to be a scope limitation.
C)seek to obtain the corroborating information from management.
D)disclose this fact in a footnote to the financial statements.

Question 15

An example of a Type II event or condition is an uncollectible account receivable resulting from deterioration in a customer's financial condition prior to year end, about which the entity is unaware. The customer declares bankruptcy after the balance sheet date but prior to the issuance of the financial statements.

Question 16

The refusal of an entity's attorney to provide a representation on the legality of a particular act committed by the entity is generally:

A)sufficient reason to issue a "subject to" qualified opinion.
B)considered to be a scope limitation.
C)insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality.
D)proper grounds to withdraw from the engagement without further consideration.

Question 17

The auditor must perform final analytical procedures before deciding on the appropriate audit report to issue for the entity.

Question 18

An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against an entity except the:

A)period in which the underlying cause for legal action occurred.
B)probability of an unfavorable outcome.
C)jurisdiction in which the matter will be resolved.
D)existence of a situation indicating an uncertainty as to the possible loss.

Question 19

When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining:

A)an estimate of when the matter will be resolved.
B)the period in which the underlying cause of the litigation occurred.
C)the probability of an unfavorable outcome.
D)an estimate of the potential loss.

Question 20

An auditor will ordinarily examine invoices from lawyers primarily in order to:

A)substantiate accruals.
B)assess the legal ramifications of litigation in progress.
C)estimate the dollar amount of contingent liabilities.
D)identify actual or potential litigation against the entity.

Question 21

Which of the following is generally requested in a legal letter?

A)A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
B)A list of all attorneys that performed any work for the entity during the year.
C)A statement indicating that the attorney is responsible for the fair presentation of unasserted claims in the entity's financial statements.
D)A request that the attorney provide a copy of all invoices given to the entity during the year.

Question 22

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?

A)Confirm, as of the completion of fieldwork, accounts receivable that have increased significantly from the year-end date.
B)Read the minutes of the board of directors.
C)Inquire of management concerning events that may have occurred.
D)Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.

Question 23

An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was:

A)limited to the specific event referenced.
B)limited to include only events occurring before the date of the last subsequent event referenced.
C)extended to subsequent events occurring through the date of issuance of the report.
D)extended to include all events occurring since the completion of fieldwork.

Question 24

Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the:

A)balance sheet date.
B)date of the auditor's report.
C)balance sheet date but prior to the issuance of the financial statements.
D)date of the auditor's report and concern contingencies that are not reflected in the financial statements.

Question 25

Generally, loss contingencies that are judged to be remote:

A)should be disclosed in the footnotes.
B)should be recorded in the financial statements.
C)should not be disclosed in the footnotes.
D)should be recorded in the financial statements and the footnotes.

Question 26

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

A)An analysis of related party transactions for the discovery of possible irregularities.
B)A review of the cutoff bank statements for the period after the year-end.
C)A reading of the available minutes of meetings of stockholders, directors, or other committees for the subsequent-events period.
D)An investigation of material weaknesses in internal control previously communicated to the entity.

Question 27

Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?

A)Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters.
B)Significant unusual transactions and critical estimates, but not management's consultation with other accountants about significant accounting matters.
C)Management's consultation with other accountants about significant accounting matters but not significant unusual transactions and critical estimates.
D)Neither significant unusual transactions, critical estimates, nor management's consultation with other accountants about significant accounting matters.

Question 28

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments in audit procedures for subsequent events and contingent liabilities?

A)Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
B)Obtain a legal letter.
C)Obtain a written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed.
D)Confirm directly with the entity's lawyer that all claims have been recorded in the financial statements.

Question 29

An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the:

A)issuance of the financial statements.
B)final review of the audit working papers.
C)auditor's report.
D)delivery of the auditor's report to the entity.

Question 30

An attorney is responding to an independent auditor as a result of the entity's letter of inquiry. The attorney may appropriately limit the response to:

A)asserted claims and litigation.
B)matters to which the attorney has given substantive attention in the form of legal consultation or representation.
C)asserted, overtly threatened, or pending claims and litigation.
D)items that have an extremely high probability of being resolved to the entity's detriment.

Question 31

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?

A)Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records.
B)Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.
C)Review the treasurer's monthly reports on temporary investments owned, purchased, and sold.
D)Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.

Question 32

Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?

A)Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date.
B)Culmination of events affecting the realization of inventories owned as of the balance sheet date.
C)Material changes in the settlement of liabilities that were estimated as of the balance sheet date.
D)Material changes in the quoted market prices of listed investment securities since the balance sheet date.

Question 33

A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork. The entity believes that this event could have a significant direct effect on the financial statements. The auditor should:

A)advise management to disclose the event in the notes to the financial statements.
B)disclose the event in the auditor's report.
C)withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known.
D)advise management to adjust the financial statements.

Question 34

The date of the management representation letter generally coincides with the:

A)date of the latest subsequent event referred to in the notes to the financial statements.
B)balance sheet date.
C)date of the auditor's report.
D)date of the engagement agreement.

Question 35

Which of the following auditing procedures is ordinarily performed last?

A)Confirming accounts payable.
B)Testing the purchasing function.
C)Reading the minutes of directors' meetings for evidence of authorization of acquisition of fixed assets.
D)Obtaining a management representation letter.

Question 36

The purpose of analytical procedures at the completion of the audit includes all of the following except:

A)revising the audit plan.
B)assessing the conclusions reached on the financials statement components.
C)evaluating the overall financial statement presentation.
D)recalculating some of the ratios examined during audit planning to evaluate how these ratios may have been affected by audit adjustments.

Question 37

Which of the following procedures should an auditor generally perform regarding subsequent events?

A)Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
B)Send second requests to the entity's customers who failed to respond to initial accounts receivable confirmation requests.
C)Communicate material weaknesses in internal controls to those charged with governance.
D)Review the cutoff bank statements for several months after year-end.

Question 38

An example of a Type I subsequent event is:

A)a tornado that destroys an entity's factory after the balance sheet date.
B)an event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year)that a large portion of the entity's inventory is obsolete.
C)notification of an IRS audit after the balance sheet date.
D)the entity's Board of Directors unexpectedly resigns after the balance sheet date.

Question 39

The management letter is used:

A)to allow management to document, in writing, oral representations to the auditor.
B)to confirm the terms of the audit engagement.
C)to list all reportable conditions with respect to internal controls.
D)to make recommendations to the entity based on observations made during the audit.

Question 40

If an auditor dates the auditor's report on financial statements for the year ended December 31, 2013, as of February 10, 2014, except for Note J, as to which the date is March 3, 2014, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of:

A)all subsequent events occurring through March 3, 2014.
B)all subsequent events occurring through February 10, 2014.
C)all subsequent events occurring through February 10, 2014 and the specific subsequent event referred to in Note J through March 3, 2014.
D)only the specific subsequent event referred to in Note J as of March 3, 2014.

Question 41

A Type II subsequent event usually requires:

A)an adjustment to the financial statements and the footnotes.
B)an adjustment to the financial statements but no special disclosure is required.
C)disclosure in the footnotes.
D)neither an adjustment to the financial statements nor disclosure in the footnotes.

Question 42

"There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

A)report on internal control.
B)special report.
C)management representation letter.
D)letter for underwriters.

Question 43

On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to:

A)notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied upon.
B)notify each member of the entity's board of directors about management's refusal to adjust the financial statements.
C)issue revised financial statements and distribute them to each creditor known to be relying on the financial statements.
D)issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements.

Question 44

Which of the following events occurring after the issuance of an entity's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

A)An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
B)A contingency is resolved that had been disclosed in the audited financial statements.
C)New information is discovered concerning undisclosed lease transactions in the audited period.
D)A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold.

Question 45

Which of the following ratios is least likely to assist the auditor in determining whether the entity is experiencing financial difficulties?

A)Net worth/total liabilities.
B)Cash/total assets.
C)Total liabilities/total assets.
D)Net income before taxes/net sales.

Question 46

An entity has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The entity refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must:

A)require classification of bonds payable as a current liability.
B)contact the bond trustee directly.
C)evaluate whether there is substantial doubt about the entity's ability to continue as a going concern.
D)obtain an opinion from the company's attorney as to the likelihood of the trustee's enforcement of the requirement.

Question 47

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.

Question 48

Which of the following statements extracted from an entity's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

A)"I believe that the possible liability to the company is nominal in amount."
B)"I believe that the action can be settled for less than the damages claimed."
C)"I believe that the plaintiff's case against the company is without merit."
D)"I believe that the company will be able to defend this action successfully."

Question 49

The primary reason an auditor requests letters of inquiry be sent to an entity's attorneys is to provide the auditor with:

A)a description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet.
B)an expert opinion as to whether a loss is possible, probable, or remote.
C)the opportunity to examine the documentation concerning litigation, claims, and assessments.
D)corroboration of the information furnished by management concerning litigation, claims, and assessments.

Question 50

A written representation from an entity's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the:

A)chief executive officer and the chief financial officer.
B)chief financial officer and the chairman of the board of directors.
C)chairman of the audit committee of the board of directors.
D)chief executive officer, the chairman of the board of directors and the entity's lawyer.

Question 51

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(n):

A)entity engagement letter.
B)report on compliance with laws and regulations.
C)management representation letter.
D)attestation report on internal controls.

Question 52

Communications between the auditor and those charged with governance should include all of the following except:

A)a summary of specific audit procedures used.
B)a summary of uncorrected misstatements.
C)consultations with other accountants.
D)major issues discussed with management before the auditor was retained.

Question 53

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 misstatements in the internal controls.

Question 54

After an audit report containing an unqualified opinion on a nonpublic entity's financial statements is issued, the auditor learns that the entity has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should:

A)determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued.
B)notify the entity that the auditor's report may no longer be associated with the financial statements.
C)describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements.
D)take no action because the auditor has no obligation to make any further inquiries.

Question 55

Which of the following matters is an auditor required to communicate to those charged with governance?

A)The basis for assessing control risk at low.
B)The disagreements with management, if any.
C)The auditor's preliminary judgments about materiality levels.
D)The justification for performing substantive procedures at interim dates.

Question 56

Which of the following expressions is least likely to be included in a management representation letter?

A)No events have occurred subsequent to the balance sheet date that require adjustment to or disclosure in the financial statements.
B)The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
C)Management acknowledges responsibility for illegal actions committed by its employees.
D)Management has made available all financial statements and related data.

Question 57

After fieldwork audit procedures are completed for a public company and private company whose financial statements are expected to be widely distributed, a partner of the CPA firm who has not been involved in the audit performs an engagement quality review of the working papers. This review focuses on:

A)an evaluation of the significant judgments made by the engagement teams and the conclusions reached in formulating the audit report.
B)irregularities involving the entity's management and its employees.
C)the materiality of the adjusting entries proposed by the audit staff.
D)the communication of internal control weaknesses to those charged with governance.

Question 58

As part of an audit, a CPA often requests a management representation letter from the entity. Which one of the following is not a valid purpose of such a letter?

A)To provide audit evidence.
B)To emphasize to the entity their responsibility for the fairness of the financial statements.
C)To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed.
D)To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.

Question 59

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.

Question 60

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 probable 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 or 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.

Question 61

Discuss the internal control communication requirements of the PCAOB. What must auditors of public companies report to those charged with governance?

Question 62

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

A)Significant related party transactions are pervasive.
B)Usual trade credit from suppliers is denied.
C)Arrearages in preferred stock dividends are paid.
D)Restrictions on the disposal of principal assets are present.

Question 63

Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

Question 64

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

Question 65

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.

Question 66

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

Question 67

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

A)Inspecting title documents to verify whether any assets are pledged as collateral.
B)Confirming with third parties the details of arrangements to maintain financial support.
C)Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation.
D)Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Question 68

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

A)Cash flows from operating activities are negative.
B)Research and development projects are postponed.
C)Significant related party transactions are pervasive.
D)Stock dividends replace annual cash dividends.

Question 69

State the two primary purposes of the management representation letter.

Question 70

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?

Question 71

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 provide timely observations arising from the audit that are significant to the financial reporting process.
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.

Question 72

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?

Question 73

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.

Question 74

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the:

A)possibility of purchasing certain assets rather than leasing them.
B)capability of extending the due dates of existing debt.
C)appropriateness of changing depreciation methods from double declining balance to straight line.
D)marketability of property and equipment that management plans to keep.

Question 75

After issuance of the financial statements and the accompanying 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.

Question 76

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 addressing control deficiencies communicated to the audit committee during previous engagements.
D)Management's acknowledgment of its responsibility for employees' violations of laws.

Question 77

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:

A)ability to expand operations into new product lines in the future.
B)feasibility of plans to purchase leased equipment at less than market value.
C)marketability of assets that management plans to sell.
D)committed arrangements to convert preferred stock to long-term debt.

Question 78

After the financials have been issued with an accompanying 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.

Question 79

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

Question 80

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 discuss considerations relating to assessment of going concern.
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.