Geim AUD Chp 14

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Evidence -- Key Considerations

A lawyer's refusal to furnish information requested is:

A scope limitation sufficient to preclude an Unqualified Opinion.

A scope limitation requires an auditor to:

Qualify an opinion or Disclaim an opinion

When there is substantial doubt about an entities ability to continue as a going concern the auditor should:

Include an explanatory paragraph after the opinion paragraph.

**Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
1.Comparing the financial statements being reported on with those of the prior period.
2.Investigating personnel changes in the accounting department occurring after year end.
3.Confirming a sample of material accounts receivable established after year end.
4.Inquiring as to whether any unusual adjustments were made after year end.

4.Inquiring as to whether any unusual adjustments were made after year end.

This answer is correct.
Procedures performed at or near the completion of field work normally include inquiring of management as to (1) whether the interim statements were prepared on the same basis as the statements being reported on, (2) whether any substantial contingent liabilities or commitments existed at the date of the balance sheet, (3) whether any significant change had occurred in equity, (4) whether any unusual adjustments had been made during the subsequent period, and (5) the current status of items that were accounted for on a basis of tentative, preliminary, or inconclusive data.

While AICPA standards require the auditor to evaluate going concern for a reasonable period not to exceed 1 year beyond the financial statements, the International Standards on Auditing require consideration of going concern issues
1.By a period no more than reasonably expected by the user.
2.Extending to at least, but not limited to, 1 year from the date of the financial statements.
3.For at least 6 months from the date of the financial statements.
4.Overlapping the next year's financial statement by at least 3 months.

2.Extending to at least, but not limited to, 1 year from the date of the financial statements.

This answer is correct.
AICPA standards require the auditor to evaluate going concern for a reasonable period not to exceed 1 year beyond the date of the financial statements. The ISAs require consideration of going concern issues extending to at least, but not limited to, 1 year beyond the date of the financial statements.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
1."Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion."
2."No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."
3."There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."
4."We have no plans or intentions that may materially affect the carrying amount or classification of assets and liabilities."

1."Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion."

This answer is correct.
The amounts and kinds of evidence needed are matters to be determined in the exercise of the professional judgment of the auditor (AU 326).

Which of the following statements ordinarily is included among the written management representations obtained by the auditor?
1.Management acknowledges responsibility for illegal actions committed by employees.
2.Guarantees for which the company is potentially liable have been properly recorded or disclosed.
3.Sufficient evidential matter has been made available to permit the expression of an unqualified opinion.
4.Management acknowledges that there are no material weaknesses in internal control.

2.Guarantees for which the company is potentially liable have been properly recorded or disclosed.

This answer is correct.
AU 333 lists the concerns ordinarily addressed in management representation letters, if applicable. The list includes disclosure of "guarantees, whether written or oral, under which the entity is contingently liable."

"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
1.Special report.
2.Management representation letter.
3.Letter for underwriters.
4.Report on internal control.

2.Management representation letter.

This answer is correct.
The auditor is required to obtain written representations from the client in the form of a management representation letter. AU 333 states that, although the specific representations depend on the circumstances, they usually include communications from regulatory agencies about noncompliance with, or deficiencies in, financial reporting practices.

Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, Year 3. Key's current management team was not present until January 1, Year 2. What period of time should be covered by Key's management representation letter?
1. January 1, Year 1, through December 31, Year 2.
2. January 1, Year 1, through May 1, Year 3.
3. January 1, Year 2, through December 31, Year 2.
4. January 1, Year 2, through May 1, Year 3.

2. January 1, Year 1, through May 1, Year 3.

This answer is correct.
Because the auditor is concerned with events occurring through the date of his or her report that may require adjustment to or disclosure in the financial statements, the representations should be made as of the date of the auditor's report. Moreover, if current management was not present during all periods covered by the auditor's report, the auditor should nevertheless obtain written representations from current management on all such periods (AU 333).

***A purpose of a management representation letter is to reduce
1.Audit risk to an aggregate level of misstatement that could be considered material.
2.The possibility of a misunderstanding concerning management's responsibility for the financial statements.
3.An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on.
4.The scope of an auditor's procedures concerning related party transactions and subsequent events.

2. The possibility of a misunderstanding concerning management's responsibility for the financial statements.

This answer is correct.
Management's written representations confirm representations given to the auditor, indicate and document their continuing appropriateness, and reduce the possibility of misunderstanding about the subject matter of the representations. That subject matter includes management's acknowledgment of responsibility for the financial statements

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
1.Confirming bank accounts established after year end.
2.Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy.
3.Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end.
4.Investigating changes in equity occurring after year end.

3.Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end.

This answer is correct.
Procedures applied after the balance sheet date should include the examination of data to determine that proper cutoffs have been made and to evaluate assets and liabilities as of the balance sheet date. The auditor also should perform procedures with respect to the subsequent events period to ascertain whether events have occurred that may require adjustment or disclosure essential to fair presentation of the financial statements. Such procedures include obtaining a letter of audit inquiry from the client's legal counsel (AU 560).

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
1.Examine a sample of transactions that occurred since the year end to verify the effectiveness of computer controls.
2.Recompute depreciation charges for plant assets sold for substantial gains since the year end.
3.Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.
4.Inquire of management whether there have been significant changes in working capital since the year end.

4.Inquire of management whether there have been significant changes in working capital since the year end.

This answer is correct.
The auditor should perform procedures with respect to material events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements. Procedures that should be performed include inquiring of and discussing with responsible executives as to whether any significant change occurred in capital stock, noncurrent debt, or working capital prior to the date of inquiry (AU 560).

To which of the following matters would materiality limits not apply when obtaining written client representations?
1.Violations of state labor regulations.
2.Instances of fraud involving management.
3.Disclosure of line-of-credit arrangements.
4.Information about related party transactions.

2.Instances of fraud involving management.

This answer is correct.
Management's representations may be limited to matters that are considered individually or collectively material on the condition that management and the auditor have reached an understanding concerning the limits of materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees with significant roles in internal control, or (3) others if the fraud could materially affect the statements (AU 333).

Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may create a substantial doubt about an entity's ability to continue as a going concern?
1.Confirmation of accounts receivable from principal customers.
2.Confirmation of bank balances.
3.Reconciliation of interest expense with debt outstanding.
4.Review compliance with the terms of debt agreements.

4.Review compliance with the terms of debt agreements.

This answer is correct.
Audit procedures designed and performed to achieve other audit objectives should be sufficient to identify conditions and events indicative of substantial doubt about the going concern assumption. They include analytical procedures; review of subsequent events; review of compliance with debt and loan agreements; reading minutes of shareholders', directors', and board committee meetings; inquiry of the entity's legal counsel; and confirmation of arrangements to provide or maintain financial support (AU 341).

**Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?
1.Request that client lawyers undertake a reconsideration of litigation, claims, and assessments with which they were consulted during the period under examination.
2.Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
3.Request that client management engage outside lawyers to suggest wording for the text of a note to the financial statements explaining the nature and probable outcome of existing litigation, claims, and assessments.
4.Request that client management prepare a letter of audit inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

4.Request that client management prepare a letter of audit inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

A lawyer's response to an auditor's request for information concerning litigation, claims, and assessments will ordinarily contain which of the following?
1.An assertion that the unasserted possible claims identified by the client represent all such claims of the client.
2.Confidential information that would be prejudicial to the client's defense if publicized.
3.An explanation regarding limitations on the scope of the response.
4.A statement of concurrence with the client's determination of which unasserted possible claims warrant specification.

3. An explanation regarding limitations on the scope of the response.

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

1.Confirming with third parties the details of arrangements to maintain financial support.

This answer is correct.
The procedures typically employed to identify going concern issues include (1) analytical procedures, (2) review of subsequent events, (3) review of compliance with debt and loan agreements, (4) reading minutes of meetings, (5) inquiry of legal counsel, and (6) confirmation with related and third parties of arrangements for financial support.

A major customer of an audit client suffers a fire after the balance sheet date but prior to the date of the auditor's report. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should
1.Advise management to adjust the financial statements.
2.Disclose the event in the auditor's report.
3.Advise management to disclose the event in notes to the financial statements.
4.Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known.

3.Advise management to disclose the event in notes to the financial statements.

This answer is correct.
Subsequent events, such as a fire or other casualty, that provide evidence with respect to conditions that did not exist at the balance sheet date should not result in adjustment of the financial statements, but such events should ordinarily be disclosed in the notes if necessary to keep the statements from being misleading (AU 560).

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